Key Differences of PFRS For Small Entities and PFRS For SMEs

KEY DIFFERENCES OF PFRS
FOR SMALL ENTITIES AND

PFRS FOR SMEs
a Webinar by
Katherine Uy Sobremonte, CPA, CMA, MBA, REB
1
All rights reserved 2020 KUS
Outline
• What is PFRS for Small Entities?
• Which business entities can adopt PFRS for Small
Entities?
• What are the key simplifications of PFRS for Small
Entities?
• What are the Transitory Provisions in adopting PFRS
for Small Entities?
2
What is PFRS for Small Entities?
• PFRS for Small Entities is a third financial reporting
standard proposed by Association of Certified
Public Accountants in Public Practice (ACPAPP) to
cater the needs of small entities.
Approving Agency Date Approved
Financial Reporting Standards December 13, 2017
Council
Professional Regulation February 20, 2018
Commission
Securities and Exchange March 22, 2018
• Commission
PFRS for Small Entities is now included as part of
its financial reporting rules and regulations in line
with the corporate regulator’s Ease of Doing
Business Initiatives. 3
Which business entities can
adopt PFRS for Small Entities?

SEC Memo Circular 5-2018
Income Tax
PFRS for PFRS for
Full PFRS SMEs Small Entities
Basis or PFRS for
Small Entities
Total Assets of Total Assets of Total Assets of Total Assets of

More Than More Than Between Below
Php 350 Php 100 Mil to Php 3 Mil to Php 3 Million
Million Php 350 Mil Php 100 Mil
Total Liabilities Total Liabilities Total Liabilities

Total Liabilities
of More Than of More Than of Between
of Below
Php 250 Php 100 Mil to Php 3 Mil to
Php 250 Mil Php 3 Million
Million Php 100 Mil
5
Small Entities Exempt
from Mandatory PFRS
for Small Entities
1. Subsidiary of a parent company reporting
under the full PFRS or PFRS for SMEs
2. A subsidiary of a foreign parent company

which will be moving towards IFRS or IFRS for
SMEs pursuant to the foreign country's
published convergence plan
6

from Mandatory PFRS
for Small Entities
3. Part of a group that is reporting under the
full PFRS or PFRS for SMEs (either as a
significant joint venture or associate)
4. Branch office or regional operating

headquarter of a foreign company reporting
under the full IFRS or IFRS for SMEs
7

from Mandatory PFRS
for Small Entities
5. Entity that will breach the quantitative thresholds
set in the criteria for a small entity.
6. A small entity which has been preparing financial
statements using full PFRS or PFRS for SMEs and
has decided to liquidate
7. Such other cases that the Commission may consider
as valid exceptions from the mandatory adoption of
PFRS for Small Entities
8

Micro Entities
Micro entities are those that MEET ALL of the following
criteria:
1. Total assets and liabilities are below P3
Million
2. Are not required to file financial
statements under Part II of SRC Rule 68
3. Are not in the process of filing their
financial statements for the purpose of
issuing any class of instruments in a
public market; and
4. Are not holders of secondary licenses
issued by regulatory agencies.
9

Micro Entities
• Micro entities have the option to use as their
financial reporting framework either:
1. Income Tax basis or
2. PFRS for Small Entities
• However, the comparative financial statements shall
at least consist of the following:
a. Statement of Management's Responsibility
b. Auditor's Report
c. Statement of Financial Position
d. Statement of Income and
e. Notes to Financial Statements
10

Micro Entities
Based on SEC Notice issued on March 18,2019
“If Financial Statements of Corporations with Total

Assets or Total Liabilities are less than Six Hundred
Thousand Pesos (Php 600,000), the financial
statements shall be certified under oath by the
corporation’s treasurer or chief financial officer..”
< Php 600,000 = No Audit Report

11

What are the
key simplifications of PFRS
for Small Entities?
12

13
KEY SIMPLIFICATIONS OF
PFRS FOR SMALL ENTITIES
1. Leases
2. Inventories
3. Provisions and Contingencies
4. Investment Properties
5. Share-based payments transactions
6. Deferred Taxation
7. Employee Benefits
8. Biological Assets
9. Accounting Policies, Estimates and Errors
14

Classification of Leases
PFRS for SMEs PFRS for Small Entities
Two Classifications:
1. Operating Lease Operating Lease only
2. Finance Lease
15

Disclosures for Leases (Lessee)
a. All Lessees must provide general description of
the lessee’s significant leasing arrangements
including, for example, information about
contingent rent, renewal or purchase options and
escalation clauses, subleases, and restrictions
imposed by lease arrangements.
b. Disclose also Lease payments recognized as an
expense.
16

4. Disclosures for Leases (Lessee)
X
Future Lease Commitment
Php 2,598,80
Not later than one year 6
Later than one year and not later
than five years 835,500
Later than five years 0
Php 3,434,30
TOTAL LEASE COMMITMENT 6
17

1. Leases
2. Inventories
18

1. Definition of Inventories
1. Work in Progress arising under 1. Work in Progress
construction contracts, including directly arising under
related service contracts construction contracts,
2. Financial Instruments including directly
3. Biological Assets related service
4. Agricultural and forest products, contracts
agricultural produce after harvest, 2. Financial Instruments
minerals and mineral products (Fair
Value less costs to sell through profit or
loss P/L)
5. Commodity brokers and dealers
(inventories at fair value less costs to
sell through P/L)
19

2. Recognition of Inventories
a. Initially recognized at COST
b. Cost of Inventories includes:

i. All cost of purchase
ii. Cost of conversion and
iii. Other costs incurred in bringing the
inventories to their present location and
condition
20

3. Subsequent Measurement of
Inventories
PFRS for SMEs PFRS for Small
Entities
Lower of Cost Lower of Cost
or or
Estimated Selling Price Less Costs to Market Value
Complete and Sell
21

4. Disclosures of Inventories
a) the accounting policies adopted in measuring
inventories, including the cost formula used.
b) the total carrying amount of inventories and

carrying amount on classifications appropriate to
the entity.
c) The amount of inventories recognized as

expense during the period.
22

4. Disclosures of Inventories
d) Impairment losses recognized or reversed in
profit or loss.
e) The total carrying amount of inventories

pledged as security for liabilities.
23

1. Leases
2. Inventories
24 24

Entities
A. Scope Includes Onerous Does not include
Contracts Onerous Contracts
25 25

1. Leases
2. Inventories
26

1. Definition of Investment Property
Investments in land or buildings that meets IP criteria
Finance
Finance Lease
Lease is NOT
is allowed
allowed
27

2. Subsequent Measurement of IP
Fair Value at each reporting date Two options:
1. Cost Model or
2. Fair Value Model
COST MODEL
• Measure all investment property in accordance with Section 12 –
Property, Plant and Equipment
FAIR VALUE MODEL

• After initial recognition, an entity that chooses the fair value model shall
measure all of its investment properties at fair value at each reporting
date with changes at fair value recognized in profit or loss. (Use Sec. 2 as
guide in determining fair value.
28

3. Transfer of Investment Property
If a reliable measure of fair value is no longer
available without undue cost or effort or an item of
investment property measured using the fair value
model, the entity shall thereafter account for that
item
TRANSFER INVESTMENT CONVERT FROM FAIR

PROPERTY TO PPE VALUE TO COST MODEL
29

3. Transfer of Investment Property
• The carrying amount of the investment
property on the date of the change becomes
its cost.
• It requires disclosure of this change. It is a

change of circumstances and not a change in
accounting policy.
30

4. Disclosures of Investment Property
Entities applying the cost model shall disclose the
following for each class of investment property:
a) Depreciation methods used
b) Useful lives or the depreciation rates used
c) Gross carrying amount and the accumulated
depreciation (aggregated with accumulated
impairment losses) at the beginning and end of
the reporting period
31

4. Disclosures of Investment Property
le
Tab
on
ti
lia
ci
con
Re
32

1. Leases
2. Inventories
33

Entities
A. 1. Equity-settled share-based payment
Scope transactions
2. Cash-settled share-based payment
transactions
3. The entity or the supplier of
goods/services has a choice whether the
entity settles the transaction in cash (or
other assets) or by issuing equity
instrument.
34 34

B. Share-based payment are recognized when it
Recognition obtains the goods or as the services are received.
Increase in Equity – Equity Settled Share-based
payment transaction
Increase in Liability – Cash Settled share-based
payment transaction
If goods or services received in a share-based
payment transaction do not qualify for recognition
as assets, then recognize it expenses.
35 35

Entities
C. Hierarchy of Measurement
Measurement 1. Fair Value of the Goods or Net Asset Value of
of Equity Services Received the Equity
Settled Share- Instruments granted
based Payment
Transactions 2. If Fair Value of the goods Net Asset Value =
or services cannot be (Total Assets less
estimated reliably, use Total Liabilities)
corresponding increase in Divided by
equity (Fair value of the # of outstanding
equity instruments shares at
granted) measurement date
36 36

Entities
D. Disclose the nature and extent of Share-Based
Disclosures Payment that existed during the period:
a. Description of each type of SBP arrangements
that existed at any time during the period
including
i. General terms and conditions of each
arrangement (vesting requirements,
maximum term of options granted)
ii. Method of settlement (cash or equity).
An entity with substantially similar types of SBP
arrangements may aggregate this information.
37 37

Entities
D. Disclose the nature and extent of Share-Based
Disclosures Payment that existed during the period:
b. Number and weighted average exercise prices
of share options for each of the following
groups of options:
i. Outstanding at the beginning of the period
ii. granted during the period
iii. forfeited during the period
iv. exercised during the period
v. expired during the period
vi. outstanding at the end of the period
vii. exercisable at the end of the period
38 38

Entities
D. Disclosures For equity-settled share-based
payment arrangements, an
EQUITY- entity shall disclose information * No such provision
SETTLED about:
SHARE- 1. How it measured the fair
BASED value of goods or services
PAYEMENTS received or the value of the
equity instruments granted.
2. If a valuation methodology
was used, the entity shall
disclose the method and its
reason for choosing it.
39 39

Entities
d. Disclosures Information about the effect of
share-based payment SAME
transactions on the entity’s
profit or loss for the period and
on its financial position:
a. Total expense recognized
in profit or loss for the
period
b. Total carrying amount at
the end of the period for
liabilities arising from
share-based payment
transactions.
40 40

1. Leases
2. Inventories
41 41

⮚ An entity should make an accounting policy
choice to account for income taxes using either:
1. Taxes Payable Method or

2. Deferred Income Taxes Method
42 42

1. Taxes Payable Method
⮚ Recognize Current Tax Liability for Tax Payable on
taxable profit for the current and past periods
(Tax Due – Tax Paid in Advance = Tax Payable)
⮚ Recognize Current Tax Asset for Excess amount paid
(Tax Paid in Advance - Tax Due = Excess Income Tax
Paid)
43 43

1. Taxes Payable Method
⮚ An entity shall measure its current tax liabilities
(assets)using the tax rates and laws that have been
enacted or substantively enacted by the reporting
date.
⮚ An entity shall regard tax rates as substantively
enacted when future events required by the
enactment process historically have not affected the
outcome and are unlikely to do so.
⮚ Do not discount current tax assets and liabilities
44 44

2. Deferred Income Taxes Method
Current Tax Deferred Tax
Amount reported on an Income tax payable
entity’s income tax return (recoverable) in respect
for the period in of the taxable profit (tax
conformity with tax laws loss) for future reporting
or regulations periods as a result of past
transactions or events
45 45

3. Disclosures of Taxes Payable Method
Disclose the following:
* No such 1. Current tax expense (income)
provision 2. Any adjustments recognized in
the period for current tax of
prior periods; and
3. The amount and expiry dates
of unused tax losses and
unused tax credits
46 46

1. Leases
2. Inventories
47 47

Post-Employment Benefits
⮚ Post-employment benefits are employee benefits
(other than termination benefits) that are payable
after the completion of employment, for example,
retirement benefits, such as pensions.
⮚Follow Republic Act No. 7641 also known as The
Philippine Retirement Law
48 48

⮚Accounted using ACCRUAL Approach
⮚ Calculate the expected liability as of reporting date

using the current salary of the entitled employees
and the employees’ years of service, without
consideration of future changes in salary rates and
service periods
49

⮚ The entity shall recognize the liability for such post-
employment benefit plan at the NET total of the
following amounts:
(At Reporting Date)
a. the accrued amount of the Accrued Retirement Benefit
retirement benefits at the Less: Fair Value of Plan
reporting date; Less Assets (Used directly to
b. the fair value of plan assets (if settle RB)
any) at the reporting date out Net Accrued Retirement
Benefit
of which the obligations are to
be settled directly.
50

Measurement of Post-
Employment Benefits
Entities
Classified as either:
1. Defined Contribution Plan Accrual Approach
2. Defined Benefit Plan
51

3. Disclosures under Accrual Approach
a. Post Benefit Plan Expense recognized in profit

or loss as an expense
b. Amount of its obligation
c. Extent of funding at the reporting date
52 52

Republic Act (RA) No. 7641
Section 1. Article 287 of Presidential Decree No. 442, as amended, otherwise known as the Labor Code of the
Philippines, is hereby amended to read as follows:
"Art. 287. Retirement. – Any employee may be retired upon reaching the retirement age established in the
collective bargaining agreement or other applicable employment contract.
"In case of retirement, the employee shall be entitled to receive such retirement benefits as he may have
earned under existing laws and any collective bargaining agreement and other
agreements: Provided, however, That an employee's retirement benefits under any collective bargaining and
other agreements shall not be less than those provided herein.
"In the absence of a retirement plan or agreement providing for retirement benefits of employees in the
establishment, an employee upon reaching the age of sixty (60) years or more, but not beyond sixty-five (65)
years which is hereby declared the compulsory retirement age, who has served at least five (5) years in the
said establishment, may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2)
month salary for every year of service, a fraction of at least six (6) months being considered as one whole year.
"Unless the parties provide for broader inclusions, the term one-half (1/2) month salary shall mean fifteen
(15) days plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of not more than five (5)
days of service incentive leaves.
"Retail, service and agricultural establishments or operations employing not more than (10) employees or
workers are exempted from the coverage of this provision.
"Violation of this provision is hereby declared unlawful and subject to the penal provisions provided under
Article 288 of this Code."
53
Sample Note Disclosures
Note 2 – Significant Accounting Policies
Retirement benefits
The entity is yet to establish a formal retirement plan for its
employees. Thus, the entity’s retirement benefit obligation is
measured using the accrual approach based on the minimum
retirement benefits required under Republic Act (RA) No. 7641,
otherwise known as The Philippine Retirement Pay Law. Accrual
approach is applied by calculating the expected liability as at reporting
date using the current salary of the entitled employees and the
employees’ years of service, without consideration of future changes
in salary rates and services periods.
54 54

Note 13 – Retirement benefits obligations
The entity recognized the amount of retirement benefits for its qualified
employees following the minimum requirements benefit required by RA No.
7641 – Retirement Pay Law, using accrual approach. The movements in the
account during the years ended December 31 are as follows:
2019 2018
Beginning of the year P 223 P 143
Retirement benefit expense (See Note 17) 278 115
Benefits paid (37) (35)
End of the Year P 464 P 223
55 55

Note 17 – Employee benefit expense
The details of the account for the years ended December 31 are
as follows:
2019 2018
P 1,204 P
Salaries and wages 1,125
278
Retirement benefit expense 115
84
Short-term employee benefits 82
10
Termination benefits 180
P P
Total 1,576 1,502
56 56

1. Leases
2. Inventories
57 57

Sec. 27 Biological
PFRS for SMEs Assets
A. Scope PFRS for SMEs Section 34 Section 27
Specialized Activities – Includes discussion on
Agriculture includes 1. Biological Assets and
Biological Assets 2. Agricultural Produce
at the point of
Harvest
An entity shall recognize a biological asset or
agricultural produce when and only when:
a. Entity controls the asset as a result of past events
b. Future economic benefits flow is probable
c. Fair value or cost of the asset can be measured
reliably without undue cost or effort
58 58

Sec. 27 Biological Assets
Entities
B. Two Options: Two Options:
Recogniti 1. Fair Value Model 1. Current Market
on 2. Cost Model Price Model
2. Cost Model
59 59

PFRS forPFRS Small
for SMEs
Entities
C. Sec. 27 Biological
FAIR VALUE MODEL Assets
CURRENT MARKET PRICE
Recognition Fair Value less estimated Current Market Price or
costs to sell the Probable Selling
BIOLOGICAL Price to willing buyers
ASSETS as of reporting date
Any changes in current
market price is
recognized in Profit or
Loss
COST MODEL COST MODEL
Cost less any accumulated
depreciation and SAME
accumulated impairment
losses
60 60

D.
FAIR VALUE MODEL CURRENT MARKET
RecognitionFair Value less estimated PRICE
costs to sell at the point of Current Market Price at
AGRICULTUR harvest the point of harvest
AL
HARVESTED Any changes in current
AT THE market price is
POINT OF recognized in Profit or
HARVEST Loss
COST MODEL COST MODEL

Cost less any accumulated
depreciation and SAME
accumulated impairment
losses
61 61

Sec.
E.
27 Biological
PFRS for SMEs
FAIR VALUE MODEL
Assets
CURRENT MARKET
Disclosures An entity shall disclose the PRICE
following with respect to its
biological assets measured at
fair value:
a. Description of each class of
its biological assets SAME
b. Methods and significant
assumptions applied in b. Methods and significant
determining the fair value assumptions applied in
of each category of determining the current
agricultural produce at the market price each category
point of harvest and each of agricultural produce at
category of biological assets the point of harvest and
each category of biological
assets
62 62

E. Disclosures FAIR VALUE MODEL CURRENT MARKET PRICE
c. Reconciliation of changes in c. Reconciliation of changes in
the carrying amount of the carrying amount of
biological assets between biological assets between the
the beginning and the end beginning and the end of the
of the current period. The current period. The
reconciliation shall include: reconciliation shall include:
i. Gain or loss from i. Gain or loss from
changes in fair value changes in current
less costs to sell market price
ii. Increases resulting ii. Increases resulting
from purchases from purchases
iii. Decreases resulting iii. Decreases resulting
from harvest from harvest
iv. other changes
63 63

E.
Sec. 27 Biological
PFRS for SMEs
Assets
COST MODEL
Disclosures Disclose the following:
a. Description of each class of its biological assets
b. Depreciation method used
c. Useful lives or the depreciation rates used
d. Gross carrying amount and the accumulated
depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the
period
e. Explanation of why fair *No such provisions

value cannot be
measured reliably
64

1. Leases
2. Inventories
65 65

Sec. 5 Accounting Policies,
Estimates and Errors
How to Apply Changes in Accounting
Policies
⮚ Apply changes in the carrying
amounts of assets and liabilities at
the beginning of the current period,
adjust any cumulative effect to the
opening balance of retained earnings
or other component of equity, as
appropriate of the current period
Comparative information shall not be restated

66 66

B. When an amendment to this When change in
Disclosures IFRS has an effect on the accounting policy has an
current period or any prior effect on the current
Change in period, or might have an period or any prior
Accounting effect on future periods, an period, an entity shall
Policy entity shall disclose the disclose the following:
following:
a. SAME
a. the nature of the change
in accounting policy
67 67

B. Disclosures b. for the current period and b. the amount of
each prior period presented, adjustments to the
Change in to the extent practicable, the carrying amounts of
Accounting amount of the adjustment for assets and liabilities at
Policy each financial statement line the beginning of the
item affected current period and any
cumulative effect
c. the amount of the adjustment recognized as an
relating to periods before adjustment to the
those presented, to the extent opening balance of
practicable retained earnings (or
other component of
equity, as appropriate) of
the current period
68 68

B. Disclosures d. an explanation if it is c. For each financial
impracticable to determine statement line item
Change in the amounts to be disclosed affected in the prior
Accounting in (b) or (c) above. period, the amount of
Policy the necessary
adjustment and the
adjusted amount had the
new accounting policy
been applied in the prior
Financial statements of period.
subsequent periods need not Financial statements of
repeat disclosure. subsequent periods need to
repeat these disclosures.
69 69

1. Leases
2. Inventories
70 70

Sec. 29
TRANSITORY PROVISIONS
⮚Applies to first-time adopter of the Framework
regardless of whether the previous accounting
framework was full PFRS or PFRS for SMEs
⮚An entity can be a first-time adopter only ONCE.
⮚Date of transition is the beginning of the earliest
period for which it should present full comparative
information in accordance with PFRS for Small
Entities
71 71

Procedures for Preparing FS
at the Date of Transition
⮚Adjusted directly in Retained Earnings (or, if
appropriate, another category of equity) at the date
of transition
SPECIAL EXEMPTIONS IN TRANSITION
a) Fair value as deemed cost
b) Revaluation as deemed cost
c) Deferred income tax
d) Arrangements containing a lease
72 72

Disclosure about the Transition
1. Description of the nature of each change in
accounting policy
2. Reconciliations of its equity (Old vs. New) for both of
the following dates:
i. the date of transition to the New Framework;
ii. the end of the latest period presented in the
entity’s most recent annual financial
statements determined in accordance with its
previous framework
73
Disclosure about the Transition
3. Reconciliation of the profit or loss determined in
accordance with old framework for the latest period in the
entity’s most recent annual financial statements to its
profit or loss determined in accordance with the new
framework.
74
Sample Note
TRANSITION TO PFRS FOR SMALL ENTITIES
(PFRS for SEs)
Explanation of transition to the PFRS for Small
Entities
Under the previous accounting framework (PFRS

for SMEs), the corporation uses the fair value
approach for its investment properties. Under the
PFRS for Small Entities, the corporation adopted the
cost model approach.
75
The corporation also adopted the taxes payable
method in recognizing and measuring its taxes
payable. Moreover, the corporation has adopted
the accrual approach to calculate the retirement
benefit obligations as required by PFRS for Small
Entities instead of the projected unit credit method
in computing the retirement benefit obligations.
76
Sample Note
TRANSITION TO PFRS FOR SMALL
ENTITIES (PFRS for SEs)
Explanation of transition to the PFRS for Small
Entities (continuation)

The following reconciliations show the effect of
the transition from previous accounting framework
(PFRS for SMEs) to the PFRS for Small Entities (PFRS
for SEs) on the corporation’s a) Equity as at January 1,
2019 and December 31, 2019 and b) profit for the
year 2019.
77
Sample Note

December Decembe
31, 2019 r 31, 2018
a) Equity
Total Equity under PFRS for SMEs Php 6,825,896 Php 5,766,136

Transition Adjustments for January 1, 2019 (675,494) 0
Inventory Impairment 0 (294)
Reversal of Unrealized Gain on Fair Value of
Investment Property (79,800) (175,200)
Recognition of Depreciation for Investment
Property-Building (250,000) (500,000)
Post-Employment Benefit effect (16,885) 0
Income Tax Effect of the transition 80,066 0
TOTAL EQUITY UNDER PFRS FOR
SMALL ENTITIES Php 5,883,783 Php 5,090,642
78
Sample Note
b) Profit for the year ended December 31, 2019
2019

Net Income under PFRS for SMEs Php 1,559,760
Reversal of Unrealized Gain on Fair Value of (79,800)
Investment Property
Recognition of Depreciation for Investment Property- (250,000)
Building
Post-Employment Benefit effect (16,885)
Income Tax Effect of the transition 80,066
NET INCOME UNDER PFRS FOR SMALL Php
ENTITIES 1,293,141
79
Sec. 29
TRANSITORY PROVISIONS
⮚Effective : January 1, 2019
⮚Earlier application is permitted.
⮚If an entity applies this Framework in its financial
statements for a period before 1 January 2019, it
shall disclose that fact.
80

Key Differences of PFRS For Small Entities and PFRS For SMEs

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KEY DIFFERENCES OF PFRS

FOR SMALL ENTITIES AND

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Total Assets of Total Assets of Total Assets of Total Assets of

Total Liabilities Total Liabilities Total Liabilities

2. A subsidiary of a foreign parent company

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4. Branch office or regional operating

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“If Financial Statements of Corporations with Total

< Php 600,000 = No Audit Report

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b. Cost of Inventories includes:

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b) the total carrying amount of inventories and

c) The amount of inventories recognized as

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e) The total carrying amount of inventories

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FAIR VALUE MODEL

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PFRS for SMEs PFRS for Small Entities

TRANSFER INVESTMENT CONVERT FROM FAIR

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• It requires disclosure of this change. It is a

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1. Taxes Payable Method or

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⮚ Calculate the expected liability as of reporting date

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