Chapter 22- SMEs-Definition

Introduction

The Financial Reporting Standards Council or FRSC approved on October 13, 2009 the
adoption of IFRS for SMEs issued by the International Accounting Standards Board or
IASB as Philippine Financial Reporting Standards for Small and Medium-sized Entities
or PFRS for SMEs.

There are 35 sections comprising the PFRS for SMEs relating to topics basically on
financial accounting and advanced accounting.

Sections relating to financial accounting

Section 1 Small and medium-sized entities

Section 2 Concepts and pervasive principles
Section 3 Financial statement presentation
Section 4 Statement of financial position
Section 5 Statement of comprehensive income and income statement Section 6
Statement of changes in equity and statement of income and retained earnings
Section 7 Statement of cash flows
Section 8 Notes to financial statements
Section 10 Accounting policies, estimates and errors
Section 11 Basic financial instruments
Section 12 Other financial instruments issues- excluding hedging
Section 13 Inventories
Section 14 Investments in associates
Section 16 Investment property
Section 17 Property, plant and equipment
Section 18 Intangible assets other than goodwill
Section 20 Leases
Section 21 Provisions and contingencies
Section 22 Liabilities and equity
Section 23 Revenue
Section 13 Government grants
Section 25 Borrowing costs
Section 26 Share-based payment
Section 27 Impairment of assets
Section 28 Employee benefits
Section 29 Income tax
Section 31 Hyperinflation
Section 32 Events after the end of reporting period
Section 33 Related party disclosures
Section 34 Specialized activities, such as agriculture, extractive activities and service
 concession
Section 35 Transition to PFRS for SMEs

Definition of SMEs

The International Accounting Standards Board defines “small and medium-sized

entities” or SMEs as entities that:
a. Do not have public accountability
b. Publish general purpose financial statements for external users

Publish accountability

An entity has public accountability if:

a. Its debt or equity instruments are traded in a public market or it is in the process
of issuing such instruments for trading in public market.
b. It holds assets in fiduciary capacity for a broad group of outsiders as one of its
primary businesses.

Securities traded in a public market

The IASB concluded that, regardless of size, entities whose securities are traded in a
public market should follow full PFRS and not PFRS for SMEs.

• An entity’s decision to enter a public capital market makes it “publicly accountable”.

• This public accountability of “listed entities” is recognized by the government by
establishing laws and regulations that deal with market regulation and
disclosures to investors.

Financial institutions

The primary business for financial institutions is to hold and manage financial resources
entrusted to them by a broad group of clients and customers who are not involved in the
management of the entities.

As such, financial institutions are “publicly accountable” because the entities act in a
fiduciary capacity.

Accordingly, financial institutions must follow full PFRS and not PFRS for SMEs.
Incidental to primary business

Some entities may also hold assets in a fiduciary capacity for a broad group of outsiders
because they hold and manage financial resources entrusted to them by clients,
customers or members not involved in the management of the entity.
However, if such entities do so for reasons incidental to a primary business, the entities
are not publicly accountable.

General purpose financial statements

PFRS for SMEs is designed to apply to the general purpose financial statements and
other financial reporting of profit-oriented entities that “do not have public
accountability”.

Objective of general purpose financial statements prepared in accordance with PFRS

for SMEs is to provide useful information about an entity’s financial position,
performance and cash flows to a wide range of users who are not in a position to
demand reports tailored to meet their particular needs.

SME under Philippine jurisdiction

The IASB’s definition of SMEs does not include “size criteria” for determining what is a
small and medium-sized entity because it is not feasible to develop size test that would
be applicable and long-lasting in numerous countries.

Under Philippine jurisdiction, the definition of small and medium-sized entity (SME)
includes size criteria in terms of total assets and total liabilities.

The definition of SME is set forth in Philippine Securities and Exchange Commission En
Banc Resolution dated August 13, 2009.

The Philippine Securities and Exchange Commission defines SME as an entity:

a. With total assets between P 3,000,000 and P 350,000,000 OR with total liabilities
between P 3,000,000 and P 250,000,000.
b. That is not required to file financial statements under SRC Rule 68.1

SRC Rule 68.1 – pertains to “listed entities” or entities whose securities are
traded in an exchange market, and entities with assets of at least P 50,000,000
and have 200 or more holders each holding at least 100 shares of a class of
equity securities.
c. That is not in the process of filing financial statements for the purpose of issuing
any class of instruments in a public market.
d. That is not a holder of secondary licenses issued by a regulatory agency such as
a bank, an investment house, a finance company, an insurance company,
securities broker or dealer, a mutual fund and pre-need company.
e. That is not a public utility.
Micro-business entities

Micro-business entities are entities whose total assets or total liabilities are below the P
3,000,000 floor threshold.

Micro-business entities have the option to use any of the following bases of accounting
in the preparation of financial statements:
a. Full PFRS
b. PFRS for SMEs
c. Another acceptable basis of accounting

Exemption from PFRS for SMEs

The Philippine SEC in its meeting on October 7, 2010 resolved to exempt from the
mandatory adoption of the PFRS for SMEs small and medium-sized entity that meets
any of the following criteria:

1. A subsidiary of a parent reporting under full PFRS.

2. A subsidiary of a foreign parent that will be moving forward full IFRS pursuant to
the foreign country’s published convergence plan.
3. A subsidiary of a foreign parent that has been applying the standards for a
nonpublicly accountable entity for local reporting purposes and is considering
moving to full PFRS instead of the PFRS for SMEs in order to align its policies
with the expected move to full IFRS by its foreign parent pursuant to the foreign
country’s published convergence plan.
4. It has short-term projections that show that it will breach the quantitative
thresholds set in the criteria for an SME, and the breach is expected to be
significant and continuing due to its long-term effect on the entity’s asset or
liability size.
5. Part of a group, either as a significant joint venture or an associate, that is
reporting under full PFRS.
6. A branch office of a foreign entity reporting under full IFRS.
7. It has concrete plans to conduct an initial public offering within the next two years.
8. It has a subsidiary that is mandated to report under full PFRS.
9. It has been preparing financial statements using full PFRS and has decided to
liquidate its assets.
First-time adopter

A first-time adopter of PFRS for SMEs is an entity that presents the first annual financial
statements that conform with PFRS for SMEs regardless of whether the previous
accounting framework was full PFRS or another set of generally accepted accounting
principles.

Date of transition
The date of transition to PFRS for SMEs is the beginning of the earliest period for which
full comparative information is presented in accordance with PFRS for SMEs in the first
annual financial statements that conform with PFRS for SMEs.

The PFRS for SMEs is effective for annual periods beginning on or after January 1,
2010.

Thus, if the first-time adopter presents the first annual financial statements in conformity
with PFRS for SMEs on December 31, 2015 on a comparative basis, the date of
transition to PFRS for SMEs is January 1, 2014.

Transition from PFRS for SMEs to full PFRS

If an SME that uses the PFRS for SMEs in a current year breaches the floor and ceiling
size criteria at the end of the current year, the entity shall be required to transition to full
PFRS in the next year if the ceiling threshold is breached or another acceptable
accounting basis if the floor threshold is breached.

This transition must be made provided the event that caused the change is considered
“significant and continuing”.

As a general rule, 20% or more of total assets or total liabilities would be considered
significant.

Opening statement of financial position

The opening statement of financial position is the statement of financial position on the
date of transition to PFRS for SMEs.

In the opening statement of financial position, a first-time adopter shall: a. Recognize all
assets and liabilities whose recognition is required by PFRS for SMEs.
b. Not recognize as assets or liabilities if the PFRS for SMEs does not permit such
recognition.
c. Reclassify items that are recognized under the previous accounting framework as
one type of asset, liability or component of equity, but a different type of asset,
liability or equity under PFRS for SMEs.
d. Apply PFRS for SMEs in measuring all recognized assets and liabilities.

First-time adoption requires full retrospective application of PFRS for SMEs effective at
the reporting date for an entity’s first annual financial statements that conform with
PFRS for SMEs.

Therefore, the first-time adopter shall recognize those adjustments directly in retained
earnings or another category of equity, if appropriate.
Mandatory exceptions to retrospective application

A first-time adopter does not change the accounting that it followed previously for any of
the following transactions:
a. Derecognition of financial assets and financial liabilities
b. Hedge accounting
c. Accounting estimates
d. Discontinued operations
e. Measuring noncontrolling interest

In general, no restatement of the opening statement of financial position is required if its

“impracticable” to do so.

Reconciliation

A first time adopter shall make the following reconciliations in the financial statements:

1. Reconciliation of equity reported under the previous reporting framework to equity

under PFRS for SMEs for both:
a. The transition date
b. The end of the latest period presented in the entity’s most recent annual
financial statements.

2. Reconciliation of the profit or loss determined in accordance with the previous

reporting framework for the latest period in the entity’s annual financial
statements to the profit or loss determined in accordance with PFRS for SMEs
for the same period.