FAR 3 SMES REVIEWER
Chapter 23
False 1. The IASB defines SMEs as entities that have public accountability and publish general purpose
financial statements for external users.
True 2. An entity whose shares and debt instruments are traded in an "over-the-counter" market is
publicly accountable.
False 3. Entities with total assets or liabilities above the floor threshold of 3,000,000 are known as micro-
business entities.
False 4. A bank with total assets of P350,000,000 is an SME.
True 5. Am SME that resents the first financial statements that conform with IFRS for SMEs is known as a
first-time adopter.
Chapter 24
•Full PFRS and PFRS for SMEs have the same provisions on the general features in the preparation of
financial statements. (TRUE)
•It is inappropriate for an entity to leave accounting policies unchanged when better and acceptable
alternatives exist. (TRUE)
•An entity shall present separately each material class of similar items and also present separately items
of dissimilar nature or function unless they are immaterial. (TRUE)
•Except when permitted or required otherwise by PFRS for SMEs, an entity shall disclose comparative
information in respect of the previous period for all amounts reported in the current period’s financial
statements. (TRUE)
•A “publicly accountable entity” is prohibited from making explicit and unreserved statement of
compliance with the PFRS for SMEs in the notes even if it is required by law to prepare the financial
statements in accordance with the PFRS for SMEs. (TRUE)
*To be relevant, financial information must have predictive and confirmatory value. TRUE
* All of the following are enhancing qualitative characteristics of financial information, except: A.
Understandability B. Comparability C. Materiality D. Verifiability ANSWER LETTER C
* Relevance means that relevant information should be presented in a way that facilitates
understanding and avoids erroneous implication. FALSE
* Information is material if its omission or misstatement could influence the economic decision that
users make on the basis of the financial information about an entity. TRUE
* Reliability is the capacity of the information to influence an economic decision. FALSE
Chapter 25: SMEs- Statement of Financial Position
1. Full PFRS permits the presentation of a single statement of income and retained earnings. (False, Full
PFRS does not permit)
2. PFRS for SMEs doesn't require a third statement of financial position. (True)
3. PFRS for SMEs requires presentation of investments in associates but not investment in joint
ventures. (False, PFRS for SMEs requires the presentation of both investments)
4. There is no prescribed format for the statement of financial position of an SME. (True)
5. Total of assets classified as held for sale is required to be presented under PFRS for SMEs. (False, it is
required under full PFRS but not under PFRS for SMEs)
Chapter 26
1. All of the following are components of OCI of an SME, except
a. Actuarial gain or loss on defined benefit plan
b. Revaluation surplus of property, plant and equipment
c. Unrealized gain or loss on equity investment measured at FV through OCI
d. All of these are SME components of OCI
Answer: C
2. Items of OCI that will be reclassified to profit or loss under PFRS for SMEs includes:
a. Gain or loss from translating the financial statements of a foreign operation
b. Revaluation surplus during the year related to revaluation of property, plant and equipment c. Change
in fair value of hedging instruments
d. Actuarial gain or loss in defined benefit plan if the entity elected to present such item in OCI
Answer: C
3. A change from the single-statement approach to the two-statement approach of presenting the total
comprehensive income is a change in accounting policy.
Answer: True
4. PFRS for SMEs have the same provisions with Full PFRS in which of the following? a. Presentation of
total comprehensive income
b. Preparation and presentation of statement of changes in equity
c. Preparation and presentation of the statement of cash flows
d. All of the above
Answer: D
5. Under PFRS for SMEs, an entity shall present or describe any items of income or expense as
extraordinary.
Answer: False
Chapter 27
1. Adjusting events are those that are indicative of conditions that arose after the end of reporting
period and lead to adjustments.
Answer: False.
2.PFRS for SMEs and FULL PFRS share the same principles in the matter of presenting the notes to
financial statements.
Answer: True.
3. Summary of significant accounting policies applied ranks second in the order of presenting the notes.
Answer: True.
4. PFRS for SMEs does not require the presentation of the following:
I. Segment information
II. Earnings per share
III. Domicile and legal form of the reporting entity
IV. Interim financial reports
A. I, II and III
B. III only
C. I, II, and IV
D. All of the above
Answer: C
5. Odd one out. (Related parties)
A. Joint ventures
B. Postemployment benefit plans
C. Distributor
D. Associates
Answer: C.
Because a Distributor is an unrelated party while the rest are examples of major categories of related
parties.
Chapter 28 SMEs – Accounting Changes
True or False
1. Retrospective application means that the new accounting policy is applied to events and
transactions occurring after the date at which the policy is changed.
2. When it is impracticable for an entity to apply a new accounting policy retrospectively because it
cannot determine the cumulative effect of applying the policy to all prior periods, the entity
shall apply the new policy prospectively from the earliest period practicable.
3. Changes in accounting estimates result from new information or new development and
accordingly are not corrections of errors.
4. When it is difficult to distinguish a change in an accounting estimate from a change accounting
policy, the change is treated as a change in an accounting estimate.
5. Prior period errors are adjusted retrospectively by adjusting the ending balance of retained
earnings and affected assets and liabilities
Answers:
1. False
2. True
3. True
4. True
5. False
Chapter 29 SMEs- INVENTORIES and REVENUE
1. Under PFRS for SMEs, Loss on inventory writedown is a component of cost of goods sold.
Answer: False
2. PFRS for SMEs and Full PFRS share the same principles for the recognition of revenue from sale of
goods, interest, royalties & dividends.
Answer: True
3. Storage costs incurred that are necessary during the production process before a further production
stage shall be expensed outright.
Aswer: False
4. Inventories must be measured by an SME at cost.
Answer: False
The lower of cost and estimated selling price less cost to complete and dispose.
5. An SME may use techniques for measuring cost of inventories if the results approximate cost.
Accepted techniques include all of the following, except
a. Standard Cost
b. Retail method
c. Gross Profit Method
d. Most recent purchase price
Answer: C
6. Revenue from sale of goods shall be recognized when all of the following conditions have been
satisfied, except
I. The entity has transferred to the buyer the significant risks and rewards of ownership of the goods.
II. The entity retains either continuing managerial involvement or effective control over the goods sold.
III. The amount of revenue can be measured reliably.
IV. It is probable that economic benefits will flow to the entity.
a. I
b. II
c. III
d. IV
Answer: B
7. Which condition/s does not apply to the recognition of revenue for transactions involving the
rendering of services?
I. The amount of revenue and the costs incurred and costs to complete can be measured reliably.
II. It is probable that payment for the services shall be received by the entity.
III. The significant risks and rewards of ownership have been transferred to the buyer.
IV. The stage of completion of the transaction at the end of reporting period can be measured reliably.
a. Only IV
b. II & III
c. Only III
b. I & II
Answer: C
8. A retailer of perishable produce seeks to avoid obsolescence by arranging the produce in such a way
that customers are most likely to purchase the oldest inventory first. The cost formula that is more
appropriate for the entity is
a. LIFO
b. FIFO
c. Weighted Average
d. Specific Identification
Answer: B
Chapter 30
1. A financial liability is any contractual obligation to deliver cash or another financial asset to another
entity and to exchange financial instruments with another entity under conditions that are potentially
favorable to the entity. (False)
2. PFRS for SMEs and Full PFRS don’t have the same definitions of financial instrument, financial asset
and financial liability. (False)
3. Gold bullion deposited in bank is not considered a financial asset. (True)
4. Deferred revenue is a financial liability. (False)
5. To be classified as basic financial instrument, the investment in preference shares must be
nonconvertible and puttable. (False)
Chapter 31 SME's – Investment in Associate
1. The PFRS for SMEs provide much guidance in the identification of significant influence unlike full
PFRS.
Answer: FALSE
The PFRS for SMEs does not provide much guidance in identifying significant influence unlike full PFRS.
2. All investments in associates under the PFRS for SMEs may be accounted for using the fair value,
cost and equity model while under full PFRS, such investments are only accounted for using the equity
model.
Answer: TRUE
3. When accounting for investments in associate using the fair value model, an investment is
measured at fair value less costs of disposal at each reporting date with any changes recognized in profit
or loss.
Answer: FALSE
When accounting for investments in associate using the fair value model, investment is measured at fair
value at each reporting date with any changes recognized in profit or loss.
4. Under the fair value model, investments in associate are initially measured at the transaction
price inclusive of transaction costs.
Answer: FALSE
Under the fair value model, investments in associate are initially measured at the transaction price
excluding transaction costs.
5. In accounting for investments in associate under the cost model, when the fair value less costs
of disposal at year-end is greater than its carrying amount, an impairment loss shall be recognized.
Answer: FALSE
In accounting for investments in associate under the costs model, when the fair value less costs of
disposal at year-end is greater than its carrying amount, an impairment loss shall not be recognized.
6. Under PFRS for SMEs, any implied goodwill included in the carrying amount of the investment
need not be amortized, as well as under full PFRS.
Answer: FALSE
Any implied goodwill included in the carrying amount of investment is amortized over the useful life
under PFRS for SMEs. Meanwhile, under full PFRS goodwill is not amortized.
7. The cost model is permitted if the investment in associate has a published price quotation.
Answer: FALSE
The investment in associate shall be accounted for using fair value model if there is published price
quotation.
8. Under the equity method, the company assumes that using dividends as a basis for recognizing
income fails to report properly the economics of the situation.
Answer: TRUE
9. Ignoring impairment losses when fair value less cost of disposal exceeds carrying amount is
applicable to all methods of accounting investment in associates.
Answer: FALSE
When the fair value model is used in measuring the investment in associate, the cost of disposal is
ignored regardless if it exceeds the carrying amount. Hence, impairment losses aren't recognized.
10. Significant influence may be indicated in the following ways except:
a. Interchange of managerial personnel
b. Participation in policy making process
c. Preparation of consolidated financial statements
d Provision of essential information
Answer: C
This activity is not within the scope of a company having significant influence, rather, it has a controlling
interest.
Chapter 32
1. PFRS for SME is amended to include a separate line item for investment property carried
at cost less accumulated depreciation and impairment.
2. Under PAS 40, any equipment or movable property can qualify as an investment
property.
3. Changes in fair value of an investment property is reported as part of Other
Comprehensive income.
4. An investment property and a finance lease liability shall be recognized at lower
between the fair value of the property interest and the present value of minimum lease
payments.
5. PFRS for SMe provided a specific criteria on how to classify a tract of land held for
undetermined use.
Answers:
1. True
2. False ; only land or building
3. False; Changes in F.V is part of P/L
4. True
5. False; only PAS 40.
Chapter 33
1.) Depreciation of an asset does not cease when the asset becomes idle or is retired from
active use unless fully depreciated.
Answer: TRUE
2.) Depreciation of an asset ceases when the asset is derecognized.
Answer: TRUE
3.) PFRS for SMEs also address noncurrent assets held for sale.
Answer: FALSE
4.) The item of PPE held for sale in SMEs is separately presented.
Answer: FALSE
5.) Under PFRS for SMEs, an entity can either use the cost model or revaluation model for
subsequent measurement of PPEs.
Answer: TRUE
CHAPTER 34 GOVERNMENT GRANT AND BORROWING COSTS
1. Government grant shall be measured at fair value.
TRUE
2. It is possible to defer grant income even if cash/asset is already received.
TRUE
3.A grant received before the revenue recognition criteria are met is reported as income immediately.
FALSE
4. Borrowing costs that are not directly attributable to a qualifying asset shall be expensed when
incurred,
under full PFRS
TRUE
5. Loans from a government bearing no interest can be considered government grant
TRUE
6. Under PFRS for SMEs, it is not allowed to match the grant with the expense for
which it is intended to compensate
TRUE
7. It is possible to derecognize grant income
TRUE
8. Borrowing costs include interest expense calculated using straight-line method
FALSE
9. Borrowing costs may include translation differences arising from foreign currency
exchange
TRUE
10.Interest incurred from a finance lease is part of borrowing costs
TRUE
Chapter 35
ANSWER
False – Full PFRS 1. Internally-generated intangible assets are recorded as assets under PFRS for
SMEs.
False – Full PFRS 2. Research costs are expensed and development costs may be capitalized
under both PFRS for SMEs and full PFRS.
False – including 3. Useful life of all intangible assets, excluding goodwill, is considered to be
finite under PFRS for SMEs.
True 4. There is an assumption of maximum of 10 years of the useful life of an
intangible asset.
False – cost 5. For subsequent measurement, both cost model and revaluation model may
model [only] be used under PFRS for SMEs.
True 6. Under PFRS for SMEs, intangible assets are tested for impairment whenever
there is an indication of impairment.
True 7. As a general rule, residual value of an intangible asset is presumed to be zero
under both PFRS for SMEs and full PFRS.
C 8. All of the following mode of acquisition of intangible assets are recognized
under PFRS for SMEs, except:
a) Acquisition by exchange
b) Separate acquisition
c) Acquisition by internal generation
d) Acquisition by way of government grant
e) Acquisition as part of a business combination
D 9. An SME acquired an intangible asset with a cost of P75,000. Management
estimates that its useful will be 15 years. During the year, the entity incurred
Solution: P15,000 of start-up and P20,000 of training costs. It also started its research
P75,000/10yrs = and development which were P100,000 and P50,000 respectively at year-end
P7,500 and believed that technological feasibility was achieved. How much will be
the amortization expense for the year?
a) P6,000
b) P5,000
c) P8,333
d) P7,500
A 10. Which of the following mode of acquisition is cost equal to the fair value of
asset given up or fair value of asset received or carrying amount of asset
given up?
a) Acquisition by exchange
b) Separate acquisition
c) Acquisition by internal generation
d) Acquisition by way of government grant
e) Acquisition as part of a business combination
Chapter 36
SME- Impairment of Assets
1. The events and change in circumstances that lead to an impairment of asset may be
classified as external and internal source of information.
2. If the estimated recoverable amount of the asset exceeds carrying amount, the entity
shall increase the carrying amount to recoverable amount. This increase is a reversal of
impairment loss that is recognized immediately in OCI.
3. An impairment loss recognized for goodwill shall be reversed in a subsequent period.
4. Under PFRS for SME, assets, including goodwill, are tested for impairment when there is
an indication that the asset may be impaired.
5. Under FULL PFRS, assets with a finite useful life are tested for impairment when there is
an indication that the asset may not be impaired.
ANSWERS:
1. TRUE
2. FALSE
3. FALSE
4. TRUE
5. FALSE
Chapter 37
1. A provision is
a) A liability of uncertain timing or amount
b) A liability of certain timing and amount.
c) A possible obligation as a result of past event that is of uncertain timing or amount.
Answer: A
2. An SME shall recognize a provision only when
a) The entity has a present obligation as a result of a past event.
b) It is probable that the entity will be required to transfer economic benefits in settlement
c) The amount of the obligation can be estimated reliably
d) All of the above
Answer: D
3. Which of the ff. is not a contingent liability?
a) A possible but uncertain obligation
b) A present obligation that is not probable but measurable
c) A liability of uncertain timing or amount
Answer: C
4. An SME shall always measure a provision at the fair value of the amount required to
settle the obligation at the reporting date.
Answer: FALSE. At best estimate
5. Where the effect of the time value of money is material, the amount of provision shall
be the future value of the amount required to settle the obligation.
Answer: FALSE. Present Value
6. An entity shall exclude gain on the expected disposal of the asset from the
measurement of a provision.
Answer: TRUE
7. The discount rate shall be a post-tax rate that reflects current market assessment of the
time value of money
Answer: FALSE. Pre-tax
8. An SME shall review provisions at each reporting date and adjust them to reflect the
current best estimate of the amount that would be required to settle the obligation.
Answer: TRUE
9. An SME measures a provision at the best estimate of the amount required to settle the
obligation at the reporting date. When the provision involves a large population of items, the
estimate of the amount reflects the weighting of all possible outcomes by their associated
probabilities. (T / F)
Answer: True
10. When the provision arises from a single obligation, the estimate of the amount is
determined as individual most likely outcome. (T / F)
Answer: FALSE. Is the individual most likely outcome adjusted for the effect of other
possible outcomes.
Chapter 38
1. The PFRs for SMEs defines LEASE as an agreement whereby the lessor conveys to the lessee
in return for payment or a series of payments the right of use an asset for an agreed period of
time.
Answer: TRUE
2. The NET INVESTMENT IN THE LEASE is equal to the cost of the asset PLUS any initial direct
cost incurred by the lessor.
Answer: TRUE
3. Unearned finance income is not required to be disclosed in the book of accounts of a lessor
under a finance lease.
Answer: FALSE
4. “Sale and leaseback” is still covered by PFRS for SMEs lease accounting.
Answer: TRUE
Multiple Choice Questions
1. What is the classification of a lease if it does not transfer substantially all the risks and
rewards incidental to ownership?
A. Operating lease
B. Finance Lease
C. Either operating or finance lease
D. Neither operating nor finance lease
2. A lease that satisfies any of the following would lead to a finance lease except:
A. Lease term is a major part of the economic life of the asset even if title is not transferred
B. The transfer of ownership of the asset at the end of the lease term
C. There is no bargain purchase option
D. Both A and B
3. In the book of lessee (finance lease), what rate should we use in calculating the present value
of the minimum lease payments?
A. Interest rate implicit in the lease
B. Incremental borrowing rate, even if the interest rate implicit in the lease is given
C. Neither of these choices
4. Statement 1: PFRS for SMEs and full PFRS are practically the same with respect to lessor
accounting.
Statement 2: The lessee is required to follow the rental approach for low value lease or if the
lease term is 1 year or less.
A. Both statements are true
B. Only statement 1 is true
C. Both statements are false
D. Only statement 2 is true
5. Statement 1: The lessee is required to account for the lease as a finance lease under the new
lease standard.
Statement 2: The “transfer of risks and rewards” approach still applies to PFRS for SMEs.
A. Both statements are true
B. Only statement 1 is true
C. Both statements are false
D. Only statement 2 is true
Chapter 39
1. Employee benefits are all forms of consideration given by an entity in exchange for
service rendered by employees, including directors and management, or for the termination of
employment.
ANS: TRUE
2. Employee benefits include short-term employee benefits, postemployment benefits,
long-term employee benefits, termination benefits, and share-based payments.
ANS: FALSE
Employee benefits include short-term employee benefits, postemployment benefits, other
long-term employee benefits, termination benefits, and share-based payments.
3. Salaries, short-term compensated absences, subsidized goods are examples of short-
term employee benefits.
ANS: TRUE
4. In defined contribution plan, the contribution is indefinite, while in defined benefit plan,
the contribution is definite.
ANS: FALSE
The contribution is definite under a defined contribution plan. On the other hand, the
contribution is indefinite under a defined benefit plan.
5. Entitlement to compensated absences falls into three categories, namely accumulating,
non-accumulating, and vesting.
ANS: FALSE
Entitlement to compensated absences falls into two categories, namely, accumulating and non-
accumulating.
6. Full PFRS and PFRS for SMEs share the same principle for the recognition and
measurement of the short-term employee benefits, defined contribution plan, other long-term
employee benefits, and termination benefits.
ANS: TRUE
7. All past service costs are deferred and recognized as component of other
comprehensive income regardless of vesting under full PFRS.
ANS: FALSE
Under full PFRS, all past service costs are recognized as expense immediately regardless of
vesting.
8. The SME has an accounting policy choice of recognizing all actuarial gains and losses
either in profit or loss, or in other comprehensive income.
ANS: TRUE
9. Under PFRS for SMEs, the projected credit method is used in measuring the defined
benefit liability if the information that is needed to make such a calculation is already available
or can be obtained without undue cost.
ANS: TRUE
10. Termination benefits that fall due less than twelve months after the end of reporting
period are discounted using the applicable discount rate.
ANS: FALSE
Termination benefits that fall due less than twelve months are not discounted.
Chapter 40
1. Taxable Income of SMEs differs from pretax financial income because of temporary
difference only. FALSE
2. Deferred tax asset and deferred tax liability are classified as current. FALSE
3. A deferred tax asset is the amount of income tax recoverable in present periods with
respect to a deductible temporary difference FALSE
4. Tax assets and tax liabilities MAY be offset against each other. TRUE
5. A deferred tax asset is the deferred tax consequence attributable to deductible
temporary differences. TRUE
6. Current Tax liability and current tax asset are discounted FALSE
7. An SME shall recognize a deferred tax liability for a temporary difference associated
with initial recognition of goodwill FALSE
8. When a change in the tax rate is enacted, the effect is reported as an adjustment to
income tax payable in the period of the change. FALSE
9. A temporary difference arises when a revenue item is reported for tax purposes in a
period:
After it is reported in financial income
Before it is reported in financial income
a. Yes Yes
b. Yes No
ANS: A
Chapter 41
1. If the equity instruments are issued after the entity receives cash, the entity shall present the
amount receivable as an offset to equity and not as an asset. ANS: False
2. Equity is the residual interest in the assets of an entity before deducting all of its liabilities.
ANS: False
3. If payment is deferred and the time value of money is material, the initial measurement shall
be on a present value basis.
ANS: True
4. A bonus issue does not change total equity. True
Transaction costs shall be allocated between the liability and the equity component on the
basis of their relative fair value.
ANS: True
CHAPTER 42 SME – Share-Based Payment
1. Transactions with respect to goods or services received from nonemployees are
measured at the fair value of the goods or services received.
Answer: TRUE
2. Transactions with employees are measured at the intrinsic value of the equity
instruments granted.
Answer: FALSE (It is measured at fair value of the equity instruments granted)
3. If an observable market price is available for the equity instrument, such market price is
used.
Answer: TRUE
4. If the share options vest immediately, the entity shall recognize the compensation as
expense over the service or service period.
Answer: FALSE (The compensation is recognized as expense in full on the grant date.)
5. Any payment made to the employee on the cancelation or settlement of the grant shall
be accounted for as the repurchase of equity interest, meaning, deduction from equity.
Answer: TRUE
6. If the modification of vesting condition on which equity instruments were granted
reduces the fair value of the equity instruments and the modification is apparently not
beneficial to the employees, the entity shall continue to recognize compensation based on the
original condition.
Answer: TRUE
7. If the share appreciation right vests immediately, the compensation is recognized as
expense immediately on the date of grant.
Answer: TRUE
8. Under PFRS for SMEs, the share option shall be measured at fair value on the date of
grant. However, if the fair value of the share options cannot be measured reliably, the intrinsic
value of the share options is used.
Answer: FALSE (Under PFRS for SMEs, the intrinsic value of share options is not mentioned as
an alternative)
Chapter 43
1) Earnings per Share is not addressed in IFRS for SMEs.
Answer: True
2) Cost of Disposal is an incremental cost directly attributable to the disposal of an asset,
including finance cost but excluding income tax expense.
Answer: False
3) A gain or loss a rising from initial recognition of Agricultural produce at fair value less cost of
disposal at the point of harvest shall also be included in other comprehensive income.
Answer: False
4) Agricultural produce is measured at fair value less cost of disposal at the point of harvest.
Answer: True
5) Exploration expenditure must be classified as tangible asset.
Answer: False
6) Under PFRS for SMEs, the tangible exploration and evaluation asset shall be subsequently
measured using cost model or revaluation model.
Answer: True
7) Intangible exploration and evaluation asset of an SME shall be measured subsequently using
the revaluation model only.
Answer: False
8) Full PFRS and PFRS for SMEs have similar provisions on the recognition and measurement of
a service concession.
Answer: True
9) The private operator shall recognize the fair value of the infrastructure asset as Financial
Asset only.
Answer: False
10) The PFRS for SMEs does not establish an absolute rate at which hyperinflation is deemed to
arise.
Answer: True
Multiple Choice Questions
1) An SME shall measure subsequently the Intangible exploration and evaluation asset using
a) Cost Model
b) Fair Value Model
c) Either cost model or revaluation model
d) Revaluation Model
Answer- A
2) On the part of the private operator, the infrastructure asset shall be recognized as
a) PPE
b) Financial Asset
c) Intangible Asset
d) Either Financial or Intangible asset
Answer- D
3) Which of the ff. is not addressed in IFRS for SMEs?
a) EPS
b) Provisions and Contingencies
c) Liabilities and equity
d) Revenue
Answer- A
4) Specialized activities of an SME include all, except
a) Agriculture
b) Service Concession
c) Exploration and evaluation of mineral resources
d) Insurance
Answer- D
5) Which accounting treatment is not allowed under the IFRS for SMEs?
a) Weighted average method for inventories
b) Equity method for associates
c) Revaluation model for Intangible assets
d) Temporary Difference approach for deferred taxation.
Answer- C
