= YF sumone CPA REVIEW SCHOOL OF THE PHILIPPINES Manila THEORY OF ACCOUNTS VALIX SIY VALIX FERRER SMALL AND MEDIUM-SIZED ENTITIES, Definition ‘The IASB describes “small and medium-sized entities” or SMEs as entities that: 2. Gonothave public accountability. b. Publish general purpose financial reports for external users, Public accountability ‘An entity has publie accountability if: a. Its deb or equity instruments are traded in & publie market or it isin the process of issuing such instruments for trading in public market, for example. domestic or foreign stock exchange. over-the-counter market. local and regional market b. It holds assets in fiduciary capacity for a broad group of outsiders as one of its primary businesses ea This is typically the case for li unions. jnsurance companies, se funds and investment banks. However. if such entities do so for reasons (Hoypubliely accountable” SME under Philippine jurisdiction _#/aly incidental «9 a primary business” the entities are The definition of SME is set forth in SEC En Bank Resclution dated/ August 2009/s follows: SME is ai entity 3-250 ka. With total assets between 3-250 L_P3,000,000 and P250.000,000. . That io required to file financial statements under SRC Rule, 68.1. This SRC Rule 68.1 pertains 10 “listed entities” whose shares are traded in a public rm uO" accourtobilty 3.000.000 and P350.000,000. OR with tota’ trabilities between ¢. That is@o} in the process of filing financial statements for © purpese of issuing any class of uments in a pablig market. regu such a5 a bank (all company. securities d. That isCao® a holder of a secondary ligense issued by types of banks). an investment house, a finance eompany. an insuran. broker or dealer, a mutual fund and pre-need company e. That is@oP a public utility slory agen Micro-business entities 3 45 Micro-business entities are emtties whose total assess ot total liabilities are below the P3,000,000 floor threshold. Micro-business entities have the option to use any of the following bases of accounting in the preparation of financial statements: ar Full PERS basis of accounting 5755pefztt Page 2 (Eiemptins rom PERS for SMES “The Philippine SEC on[October 7, 2010,fesolved to exempt from the mandatory adoption of PFRS for SMEs small and medium-sized entity that meets any of the following criteria: _ J+ Wis subsidiary ofa parent company reporting under full PFRS. “Be Wisa subsiiay ofa foreign parent company that wil be moving towards IFRS pursuant to the foreign country’s published convergence plan. It is a subsidiary of a foreign parent company that has been applying the standards for a nonpublicly accountable entity for local reporting purposes. and is considering moving to full PERS instead of the PFRS for SMEs in order to align its policies with the expected move to full, TERS by its foreign parent company pursuant to its country’s published convergence plan. A> te has hoi {term projections that show that it will breach the quantitative thresholds set in the criteria for an SME. aad the breach is expected to be significant and continuing due to its long- term effect on the entity’s asset or liability size. 5p tis part ofa group. ctheras a significant joim venture or an associate, that is reporting under 7 fall BERS. 7 Iisa branch office of a foreign entity reporting under full [FRS. cya Je Ithas(onerete plans 6 conduct an initial public offering within the next fwo years _S+ It has aGubsidiacythat is mandated o report under full PERS. FRS and has decided to liquidate its It has been preparing financial statements using full J assets, Significant and continuing Pan SME that uses the PFRS for SMEs in.a current year breaches the floor and ceiling size eriteria at the end of the currept-year, the entity shall-be required-to-transition-to,/ull. PERS. in the next year r id is breached or another a nting basis if the floor threshold is and continuing”. As a general considered significant Birectivedate (i/i/2018 ‘An entity that meets the definition of SME shall apply the PFRS for SMEs for annual period beyinning January 1, 2010. The amount of total assets and liabilities shall be based on the audited financial statenients on December 3], 2009. An SME whose accounting period begins on a date other than January 1. 2010 shall apply the size eriteria using the audited financial statements for the immediately preceding fiscal year a Transition to PFRS for SMEs A first-time adopter of the PFRS for SMEs is an entity that presents its first annual financial statements that conform with the PFRS for SMEX regardless of whether its previous accounting framework was full PFRS or another set of generally accepted accounting principles. First-time adoption requires Tuliteeirospective application bf the PERS for SMEs effective at the Teparting date for an entity's first annual financial statements that conform with PFRS for SMEs Date of transition : The date of wansition io PERS for SMEs is the beginning of the earliest period for which full comparative information 's presented in accordence with the PFRS for SMEs in its first annual financial statements thai conform with PERS for SMEs ‘Thus, ifthe first-time adopter presents its first annual financial statements in conformity with the PERS for SMEv on December 31, 2013 on comparative basis. the date of transition to PFRS for _ SMEs y 1.2072. - aN ~ 5755 & 5755Page 3 Opening statement of financial position The opening statement of financial position is the statement of finaricial position as of the date of transition to the PERS for SMEs, In its opening statement of financial position. a first-time adopter shall: _B» Recognize all assets and liabilities whose recognition is required by the PFRS for SMES. Not recounize as assets or liabilities if the PERS for SMEy does not permit such recognition. c» Reclassif) items that it recognized under its previous accounting framework as one type of asset, liability or component of equity. but a different type of asset, liability or equity under the PERS for SMEs d, Apply the PFRS for SMEy in measuring all recognized assets and liabilities. ‘The resulting adjustments arising from transactions. other events and conditions before the date of + transition to PERS for SMEs shall be recognized directly incetatned earnings or another category. Pequity. if appropriate. SIGNIFICANT DIFFERENCES BETWEEN PFRS FOR SMEs AND FULL PERS GO Qualitative characteris of the financia! statements of ae SME Be Understandability ~ 6. Prudens “2c Relevance — 7. Completeness 3c. Materiality - 8. Comparability 4 Reliability % Timeliness” Substance over form 10. Balance between enefit and cost The “fundamental” qualitative characteristics under ‘ul! PERS are relevance and faithfil represemation. The “enhancing” qualitative characteristics ate-uaderstandubilits- comparability, verifiability and timeliness. On Measurement of elements °F! SMEs — = Historical cost and fair value Full PERS — Historical cost, current cost. realizable value and present value Components of When the only changes to the equity are a result of profit o- loss. pay ment of dividends. prior periads errors, changes in azcounting policy. 2 "single stetement of insome and retained ceatmings” can be.presented by SMBs instead of both a statement of comprehensive income and statement of changes in equity. iancial statements CMY Statement of comprrhunsic invoms + Hakeumt of oie Under Full PERS, a statement of changes in equity is aiways required. A single statement of income and retained earnings is prohibited under Full PFRS B Statement of financial position Same line items for SMEs and Pull PERS, except that the following line items are (not quired for SMEs: a. Total of assets classified as held for sale. 5 b. Total of liabilities included in disposal group classified as fizld for sales (i PERS requires presentation of investments in associates but not investment in >. joint ventures. PERS for SMEs requires presentation of both investments in associates and _ lgveren? © investments in joint ventures as separate line items, iv Under fill PERS. a third statement of financial position as al she beginning of the earliest comparative period shall be prepared: a. When an entity applies an accounting retrospective b. When an entity makes a retrospective restatement ¢. When an entity reclassifies items in its finan This ~ third statement of financial position” iCGodrequired under PERS for SMEs. 5755Page 4 @) Other of comprehensive income Under full PERS, th ‘components of other comprehensive income are: & Gain or loss from iransiating the financial statements ofa foreign operation Re efined benefit plans ¢. “The effective portion of unrealized gain or loss on hedging instruments designated as cash flow hedge CFA — infrrsic value 4. Unrealized gain as loss on equity instruments measured at fair value through other ‘comprehensive income FAfOCA » & Revaluation surplus during the year £ For particular liabilities designated as at fair value through profit or loss, the amount of change in fair value that is atfributable to change in the liability"s credit risk. Under PERS for SMEs. the components of other comprehensive incame include: 8. Gain or loss from translating the financial statements of a foreign operation, ‘Actuarial gain and loss Change in fair value of hedging instrument that was effective in offsetting the change in the F value or expected cash fiows of the hedge item. This is applicable to the hedge of the following: Variable interest rate risk 2c Foreign exchange tisk in a 3 Commodity “4¢ Foreign excha firm commitment or highly probable forecast transaction sk in 2 firm commitment or highly probable forecast transaction risk in a net investment in a foreign operation © Asset held for sale aud discontinued operation The PERS for SMEs foes(aoy address noncurrent asset held for sale and discontinued operation. Comet C3]... semana —- z a ‘An SME shall measure inventories at the lower of cast and estimated selling price less cost to complete and sel!. - If the estimated selling price le recognized as impairment loss Under full PFRS. inventories are measured at LONRY. If the NRV is lower than cost. the \ritedovn is recognized as component of cast of goods sold, ccost to complete and sell is lower than cost. the writedown is (& Basie financial instruments of SMES , [- Cash. demand and fixes term deposits or bank accounts 4 \[-2" trade aecounts and notes receivable and loans receivable Commercial papers or commercial bills ' Investments in nonputtable ordinary shares Investments in nonconvertible and nonputtable preference shares Commitment to receive a loa if the commitment “cannot be net settled” in cash L Fie Accounts payable in local and foreign currency Loans from bank and other third parties 9, Bonds and similar debt instrument f 10. Loans to or from subsidiaries or associates that are due on demand. The investment in ordinary shares and nonconvertible preference shares is nomputtable: a, When the entity does not have an option to sell the shares back to the issuer for cash. b. When there is mo arrangement that could result in the shares being automatically sold or returned to the issuer because of Future event. 5755Page 5 & Conditions for a debt instrument to be classified as basic financial instrument _ a. Returns to the holder are @ fixed amount or a variable amiount that throughout the life of instrument is equal to a single fixed amount », (No}contractual provisions that could result in the holder fosing the principal amount and interest «©. Contractual provisions that permit the debtor to prepay the instcument are not contingent on future events 4_ The payment or repayment of principal and interest must be unconditional In summary, a debt investment is basic when the creditor is assured of the payment of the principal and the fixed amount oF interest without any conditions. (0) Wwitiat measurement of basic financial instruments TP + TC. The PERS for SMEs provides that basic financial instruments are ‘initially measured at the ‘transuction price. including transaction costs However. if the instrument is measured at fair value through profit or loss. the transaction cost is expensed immediately, fi] = ce Jo=exe* (1 Subsequent measurement of basie financial instruments The PERS for SMEs provides that basie financial instruments amortized cost, cost less impairment and fair value through pr instruments, ¢ subsequently measured at i or loss depending on the Basic debr instruments are measured at amortized cos! using the effeviive interest method. L 2. [b. Commitments to receive a Joan are measured at cow fess impuirmezt. & Investments in nonputtable ordinary shares and investments in nonconvertible and onputlable preference shares are measured at fair value through profit or loss if the shares are publicly tradedy ‘or ifthe fair value can be measured reliably Ii the shares are not publiely traded or if the Tair value cannot be measured retiabty. suche investments are measured at cost fess impairment. Impairment of basic financial instruments ‘The PERS for SMEs provides that for a basic financial neat meosured at cost less impairment, the impairment loss is the difference betweus the ca:tsing amount of the asset and the best estimate of the amount that would be received ifthe asset were sold, Under full PFRS. the impairment loss is the ditference bene Present value of estimated future cash flows discermted ec mar assel he carrying amount and the ‘ke. ato of interest for similar G3) Not basic financial instruments of SMEs _Be Asset-backed securities. such collateralized moityaze 05! and securitized packages of receivables secure! As, Derivative contracts Xe Hedging instruments ©, Commitments to make a loan to another eatity ae Commitments to reeeive a loan if the commitment ean be net seitied in cash ‘The following instruments are not also basic financial insiramenis. A Invesiments in subsidiaries. associates and joint ventures vions, repurchase agreements 26, Financial instruments that meet the definition of an entity's ewn equity Leases a “d+ Employers’ rights and obligations under employee bere‘it plans investments n associates and joint ventures Full PFRS ~ Investments in associates and investments in joint ventures are accounted for using the equity method. SMEs - SMEs shall account for investments in essovictes or joint ventures using the cost iodcl, the equity method or fair value model and using the same accounting poliey for all investments in associates. 5755I Page 6 Under the cost model, the investment in associate is initially measured at the gransaction price - TP including gansction cost. Subsequently, the investor shall measure its investment in associate oA 4TC_ at gost less any accumulated impairment losses. However, the cost madel “ebeemaes if the @ fis “A investment in associate has a published price quotation in which case, the Tair value model is (eZ sed. All dividends and other distributions received are recognized as income @vithoul Pegard ‘whether the dividends are from preacquisition or postacquisition retained earnings of the associate, a rP the J Under the equity method. the investment account is initially recognized at the ‘ransaction 416" (be) price, imeluding transaction cost, Subsequently. the investment is adjusted to reflect the Fe ((y) investor’ share in poi or as and other comprehensive income ofthe associat. Dividends — and other distributions received from the associate are recognized as reduction of the carrying ‘ainount of the investment, pont), Under the fair value model, the investment in associate is initially measured a the transaction Fic rice. exeluding transaction cost. At each reporting date, the investment is measured at fir == value with changes in fair value recognized in profit or loss. If the fair value model is used. the sa QV invesagspin associate axfot ested for impairment Investment property Full PERS ~ Investment property is measured at either cost or fair value. There is a choice. SMEs ~ Investinent property is measured fair value)if the fair value can be measured reliably without undue cost or effort on an ongoing basis. Otherwise, the/eost mode/is used and the investment property is accounted for as property. plant and equipment and presented as a separate class of property, plant and equipment. One ee Full PFRS ~ Property. plant and equipment are measured by using either cost model or ~ “revaluation model. There isa choice. ie SMEs — Property. pleat and equipment are measured using the eost model only. Government geant a Under fill PPS. a government is recognized when there is alreasonable assurance.hat the entity will comoly with the specified conditions, Under the PFRS for SMEs, a government grant is recognized when the conditions ard actually satisfied) b. Under ful! PFRS. a yovernment grant is recognized as income over the periods necessary to match them withthe related casts for which they are intended to compensate a The PFRS for SMEs doesnot allow an entity to match the grant with the expense for which | itisintended to compensate oF the cast of the asset that it is used to finance. ©. Under full PRS. grant related to asset may be treated either as deferred income or a reduction in the carrying amount of the asset. There is(nd)such option under the PFRS for SMEs fer the PFRS for SMEs, the grant is deferred ised) = (iS)Borrowing costs : Full PRS ~ Borrowing costs that are directly attributable to the acquisition, construction or production of a gualitying asset must be eapitalized as part of the cost of the asset. All other borrowing costs are expensed S — SMEs aljhoro wing costs x€expenses immediately when incurred. incom until the conditions arg actually) | 5755 |Page 7 Impairment of assets Under the PERS for SMEs. assets. an indication thi the asset may be impaired. cluding goodwil, are Gst2d)for impairment when there is Under idl? PRS. assets with a finite useful life ane fest cdyfor impairment when there is an indication that the asset may be impaire os Goodwill, intangible asset with an(indefinite useful life or an intangible asset not yet available for use. are tested for impairment annually and when there is an indication that the asset may be impaired: O)Intangible assets : a, Under PFRS for SMEs, intangible assets are measured subsequentiy using the east model only. Under full PFRS. intangible assets ate measured subsequent!y using either the cost model or sevaluation model, There is achoice under full PFRS. life of an intangible asset is considered to be finite, As a asset cannot be estimeted reliably. it is (by Under PERS for SMEs. the seh matter of fact. if the useful life of an insangibl assumed (0 be 10 years. Under full PERS. the useful life of an intangible asset is either finite or indefinite. If the useful life cannot be estimated reliably. there igfno Assumption of 10 years. 7 Under PERS for SMEs. all intangibles asses, \ehuding goodwill anggiionized Under full PERS. intangible assets with a finite useful life are amortized over the useful life and intangible assets wit useful life are not pinortized but tested for impairment oe Research and development costs Under PFRS for SMI ee FRS for § EC allreseareh and development costs are expensed immediately when Under full PERS, research costs are Gxpensed imme: evelopment costs may be capitalized when speci technological feasi ty has already been established. Defined benefit his Full PERS ~ The defined benef't obligation is the net tote! of iately_when incurred. However, criteria are met. particularly when lity a. The present value of the defined benelit obligation ai yea b. Minus the fair value of plan assets ai year-end : SMEs ‘he defined benefit obtigation is the same under fii PERS. G3. Actuarial gains and losses Full PFRS - Actuarial yeins and losses are recognized ul! sale cotnprehensive ineome. SMEs - Actuarial gains and fully recognized either in profit or loss or other os i ized ‘ gai losses are fully recognized in profit or i Past service costs Full PFRS. - Vested and unvested serv ice costs: component of employee benefit expense, ° a ™ SMEs | 7) extra | Under PERS for SMEs. an exploration expenditure may be elassfied as tangible asset or intangible asset arid shall be measured using the cost model only. industry Under fill PERS. if an entity’s secounting policy results in the recognition of an exploration and evaluation asset, such asset shall be measured initially at cost. The exploration and evaluation asset may be classified as tangible asset or intangible asset and shall be measured subsequently using either the cost model or fair value model Business combination SMEs - Transaction costs are ineluded in cost of business combination. Contingent consideration is ineluded as part of cost of business combination ‘if it is probable and can be Full PFRS — Transection costs are exeluded from the cost of business combination. Contingent consideration is recognized.regardless OY the probability of payments. ‘onsolidated ‘inancial statements Under PERS for SMEs, a parent need(not present consolidated financial statements if ie The parent is itscif'a subsidiary and its ultimate parent or any intermediate parent produces } consolidated financial statements that comply with full PFRS or PFRS for SMEs. {be The parent has mo subsidiaries other than one which was acquired withthe intention of selling or disposing of it within one year. Under full PFRS, a parent neef{ not present consolidated financial statements if: {» ‘The parent is itself a wholly-owned subsidiary or partially-owned subsidiary and its other owners do not object to the parent not presenting consolidated financial statements. _d- The parents debe and equity instruments are(aot traded in & public market. g> The parent did Gof file or ‘sot in the process of filing its financial statements with a ee regulatory organization for the purpose of issuing any class of instruments in a public market. |, The ultimate or any intermediate parent produces consolidated fingncial statements that 7 comply with PERS Special purpose entity ~ This is an entity created to accomplish a narrow and well-defined objective such as to_effect a lease,.to undertake R and D activities or to securitize financial assets, An enlity consolidates an SPE when the substance of the relationship between the entity Se ‘and the SPE indicates that the SPE is controlled by the entity. yd ao END e 5755