Philippine Financial Reporting Standard for Small Entities (“the Framework”)

Section 1 - Scope of the Framework

1. This Framework is intended for use by small entities as defined by the Philippine Securities and
Exchange Commission.

2. Entities who have operations or investments that are based or conducted in a different country
shall not apply this Framework and should instead apply the full Philippine Financial Reporting
Standards (PFRSs) or Philippine Financial Reporting Standard for Small and Medium-sized
Entities (PFRS for SMEs), as appropriate.

Section 2 - Concepts and Pervasive Principles

Objective of financial statements of an entity applying this Framework.

3. The objective of financial statements of an entity applying this Framework is to provide

information about the financial position, performance and cash flows of the entity that is useful for
economic decision-making by a broad range of users who are not in a position to demand reports
tailored to meet their particular information needs.

Financial position

4. The financial position of an entity is the relationship of its assets, liabilities, and equity as of a
specific date. These are defined as follows:
a. an asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
b. a liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits; and
c. equity is the residual interest in the assets of the entity after deducting all its liabilities.

Performance

5. Performance is the relationship of the income and expenses of an entity during a reporting period.
Income and expenses are defined as follows:
a. income is increases in economic benefits during the reporting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than
those relating to contributions from equity investors; and
b. expenses are decreases in economic benefits during the reporting period in the form of outflows
or depletions of assets or incurrences of liabilities that result in decreases in equity, other than
those relating to distributions to equity investors.

Cash flows

6. Cash flow information shows how an entity generates and uses cash and cash equivalents. Entities
need cash to conduct their operations, to pay their obligations, to make investments in income-
producing assets, and to provide returns to their investors. Information about the performance of
an entity shows the income, expenses, and profit or loss of the entity on an accrual basis.
However, the actual inflows and outflows of cash from an entity’s operations generally differ -
often significantly - from its income and expenses on an accrual basis. Moreover, reporting
performance on an accrual basis gives no insight into the cash used by an entity in its investing
activities or the cash generated by the entity through its financing activities.

7. Cash flows are classified as cash flows from operating, investing, and financing activities.
Classification by activity provides information on how those activities affect the financial position
of the entity (including its liquidity and solvency) and the amount of its cash and cash equivalents.

Recognition of assets, liabilities, income and expenses

Prepared by: ASCM
 8. An item shall be recognized (i.e., incorporated in the financial statements) if it meets the definition
of an asset, liability, income, or expense and satisfies the following criteria:
a. it is probable (i.e., more likely than not) that any future economic benefit associated with the
item will flow to or from the entity; and
b. the item has a cost or value that can be measured reliably.

9. In many cases, the cost or value of an item is known. In other cases, it must be estimated. The use
of reasonable estimates is an essential part of the preparation of financial statements and does not
undermine their reliability.

Accrual basis

10. An entity shall prepare its financial statements, except for cash flow information, using the accrual
basis of accounting. On the accrual basis, items are recognized as assets, liabilities, equity,
income, or expenses when they satisfy the definitions and recognition criteria for those items.

Fair value of an asset

11. Measurement requirements are generally set out in the individual sections of this Framework.
However, the following guidance on fair value measurement is relevant to several sections and so
has been included here.

12. Most of the requirements under this Framework require a cost-based measurement. However, in a
few circumstances, fair value measurement is required or permitted under this Framework. The
fair value of an asset is the amount for which the asset could be exchanged between
knowledgeable, willing parties in an arm’s length transaction. An entity shall use the following
hierarchy to estimate the fair value of an asset:
a. the best evidence of fair value is a price in a binding sale agreement in an arm’s length
transaction or a quoted price for an identical asset in an active market (the latter is usually the
current bid price).
b. if there is no binding sale agreement or active market for an asset, the price of a recent
transaction for an identical asset provides evidence of fair value as long as there has not been a
significant change in economic circumstances or a significant lapse of time since the transaction
took place. If the entity can demonstrate that the last transaction price is not a good estimate of
fair value (for example, because it reflects the amount that an entity would receive or pay in a
forced transaction, involuntary liquidation, or distress sale), that price is adjusted.
c. if there is no binding sale agreement or active market for an asset and recent transactions of an
identical asset on their own are not a good estimate of fair value, an entity estimates the fair
value by using another valuation technique. The objective of using a valuation technique is to
estimate what the transaction price would have been on the measurement date in an arm’s length
exchange motivated by normal business considerations.

13. Valuation techniques include using recent arm’s length market transactions for an identical asset
between knowledgeable, willing parties, reference to the current fair value of another asset that is
substantially the same as the asset being measured, and discounted cash flow analysis. If there is a
valuation technique commonly used by market participants to price the asset and that technique
has been demonstrated to provide reliable estimates of prices obtained in actual market
transactions, the entity uses that technique.

14. The objective of using a valuation technique is to establish what the transaction price would have
been on the measurement date in an arm’s length exchange motivated by normal business
considerations. Fair value is estimated on the basis of the results of a valuation technique that
makes maximum use of market inputs and relies as little as possible on entity-determined inputs.
A valuation technique would be expected to arrive at a reliable estimate of the fair value if:
a. it reasonably reflects how the market could be expected to price the asset; and
b. the inputs to the valuation technique reasonably represent market expectations and measures of
the risk return factors inherent in the asset.
Prepared by: ASCM
Offsetting

15. An entity shall not offset assets and liabilities, or income and expenses, unless required or
permitted by this Framework.
a. Measuring assets net of valuation allowances - for example, allowances for inventory
obsolescence and allowances for uncollectible receivables - is not offsetting.
b. If an entity’s normal operating activities do not include buying and selling non-current assets,
including investments, and operating assets, then the entity reports gains and losses on disposal
of such assets by deducting from the proceeds on disposal the carrying amount of the asset and
related selling expenses.

Prepared by: ASCM