Full PFRS, PFRS for SME, PFRS for Small Entities

Comparison
Accountancy (Central Philippine University)

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 PFRS for SMALL AND MEDIUM ENTERPRISES, PART II

SIMILARITIES AND DISTINCTION OF THE PHILIPPINE FINANCIAL REPORTING FRAMEWORK

Full PFRS PFRS for SME PFRS for SE

Conceptual Framework for ▪ The scope for conceptual framework is ▪ The scope for conceptual framework is ▪ No provision on the scope of
financial reporting more detailed compared to other less detailed compared to full PFRS. conceptual framework.
reporting standards. ▪ In terms of measurement bases: ▪ In terms of measurement bases:
▪ In terms of measurement bases: a. Historical cost a. Historical cost
a. Historical cost b. Fair value b. Fair value
b. Current value
i. Fair value
ii. Value in use and fulfillment value
iii. Current cost
Financial statements Components of FS: Components of FS: (Section 3-8) Components of FS:
presentation (PAS 1) 1. Statement of financial position 1. Statement of financial position 1. Statement of financial position
2. Statement of comprehensive income 2. Statement of comprehensive income 2. Statement of income
3. Statement of changes in equity 3. Statement of changes in equity 3. Statement of changes in equity
4. Statement of cash flows 4. Statement of cash flows 4. Statement of cash flows
5. Notes, comprising a summary of significant 5. Notes, comprising a summary of significant 5. Notes to financial statements
accounting policies and other explanation accounting policies and other explanation
information information – same requirement under full ▪ Statement of income and changes in equity
6. Additional statement of financial position PFRS except that the SMEs are not required of SE can be combined if the only changes
when an entity: to present and disclose the following: arise from:
a. applies an accounting policy ✓ Segment information (PAS 8) ✓ Profit or loss
retrospectively or ✓ Earnings per share (PAS 33) ✓ Payment of dividends
b. makes a retrospective restatement of ✓ Interim financial reports (PAS 34) ✓ Prior period errors
items in its FS or ✓ Changes in accounting policy
c. it reclassifies items in its FS Presentation:
▪ Classification of assets and liabilities into Other comprehensive income
Presentation: current and noncurrent. ▪ Small entity does not recognize OCI. All
▪ Classification of assets and liabilities into ▪ Presented as line item both investments in items of income and expense are
current and noncurrent. associates and joint ventures. recognized in profit or loss.

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▪ Presented as line item those assets and ▪ If an SME has no items of OCI in any of the
those liabilities included in the disposal periods for which financial statements are
group that are classified as held for sale presented, it may only present income
and those investments where the investor statement or it may present statement of
has significant influence over the investee comprehensive income in which the
(investment in associate) but not ‘bottom line’ is labeled as ‘profit or loss’.
investment in joint venture. ▪ PFRS for SMEs does not require
▪ Income statement can be presented as: presentation of additional statement of
a. Single statement of profit or loss and financial position.
other comprehensive income ▪ SME is permitted but not required to
b. In two statements: (i) a statement of present a single statement of income and
profit or loss section; (ii) a second retained earnings instead of a statement of
statement beginning with profit or loss comprehensive income and statement of
and displaying components of other changes in equity if the only changes to the
comprehensive income. equity are the result of the following:
▪ Cash transactions in SOCF are classified into ✓ Profit or loss
operating, investing and financing activities. ✓ Payment of dividends
Operating activities can be presented using ✓ Prior period errors
direct or indirect method. ✓ Changes in accounting policy

OCI components: OCI components:

1. Gain or loss from translation of the FS of a 1. Gain or loss from translation of the FS of a
foreign operation foreign operation
2. Remeasurements of defined benefit plan to 2. Actual gain or loss on defined benefit plan
be presented in OCI to be presented either in OCI or P/L.
3. Unrealized gain or loss from derivative 3. Change in fair value of hedging instrument
contracts designated as cash flow hedge 4. Revaluation surplus
4. Unrealized gain or loss on equity
investment measured at FVTOCI Reclassification of OCI:
5. Unrealized gain or loss on debt investment a. OCI reclassified to P/L = #3
measured at FVTOCI b. OCI reclassified to RE = #1; #2 if the entity
6. Revaluation surplus elected to present such item in OCI, and #4
7. Changes in fair value attributable to credit
risk of a financial liability designated at Note: Unrealized gains and losses on FVTOCI are

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 FVTPL not included because FVTOCI classification is
8. Changes in time value of option when the not available for SMEs.
options’ intrinsic value and time value is
separated and only the changes in the
intrinsic value is designated as the hedging
instrument.
9. Changes in the value of the forward
elements of a forward contract when
separating the forward element and spot
element of a forward contract and
designating as the hedging instrument only
changes in the spot element, and changes
in the value of the foreign currency basis
spread of a financial instrument when
excluding it from designation of that
financial instrument as the hedging
instrument.

Reclassification of OCI:
a. OCI reclassified to P/L = #1, #3 and #5
b. OCI reclassified to RE = #2, #4, #6 and #7

Revenue from contracts with ▪ PFRS 15 requires the entity to apply the ▪ Under PFRS for SMEs, revenue is ▪ The accounting for revenue of a small
customers (PFRS 15) ‘five-step’ principle when recognizing recognized based on the principle of entity shall be applied to the following
revenue from contracts with customers ‘transfer of significant risks and rewards.’ transactions and events:
namely: (Section 23) a. Sale of goods
1. Identify the contract with the customer b. Rendering of services
2. Identify the performance obligations in c. Construction contract
the contract d. Deposits or receivables yielding interest
3. Determine the transaction price e. Dividends from investments in shares
4. Allocate the transaction price to the not accounted using equity method.
performance obligations
5. Recognize revenue when (or as) a Revenue recognition:
performance obligation is satisfied. a. Probability that the economic benefits

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 associated with the transaction will flow to
the entity; and
b. The revenue and cost can be measured
reliably.

Measurement:
- Fair value of the consideration received or
receivable using accrual basis.
Noncurrent asset held for sale ▪ Under PFRS 5, an entity shall classify a non- ▪ No similar classifications are provided ▪ No similar classifications are provided
(PFRS 5) current asset or disposal group as held for under PFRS for SMEs. under PFRS for SEs.
sale if its carrying amount will be recovered
principally through a sale transaction rather
than continuing use.
▪ Property dividends in the form of
noncurrent assets are classified as held for
distribution to owners if the assets qualify
under the criteria set forth under PFRS 5.
Inventories (PAS 2) Definition: ▪ Same provision under full PFRS for the ▪ Same provision under full PFRS for nature
▪ are assets held for sale in the ordinary nature, recognition and measurement and recognition except for the subsequent
course of business, in the process of except for the treatment of the excess of measurement of inventories which is
production for such sale, or in the form of NRV over cost which is accounted for as measured at lower of cost or market value
materials or supplies to be consumed in the impairment loss. (Section 13) (LCM).
production process or in rendering services. ▪ Market value is determined as the probable
selling price to willing buyers at reporting
Recognition: date.
▪ When the entity controls the asset as a
result of past events, and
▪ It is probable that future economic benefits
will flow to the entity.

Measurement:
Initial: Cost
Subsequent: LCNRV

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 Accounting treatment if NRV > Cost:
Accounted for as loss on inventory write-down
as a component of COGS
Accounting changes (PAS 8) Accounting changes ▪ Same provision under full PFRS except that ▪ Same provision under full PFRS except that
▪ May result in either change in accounting the entity shall review the the comparative information shall not be
estimate and change in accounting policy. depreciation/amortization method, useful restated for change in accounting policy
▪ Change in accounting estimate are to be life and residual value of its PPE or IA only, and correction of prior period errors.
handled currently and prospectively, if if there are indications that there have
necessary. been changes since the most recent annual
▪ Change in accounting policy are to be reporting date. (Section 10)
handled in the order of priority:
1. Transitional provisions
2. Retrospectively or retroactively
▪ Correction of prior period error shall be
corrected retrospectively by adjusting the
opening balances of retained earnings and
affected assets and liabilities.
▪ In selecting the accounting policies that
relates to a specific transaction, other
event or condition, the entity must
consider the following in the order of
priority:
1. PFRS
2. Judgment
a. Requirement in other PFRS dealing
with similar transactions
b. Conceptual framework
c. Pronouncements issued by other
standard-setting bodies
d. Other accounting literatures and
industry practices
▪ Under PAS 16 and 38, an entity is required
to review at least each financial year-end,
the depreciation/amortization method,
useful life and residual value of its PPE or IA,

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 and if there are changes, the entity shall
account for the changes in accounting
estimates.
Events after the end of reporting Events after the reporting period ▪ Same provision under full PFRS except that ▪ Same provision under PFRS for SMEs.
period (PAS 10) ▪ Events after the reporting period as those the entity has the option to present the
events, whether favorable or unfavorable, dividends declared after the end of the
that occur between the end of the reporting as a segregate component of the
reporting period and the date on which the retained earnings at the end of the
FS are authorized for issue. reporting period (RE appropriation).
▪ It may require either as an adjustment (Section 32)
(accrue) or disclosure.
Related parties (PAS 24) Related parties ▪ Same provision under full PFRS except that ▪ Same provision under full PFRS except that
▪ Parties are considered to be related if one the entity is required only to disclose the the entity is required only to disclose the
party has: key management personnel compensation key management personnel compensation
a. The ability to control the other party in total. (Section 33) in total. (Section 33)
b. The ability to exercise significant
influence over the other party.
c. Joint control over the entity
▪ Required disclosure of key management
personnel compensation per total and per
category of the following: (SPOTS)
a. Short-term employee benefits
b. Post-employment benefits
c. Other long-term employee benefits
d. Termination benefits and
e. Share-based payment

Financial Instruments (PFRS 9) Definition: ▪ Under PFRS for SME (Section 11 and 12), ▪ Same provision under PFRS for SME
▪ Is any contract that gives rise to a financial financial instruments are classified into
asset of one entity and a financial liability basic financial instruments and other
or equity instrument of another entity. financial instruments issues (non-basic Basic Financial Instruments:
financial instruments). 1. Cash
Financial asset is any asset that is: 2. Bank deposits
▪ Cash; Basic Financial Instruments: 3. Trade receivables and payables

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▪ An equity instrument of another entity - Refer to non-complex financial instruments. 4. Loans receivable and payables
(ordinary or preference); 1. Cash 5. Notes receivables and payables
▪ Receivables arising from contractual 2. Demand and fixed term deposits or bank 6. Investment in nonconvertible preference
requirements accounts shares and non-puttable ordinary shares
▪ Derivatives, options and warrants under 3. Trade A/R, N/R and L/R
conditions that are potentially favorable 4. Commercial papers or bills Measurement:
5. Investment in non-puttable ordinary Initial:
Financial liability is any liability that is: shares Transaction price including transaction cost or
▪ Payables arising from contractual 6. Investments in nonconvertible and non- if constitutes significant financing, at present
requirements puttable preference shares value discounted at the market rate of interest
▪ Derivatives, options and warrants under 7. A/P in local and foreign currency for similar financial instruments.
conditions that are potentially unfavorable 8. Loans from bank and other third parties
9. Bonds and similar debt instrument Subsequent:
Equity instrument is any contract that 10. Loans to or from subsidiaries or associates 1. Debt instruments – AC
evidences a residual interest in the net assets that are due on demand 2. Investment in unquoted shares – cost
of an entity. model
▪ Ordinary shares Commercial paper – is an unsecured and short- 3. Investment in shares traded in active
▪ Preference shares term debt instrument issued by a large market – lower of cost or fair value (LCF),
corporation. with changes in fair value recognized in
Recognition: profit or loss.
▪ Financial assets are recognized only when Puttable instrument – is a financial instrument
the entity becomes a party to the that gives the holder the right to sell the Impairment of financial instrument
contractual provisions of the instrument. instrument back to the issuer for cash or is 3. If FA is measured at AC, the impairment
automatically redeemed or purchased by the loss is the excess of CA over the PV of cash
Classification of FA based on: issuer on the occurrence of an uncertain future flows
1. Entity’s business model and event or upon the death of the holder. 4. If FA is measured at cost, the impairment
2. Contractual cash flow characteristics loss is the excess of CA over the best
▪ FVTPL Non-basic financial instrument: estimate of selling price
▪ FVTOCI (mandatory or irrevocable election) 1. Asset-backed securities such as
▪ AC collateralized mortgage obligations,
repurchase agreements and securitized
Measurement: packages of receivables
Initial: 2. Derivative contracts
Fair value plus transaction costs, except FVTPL 3. Hedging instruments
where transaction costs are expensed outright

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Subsequent: 4. Commitments to make a loan to another
▪ FVTPL entity
▪ FVTOCI 5. Commitments to receive a loan if the
▪ AC commitment can be net settled in cash

Outside the scope of PFRS for SMEs

1. Investment in subsidiaries, associates and
joint ventures
2. Financial instruments that meet the
definition of an entity’s own equity,
including equity component of compound
financial instruments
3. Leases
4. Employer’s rights and obligations under
employee benefit plans
5. Contract for contingent consideration in a
business combination
6. Insurance contract
7. Share-based payment transaction
8. Reimbursement asset

▪ Same provision under full PFRS on the

recognition and measurement except that
there is no FVTOCI measurement on the
basic financial instruments. It does not
include also an option to designate
financial assets at FVTPL.

Measurement:
Initial:
Fair value plus transaction costs, except FVTPL
where transaction costs are expensed outright.
If the arrangement constitutes a financing
transaction, it is measured at the present value

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 of the future payments discounted at a market
rate of interest for similar debt instrument.

Subsequent:
a. Basic financial instruments – Amortized cost
b. FVTPL – investments in non-puttable
ordinary shares and investments in
nonconvertible and non-puttable
preference shares that are publicly traded
or the fair value is determinable.
c. Cost less impairment – if the equity
investments are not publicly traded or the
fair value cannot be measured.
d. For non-basic financial instruments – FVTPL
except if fair value is not determinable, in
which case, it is measured at cost less
impairment

Impairment of financial instrument

1. If FA is measured at AC, the impairment
loss is the excess of CA over the PV of cash
flows.
2. If FA is measured at cost, the impairment
loss is the excess of CA over the best
estimate of selling price.
Investment in associates and ▪ Investment in associates using equity ▪ Investment in associate using any one of ▪ Investment in associate using any one of
joint venture (PAS 28) method - mandatory the following methods: (Section 14-15) the following methods:
a. Cost model (if unquoted) 1. Cost model
Under equity method: (For ordinary shares) b. Equity method 2. Equity method
▪ Investment is initial recognized at cost and c. Fair value method (if quoted)
increased by the investor’s share of the
profit and decreased by the investor’s Under Cost model:
share of the loss and dividends ▪ Investment is initially recognized at
distributions by transaction price including transaction cost
the investee.

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 ▪ Excess of acquisition cost over the fair and decreased subsequently by
value of the net identifiable assets acquired accumulated impairment loss.
is goodwill which is included in the carrying ▪ All dividends and other distributions
amount of the investment (implicit received are recognized as income.
goodwill).
▪ There is no separate accounting required Under Equity method:
for the implicit goodwill. Neither ▪ Same provision under full PFRS with the
amortization nor separate impairment exception that goodwill shall be amortized
testing of the goodwill is permitted. over its estimated useful life. If there is no
▪ Excess of the fair value of the net reliable estimate of a useful life, the
identifiable assets acquired over acquisition goodwill shall be amortized over a period
cost is included in the investor’s share of of 10 years or less.
profit or loss of the associate.
Under Fair value model:
▪ Investment is initially recognized at
transaction price excluding transaction cost
▪ At each reporting period, the investment is
measured at fair value with changes in fair
value recognized in profit or loss.
Investment property (PAS 40) Investment property ▪ Same provision under full PFRS. (Section 16) ▪ Same provision under full PFRS
▪ defined as property (land or building or
part of a building, or both) held by an
owner or by the lessee under finance lease
to earn rentals or for capital appreciation
or both.

Examples:
1. A building that is rented out to
independent parties under operating lease
2. A tract of land acquired as a long-term
investment
3. A building that is rented out under
operating lease and the entity provides
cleaning, security and maintenance services
(the services provide is insignificant)

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 4. A tract of land held for an undetermined
future use

Measurement:
Initial: At cost
Subsequent: Either
using:
a. Fair value model - the investment is
measured at fair value with changes in fair
value recognized in profit or loss.
b. Cost model – cost less accumulated
depreciation and any accumulated
impairment loss

Transfers to or from investment property:

▪ Occurs when the property meets or ceases
to meet the definition of investment
property
▪ Accounted for as change in accounting
policy
Property, plant and equipment PPE definition: ▪ Same provision under full PFRS. (Section 17) ▪ Same provision under full PFRS except for
(PAS 16) ▪ are tangible assets that are held for use in the subsequent measurement of PPE which
production or supply of goods or services, is measured at either:
for rentals to others (except land and a. Cost model
building), or for administrative purposes, b. Fair value model
and are expected to be used during more
than period.

Recognition:
▪ Probable that future economic benefits
associated with the item will flow to the
entity; and
▪ Measurable

Measurement:

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 Initial: At cost (PP-DACs-DECRES)
Subsequent: Either using:
a. Cost model – cost less accumulated
depreciation and any accumulated
impairment loss
b. Revaluation model – revalued carrying
amount (fair value at the date of
revaluation less any subsequent
accumulated depreciation and
accumulated impairment
loss)
Intangible asset other than Intangible asset definition ▪ Intangible assets of SMEs are measured at ▪ Intangible assets of SMEs are measured at
goodwill (PAS 38) ▪ An identifiable nonmonetary asset without cost model only. (Section 18) cost model only.
physical substance.
Accounting treatment on certain items: Accounting treatment on certain items:
Measurement: ▪ All research and development costs are ▪ All intangible assets of a small entity shall
Initial: At cost recognized as expenses when incurred. be considered to have a finite life.
Subsequent: Either ▪ Useful life of an intangible asset is ▪ All intangible assets including goodwill are
using: considered to be finite. If it cannot be amortized over the useful life.
a. Cost model – cost less accumulated determined, the useful life shall be the best ▪ If no reliable estimate of the useful life, the
amortization and any accumulated estimate of management but not exceeding useful life shall be the best estimate of
impairment loss 10 years. management but not exceeding 10 years.
b. Revaluation model – revalued carrying ▪ All intangible assets are amortized and
amount (fair value at the date of tested for impairment when there is an
revaluation less any subsequent indication that the asset may be impaired.
accumulated depreciation and accumulated
impairment loss)
Accounting treatment on certain items:
▪ All research costs are recognized as
expenses when incurred. Development cost
may be capitalized when specific criteria
are met, particularly when technological
feasibility has already been established.
▪ Useful life of an intangible asset is either
finite or indefinite.

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 ▪ Only those intangible assets with finite
useful life are amortized and tested for
impairment
▪ Those with indefinite useful life are not
amortized but tested for impairment
annually and whenever there is an
indication that the asset may be impaired.

Leases (PFRS 16) Leases ▪ Under PFRS for SMEs, leases are accounted Leases
▪ Is defined as a contract or part of a for under the old lease standard of full ▪ No classification of lease in small entity.
contract that conveys the right to use the PFRS (PAS 17). The classification of lease is Generally, all leases are considered
underlying asset for a period of time in based on the transfer of risk and rewards operating leases.
exchange for consideration. incidental to ownership (substance over ▪ No provision for sale and leaseback.
legal form). (Section 20)
Classification of lease:
a. Finance lease Major criteria for a finance lease:
b. Operating lease a. Transfer of ownership of the asset at the
▪ From the point of view of the lessee, the end of the lease term.
lease should be accounted for as finance b. There is a bargain purchase option.
lease, meaning the lessee will record an c. Lease term is a major part (75%) of the
asset (ROUA) and a liability (Lease liability) economic life of the asset even if title is not
except that if the lease is (a) Short-term transferred.
lease; (b) Low value lease, the lessee has d. PV of minimum lease payments amounts to
the option to account the lease as at least substantially all (90%) of the fair
operating lease. value of the lease asset at the inception of
the lease.
Measurement:
1. Lease liability – present value of the lease Finance lease - Lessee
payments to be made over the lease term ▪ If the lease is classified as finance lease, the
2. Right of use asset – initially measured at lessee shall recognize an asset and a
the amount of lease liability adjusted for liability equal to the lower between the fair
lease prepayments, lease incentives value of the asset and the present value of
received, initial direct costs and an the minimum lease payments using
estimate of interest
restoration, removal and dismantling cost. rate implicit in the lease or if not

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 determinable using incremental borrowing
▪ From the point of view of the lessor, the rate.
lease should be accounted for as either ▪ Any initial direct costs incurred by the
finance lease or operating lease based on lessee in negotiating and arranging a lease
the transfer of risks and rewards incidental are added to the cost of the asset.
to ownership. ▪ The lessee shall depreciate the leased asset
▪ On the part of the lessor, the finance lease over the useful life. However, if there is no
is classified either as: reasonable certainty that the lessee will
a. Direct financing lease – only recognizes obtain ownership by the end of the lease
interest income term, the asset shall be depreciated over
b. Sales type lease – recognizes both the shorter between the useful life and
interest income and gross profit on lease term.
sales ▪ The minimum lease payments shall be
apportioned between the finance charge
▪ If classified as operating lease, the lessor and the reduction of the outstanding
shall recognize lease payments as income liability using the effective interest method.
either on a straight-line basis or another ▪ The lessee shall charge contingent rent as
systematic basis. Initial direct cost incurred expense in the period it is incurred.
by the lessor shall be added to the carrying
amount of the underlying asset and Finance lease – Lessor (same under full PFRS)
recognized as expense over the lease term ▪ On the part of the lessor, the finance lease
on the same basis as the lease income. Any is classified either as:
lease bonus received by the lessor from the a. Direct financing lease – only recognizes
lessee shall be recognized as unearned rent interest income
to be amortized over the lease term. ▪ The lessor shall recognize a receivable at an
amount equal to the net investment in the
▪ In case of sale and leaseback, both the lease
seller-lessee and the buyer-lessor ▪ The net investment in the lease is equal to
determine if the transfer of asset under the cost of the asset plus any initial direct
sale and leaseback transaction qualifies as a cost incurred by the lessor.
sale using PFRS 15. ▪ The total interest income over the lease
term is equal to the gross investment in
If the transfer qualifies as a sale: the lease (gross rentals over the lease term
a. The seller/lessee shall: plus
residual value, whether guaranteed or

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 - Measure the right-of-use-asset arising unguaranteed except if the ownership will
from the leaseback at the proportion of transfer to the lessee upon expiration of
the previous carrying amount of the the lease term, in which case the residual
asset that relates to the right of use value is ignored) minus the net investment
retained by the seller-lessee; and in the lease.
- Recognize only the amount of any gain ▪ The initial direct cost incurred by the lessor
or loss that relates to the rights is added to the cost of the asset to get the
transferred to the buyer-lessor. net investment in the lease.
b. The buyer-lessor shall account for the
purchase of the asset applying applicable b. Sales type lease – recognizes both interest
standards. income and gross profit on sales
▪ The lessor shall recognize a receivable
If the transfer does not qualify as a sale, the equal to the net investment in the
parties shall account for the sale and lease back lease
as a financing transaction. ▪ The net investment in the lease is the
present value of the gross investment
in the lease discounted at the implicit
interest rate in the lease.
▪ The gross investment in the lease is
equal to the gross rentals over the
lease term plus the residual value
whether guaranteed or unguaranteed
except if the ownership will transfer to
the lessee upon expiration of the lease
term, in which case the residual value is
ignored.
▪ The total interest income over the
lease term is equal to the gross
investment in the lease minus the net
investment in the lease.
▪ The sales revenue is equal to the lower
between the net investment in the
lease and the fair value of the asset at
the commencement of the lease.
▪ The cost of goods sold is equal to the

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 cost of the asset plus initial direct cost
incurred by the lessor. In sales type
lease, the initial direct cost incurred by
the lessor is expensed immediately as
component of COGS.
▪ The gross income or profit is equal to
sales minus COGS.

Operating lease
▪ If classified as operating lease, the lessor
and the lessee shall recognize lease
payments as income or expense either on a
straight-line basis or another systematic
basis.

▪ Under sales and leaseback transaction:

Finance lease, the seller-lessee:
a. Defer any gain from the sale and amortize
it over the lease term.
b. Recognize immediately any loss from the
sale
Operating lease, the seller-lessee observes the
following guidelines:
a. Sales price = fair value, any gain or loss
from sale shall be recognized immediately.
b. Sales price < fair value, any gain or loss
from sale shall also be recognized
immediately. However, when the loss is
compensated for by future lease payments
at below market price, the temporary loss
is deferred and amortized over the lease
term.
c. Sales price > fair value, the excess is
deferred and amortized over the lease
term.
On the other hand, the fair value over the

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 carrying amount of the asset sold is
recognized immediately.

Provisions and contingencies Definition: ▪ Same provision under full PFRS. (Section 21) ▪ Same provision under full PFRS.
(PAS 37) a. Provision (accrued or recognized)
▪ A provision is an existing liability of
uncertain timing or uncertain amount.
b. Contingent liability is either: (disclosed
only unless the outflow of resources is
remote)
1. A possible but uncertain obligation.
2. A present obligation that is not
recognized as a liability because it is
not probable that an outflow will occur
OR the amount cannot be measured
reliably.
c. Contingent asset (not recognized but only
disclosed when the inflow of economic
benefits is probable)
▪ A possible asset that arises from past event
and whose existence will be confirmed only
by the occurrence or nonoccurrence of one
or more uncertain future events not wholly
within the control of the entity.

Recognition:
▪ The entity has a present obligation, legal or
constructive as a result of past event.
▪ It is probable that an outflow of resources
embodying economic benefits would be
required to settle the obligation.
▪ The amount of the obligation can be
estimated reliably.

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 Measurement:
▪ Best estimate of the expenditure required
to settle the present obligation at the end
of the reporting period.
▪ Where single obligation is being measured,
the individual most likely outcome adjusted
for the effect of other possible outcomes
may be the best estimate.
▪ Where the effect of the time value of
money is material, the amount of provision
shall be the present value of the amount
required to settle the obligation.
▪ Where there is continuous range of
possible outcomes and each point in that
range is as likely as any other, the midpoint
of the range is used.
▪ Where it involves a large population of
items, the obligation is estimated by
“weighing” all possible outcomes by their
associated possibilities – expected value
approach
Equity Definition: Accounting for equity transactions are ▪ Simplified accounting for equity
Equity is the residual interest in the assets of practically the same under full PFRS with instruments.
an entity after deducting all of its liabilities. It is respect to: ▪ The entity shall measure the equity
computed as: a. Recording of equity instrument instruments at the amount of cash
b. Treasury shares transactions received. If payment is deferred and the
a. Investments by owners of the entity.
c. Compound financial instrument (liability time value of money is material, it shall be
b. Plus additions to those investments earned
and equity component) measured at present value.
through profitable operations and retained ▪ If the equity instruments are exchanged for
d. Equity swap or extinguishment of financial
for use in the operations. resources other than cash, it shall be
liability by issuing equity instrument
c. Minus reductions in owner’s investments e. Dividends recognized at the fair value of the
as a result of unprofitable operations and f. Other related equity matters resources received.
distributions to owners (dividends). ▪ An entity shall account for the transaction
cost as a deduction from equity, net of any

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Measurement: related income tax benefit.
▪ Equity instruments are measured at fair ▪ An entity shall reduce equity for the
value of the cash or other resources amount of distributions of dividends to
received or receivable, net of direct issue owners, net of any related tax benefit.
cost.
▪ If payment is deferred and the time value
of money is material, the initial
measurement shall be on a present value
basis.
▪ Transaction costs of an equity transaction
shall be deducted from equity.

COMPONENTS OF SHAREHOLDER’S EQUITY:

A. Share capital
▪ Preference share capital – shares that give
the holders thereof certain preferences
over other shareholders.
▪ Ordinary share capital – represents the
residual corporate interest that bears the
ultimate risk of loss and receives the
benefits of success.
▪ Subscribed share capital – portion of
authorized share capital that is subscribed
but not yet issued.
▪ Subscription receivable (contra-equity of
subscribed share capital) – portion of the
unpaid subscription price.
▪ Share dividends distributable (payable)
▪ Discount on share capital (issued below par
value) (receivable from the shareholder.
▪ Capital liquidated (return of capital in case
of dissolution)

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 ▪ Share premium
a. Excess of subscription price over par
value or stated value;
b. Excess of reissuance price over cost of
treasury shares issued;
c. Distribution of “small” stock dividends.
(valued at fair value of the shares)
B. Retained earnings (appropriated and
unappropriated)
C. Other components of equity
▪ Revaluation surplus (FV at the date of
revaluation less the carrying amount)
▪ Cumulative unrealized fair value
gains/losses on FVOCI
▪ Translation differences of foreign operations
▪ Effective portion of cash flow hedges
Government grant (PAS 20) Govt. grant definition: Recognition: (Section 24) Recognition:
▪ is assistance by government in the form of ▪ Government grant that does not impose Monetary grant:
transfer of resources to an entity in return condition on the recipient is recognized in ▪ Monetary government grant with no
for part or future compliance with certain income when the grant proceeds are imposed conditions is recognized as income
conditions relating to the operating receivable. when the grant proceeds are receivable.
activities of the entity. ▪ Government grant is recognized when the ▪ Monetary government grant with imposed
conditions are actually satisfied. conditions is recognized as income only
Recognition: (Matching principle) ▪ Government grant is recognized as income when the condition is met.
▪ The entity will comply with the conditions when the conditions attached to the grant ▪ Monetary grant received before the
attaching to the grant and that the grant are satisfied or met. revenue recognition criteria are met is
will be received. ▪ Grant related to assets is treated as recognized as liability.
▪ Generally, government grant is recognized deferred income until the conditions are Nonmonetary grant:
as income over the periods necessary to actually satisfied. (liability) The small entity has an accounting policy
match the grant with the related expense choice using either:
or cost. Classification: a. No recognition
▪ Grant related to assets is treated either as ▪ No classification on the grant related to b. Recognition at fair value

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 deferred income or a reduction in the cost asset or income
of the asset.
Measurement:
Classification: ▪ All grants are measured at the fair value of
▪ Grant can be classified as to grant the asset received or receivable.
related to assets or as to income

Measurement:
Monetary grant:
a. Amount of cash received
b. Fair value of amount receivable
c. Carrying amount of loan payable to the
government for which repayment is
forgiven
d. Discount on loan payable to government at
below-market rate of interest
Nonmonetary grant:
a. Fair value or
b. Nominal amount or zero, plus direct cost
incurred
Borrowing cost (PAS 23) Borrowing cost Borrowing cost (Section 25) Borrowing cost
▪ are interest and other costs that an entity ▪ All borrowing costs shall be recognized as ▪ All borrowing costs shall be recognized as
incurs in connection with borrowing of expense in the period when incurred. expense in the period when incurred.
funds ▪ SME is required to disclose all finance costs
▪ Borrowing cost that is directly attributable recognized as expense during the year.
to the acquisition or production of a
qualifying asset is required to be capitalized
as cost of the asset. Those that are not
directly attributable to a qualifying asset
shall be expensed when incurred.

Share-based payment (PFRS 2) Share-based payment transactions ▪ Same provision under full PFRS (Section 26) ▪ Distinction between equity-settled and cash
a. Equity settled share-based payment except that intrinsic value measurement is settled arrangement:
transactions (share options) not mentioned as an alternative. a. Equity settled share-based payment – a

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 Furthermore, regarding the fair value of small entity shall measure the goods and
The entity acquires goods or services as shares or share options and equity-settled services received and the corresponding
consideration for equity instruments of the share appreciation rights are measured increase in equity with reference to the net
using the following three-tier measurement asset value of the equity instrument
entity.
hierarchy: granted. Net asset value can be computed
a. Observable market price is available by dividing total assets less liabilities by the
b. Cash-settled share-based payment b. If (a) is not available, entity-specific outstanding shares at measurement date
transactions (share appreciation rights) observable market data such as: (BVPS).
▪ Recent transaction in the entity’s b. Cash settled share-based payment – a small
The entity acquires goods or services by shares, or entity shall measure the goods or services
incurring liabilities to the supplier of goods ▪ A recent independent fair valuation acquired and a liability incurred at the fair
of the entity or its principal assets. value of the liability. Until the liability is
or services for amounts that are based on
c. If (a) and (b) are not available, settled, the entity shall remeasure the fair
the price of the entity’s equity instruments. ▪ The fair value of the shares or SAR value at each reporting date with any
shall be indirectly measured using changes recognized in profit or loss for the
Share options – are granted to officers and key valuation method that uses market period.
employees to enable them to acquire shares of data; or
the entity during a specified period upon ▪ Using option pricing model
fulfillment of certain conditions at a specific
price.

Measurement:
▪ The compensation resulting from share
options is measured using the following
two methods:
a. Fair value method
b. Intrinsic value method – excess of
market value over the option or
exercise price (used only if the fair
value is not determinable)

Recognition:

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a. If vest immediately, recognized the
compensation as expense in full with
corresponding increase in equity on the
grant date.
b. If do not vest until the employee completes
a specified service period, the
compensation is recognized as expense
over the service period or vesting period.

Share appreciation right – entitles an

employee to receive cash which is equal to the
excess of the market value of the entity’s share
over a predetermined price for a stated
number of shares.

Measurement:
▪ The compensation is based on the fair
value of the liability at reporting date and
shall be remeasured at every year-end until
it is finally settled. Any changes in fair value
are included in profit or loss.
▪ The fair value of the liability is equal to the
excess of the market value of the share
over a predetermined price for a given
number of shares over a definite vesting
period.

Recognition:
c. If vest immediately, recognized the
compensation as expense in full with
corresponding increase in equity on the

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 grant date.
d. If do not vest until the employee completes
a specified service period, the
compensation is recognized as expense
over the service period or vesting period.

Share-based transaction with cash alternative

▪ Share-based payment transaction may give
either the entity or the counterparty a
choice of settling the transaction in cash or
by transfer of equity instrument.
a. Cash alternative
b. Share alternative

The accounting for this type of instrument

depends on which party has the choice of
settlement:
a. If the entity has the choice, the entity shall
account for the instrument initially as
either a liability or equity, but not both.
b. If the counterparty has the choice, the
entity is deemed to have issued a
compound financial instrument. Thus, the
compound financial instrument is
accounted for as partly liability which is the
cash alternative and partly equity which is
the share alternative.
Impairment asset (PAS 36) General principles on impairment General principles on impairment (Section 27) General principles on impairment
▪ If the recoverable amount is less than ▪ Same provision under full PFRS. ▪ Same provision under PFRS for SME.
carrying amount, the entity shall reduce the ▪ If the recoverable amount is less than

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 carrying amount of the asset to the carrying amount, the entity shall reduce the
recoverable amount. The difference is carrying amount of the asset to the
accounted for as impairment loss. recoverable amount. The difference is
▪ If PPE is measured at revaluation model, accounted for as impairment loss.
any impairment loss is charged first against ▪ Recoverable amount is the higher of FV-
revaluation surplus and any excess is COD and VIU
recognized in profit or loss. ▪ Assets including goodwill are tested for
▪ Recoverable amount is the higher of FV- impairment when there is an indication
COD and VIU that the asset may be impaired.
▪ Assets with finite useful life are tested for ▪ The standard does not state a specific time
impairment when there is an indication limit before extrapolation is required in the
that the asset may be impaired. computation of value in use. (e.g., > 5
▪ The following assets are tested for years)
impairment annually and when there is an
indication that the asset may be impaired: Fair value of an asset is the price that would be
a. Goodwill received to sell an asset in an orderly
b. Intangible assets with indefinite useful transaction between market participants at the
life or an intangible asset not yet measurement date.
available for use
Value in use is the present value of the future
cash flows expected to be derived from an
asset
or cash generating unit.
Employee benefits (PAS 19R) Employee benefits ▪ Same provision under full PFRS (Section 28) ▪ The accrual method (using current salary
▪ are all forms of consideration given by an except for the ff: and years of service without regard to
entity in exchange for service rendered by a. Actuarial gain or loss which are future changes in salary and service) is used
employees, including directors and recognized either in profit or loss or in in calculating the benefit obligation in
management, or for the termination of the OCI. accordance with the minimum retirement
employment. b. The entity is permitted to use another under R.A 7641 or the Philippine
▪ It includes: (POST) valuation method other than unit Retirement Pay Law.
a. Post-employment benefits such as projected credit method if the entity is ▪ No provision for defined benefit plans.
retirement benefit plans and pensions, unable to do it. (Section 28)
life insurance etc. c. Obligations under a defined
b. Other long-term employee benefits contribution plan need not be
such as long-term service leave or discounted.
sabbatical leave, jubilee leave etc.

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 c. Short-term employee benefits such as
wages, salaries, profit sharing and
bonuses.
d. Termination benefits such as severance
and redundancy pay.

Short-term employee benefits are employee

benefits other than termination benefits which
are expected to be settled wholly within twelve
months after the end of the period in which the
employees render the related services.

Post-employment benefits are employee

benefits, other than termination and short-
term employee benefits, which are payable
after completion of employment.

Other long-term employee benefits are all

employee benefits, other than
postemployment benefits, short-term
employee benefits and termination benefits.

Termination benefits are payments made by an

entity to employees when it terminates their
employment as required:
a. By legislation, contractual or other
agreement with employees or their
representatives.
b. By constructive obligation based on
practice, custom or a desire to act
equitably.

Post-employment benefit plan is classified

either as:

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a. Defined contribution plan – under this plan,
the entity pays fixed contribution into a
separate entity known as the fund.
b. Defined benefit plan – under this plan, the
entity’s obligation is to provide the agreed
benefits to employees based on a formula
which is usually related to the salary and
years of service.

Measurement:
a. Defined contribution plan
▪ Fixed contribution shall be recognized as
expense in the period it is payable.
▪ Any unpaid contribution at the end of the
period shall be recognized as accrued
expense (liability).
▪ Any excess payment shall be recognized as
prepaid expense (asset).
▪ It measured on an undiscounted basis
except when they do not fall due wholly
within 12 months after the end of the
reporting period.
b. Defined benefit plan
▪ The obligation is measured on a discounted
basis using the projected unit credit
method (required)
▪ The expense to be recognized is not
necessarily the amount of contribution for
the period.
▪ The defined benefit liability shall be
measured as the net amount of the
following:
a. The present value of the defined
benefit obligation at the reporting date.

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 b. Minus the fair value of the plan assets
at the reporting date.

Components of defined benefit cost

1. Service cost which comprises: (P/L)
a. Current service cost
b. Past service cost
c. Any gain or loss on settlement
2. Net interest which comprises: (P/L)
a. Interest expense on DBO
b. Interest income on plan assets (beg.
FVPA x discount rate)
c. Interest expense on effect of asset
ceiling
3. Remeasurements which comprise: (OCI and
subsequently transferred within equity)
a. Remeasurement of plan assets
(difference between the actual return
on plan assets and interest income)
b. Remeasurement of projected benefit
obligation (actuarial gain or loss)
c. Remeasurement of the effect of asset
ceiling
Income tax (PAS 12) Income Tax ▪ Same provisions under full PFRS. (Section ▪ A small entity shall make an accounting
Definition of terms: 29) policy choice using either:
▪ Accounting or financial income (FI) is the a. Taxes payable method – CUTE only; not
income for the period before deducting required to recognize DTA or DTL.
income tax expense (GAAP). This is the tax b. Deferred income taxes method – CUTE
base that is used to compute for the total + DTL - DTA
income tax expense (TITE) after
considering permanent differences.
▪ Taxable income (TI) is the income for the
period determined in accordance with the
rules established by the taxation authorities

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 upon which income taxes are payable or
recoverable (Tax Code). This is the tax base
that is used to compute for the current tax
expense (CUTE).
Journal entry:
Income tax expense xxx
Current tax liability xxx

Differences between accounting income and

taxable income may be classified into two:
a. Permanent differences – are items of
revenue and expense which are included in
either accounting income or taxable
income but will never be included in the
other. This pertains to nontaxable revenue
(e.g., interest income subject to final tax)
and nondeductible expenses (e.g., tax
penalties, surcharges and fines)
b. Temporary differences – are differences
between the carrying amount of an asset
or liability and the tax base. It includes
timing differences. It gives rise to either:
1. DTL (FTA) - presented as NCL in the
SOFP. It arises from the ff.:
a. FI > TI because of timing diff.
b. CA of an asset > its tax base
c. CA of a liability < its tax base
2. DTA (FDA or NOLCO) – presented as
NCA in the SOFP. It arises from the ff.:
a. TI > FI because of timing diff.
b. Tax base of asset > CA
c. Tax base of a liability < CA
d. Net operating loss carry over

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Recognition of DTL or DTA:
a. A DTL shall be recognized for all temporary
differences that are expected to increase
taxable profit in the future.
b. A DTA shall be recognized for all temporary
differences that are expected to reduce
taxable profit in the future.
c. A DTA shall be recognized for the carryover
of net operating loss.
d. A DTA shall be recognized to the extent
that it is probable that taxable income will
be available against which the deductible
temporary difference can be utilized.

Measurement of DTL or DTA:

▪ Measured using the tax rate that has been
enacted by the end of the reporting period
and expected to apply in the period when
the asset is recovered or the liability is
settled. e.g., the tax rate of 30% is
applicable to the taxable year 2021. By
December 31, 2021, a new tax law has
been enacted imposing a 25% tax rate
effective taxable year 2022. The current tax
liability or asset is measured at 30% but the
DTL or DTA is measured using the new
enacted tax rate of 25%.

Formulas:
▪ Current tax expense (CUTE) = TI x tax rate
enacted at the reporting date.
▪ Total income tax expense (TITE) = FI after
considering permanent differences x tax
rate enacted at the reporting date assuming

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 there is no future enacted income tax rate.
It is also equal to CUTE + DTL – DTA.
▪ Prepaid income tax (PIT) = actual taxes paid
> current tax liability.
SPECIALIZED ACTIVITIES (Section Definition: ▪ Same provisions under full PFRS except for ▪ Same provisions under PFRS for SMEs
34) Agriculture is the management by an entity of the bearer plants which is not accounted as except for the measurement of biological
a. Agriculture (PAS 41) the biological transformation and harvest of PPE under PAS 41. assets.
biological assets for sale or for conversion into ▪ Biological assets of small entities are
agriculture produce or into additional biological measured using either:
assets. a. Cost model or
b. Current market price model
Biological assets are living animals and living
plants. Current market price model is measured on
initial recognition and at each reporting date at
Agricultural produce is the harvested product current market price. The current market price
of the entity’s biological asset. is the probable selling price to willing buyers as
of reporting date. Any changes in current
Measurement: market price shall be recognized in profit or
▪ Biological assets is measured at FV-COD loss.
when such fair value is readily
determinable without undue cost or effort. ▪ Agricultural produce is measured at the
▪ If fair value is not determinable, cost less current market price at the point of harvest
accumulated depreciation and any which will be the initial cost of the
accumulated impairment loss. agricultural produce when accounted for as
▪ Agricultural produce is measured at FV- inventory.
COD at the point of harvest which will be
the initial cost of the agricultural produce
when
accounted for as inventory.
b. Exploration and evaluation of Exploration and evaluation of mineral ▪ Same provisions for the recognition, ▪ None
mineral resources (PFRS 6) resources classification and measurement under full
▪ is defined as the search for mineral PFRS.
resources after the entity has obtained
legal right to explore in a specific area as
well as
the determination of the technical

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 feasibility and commercial viability of
extracting the mineral resources.
▪ The expenditures incurred by an entity in
connection with exploration and evaluation
of mineral resources before technical
feasibility and commercial viability of
extracting a mineral resource are known as
exploration and evaluation expenditures.

Recognition and measurement:

Initial:
▪ Exploration and evaluation expenditures
may qualify as exploration and evaluation
asset and shall be measured at cost.
Subsequent:
▪ Either at cost model or revaluation model

Classification of exploration and evaluation

asset:
a. Tangible asset such as vehicles and drilling
rigs
b. Intangible asset such as drilling rights.

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