PFRS FOR SMALL AND

MEDIUM ENTERPRISES
Manalo, Patricia
Ubeda, Lance Christian
Zabala, Nathaniel Jhon
 TODAY'S AGENDA

1 State the basic purpose of the PFRS for SMEs.

2 Define an SME.

3 Provide distinct difference between full PFRS and PFRS

for SMEs.
 INTRODUCTION
The IFRS for SME’s was primarily developed in response to the apparent difficulties faced by
some entities in adopting and applying the full IFRSs. Such difficulties include:

Complexity, real or perceived, of compliance with full IFRS by SMEs, or

High cost of implementation by SMEs.
 PURPOSE
The PFRS for SMEs is adopted by the FRSC from the IASB’s IFRS for SMEs which was
developed as a separate (stand-alone standard) intended to apply to the general purpose
financial statements of, entities that in many countries are referred to by a variety of terms.
PFRS for SMEs is only the minimum standard that qualifying entities need to adopt for the
preparation and presentation of their financial statements. They may opt to adopt full
PFRSs.
 AUTHORITY
Rests with legislative and regulatory authorities and standard-setters in individual
jurisdiction.
In the Philippines, per SEC guidlines, PFRS for SMEs shall cover corporations that:
Total Assets of between 3 Million and 350 Million or Total Liabilities of between 3 Million
and 250 Million.
Not required to file financial statements imder SRC Rule 68.1.
Not in the process of filing their financial statements for the purpose of issuing any class
of instrument in a public market.
Not holder of secondary license issued by a regulatory agency.
Not public utilities.
Entities that have total asset or total liabilities below 3 Million (so called ‘micro entities’) may
use “another acceptable basis of accounting”.
 TRANSITION
TRANSITION TO PFRS FOR SME
SMEs adopting PFRS for SMEs for the first time are considered first-time adopters.
On initial adoption, entity shall apply the size criteria using the entity’s audited financial
statements for the immediately preceding financial reports period.

TRANSITION FROM PFRS FOR SME

Entities ceasing to qualify as SMEs shall adopt full PFRS unless they qualify as micro
entities.
 TRANSITION
TRANSITION PERIOD FOR BREACHES OF SIZE CRITERIA
If an entity uses PFRS for SMEs ceases to qualify as SME because it exceeds the ceiling of
the size criteria, entity shall adopt full PFRSs in the next accounting period.
If an entity ceases to qualify as SME because its total assets or total liabilities falls below the
floor of the size criteria, entity may transition to “another acceptable accounting basis” in
the next accounting period, unless micro entity opts to still adopts the PFRS for SMEs.
Determination of what is “significant and continuing” is based on management judgment
taking into consideration relevant qualitative and quantitative factors. A change of 20% or
more of total asset or total liabilities would be considered significant.
 SECTION 1
Small and Medium-sized Entities

SCOPE PFRS for SMEs is intended for use by small and medium-sized entities (SMEs).

SMEs are entities that:

DESCRIPTION Do not have public accountability.
Publish general purpose financial statements for external users.
Entity has public accountability if:
debt or equity instruments are traded in a public market or the entity is in the
process of doing so.
It holds a fiduciary capacity for a broad group of outsiders as one of its primary
businesses.
 SECTION 2
Concepts and Pervasive Principles

To provide information about the financial position, performance and cash flow of
OBJECTIVE 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.
Understandability
QUALITATIVE Presented in a comprehensible manner to users who have reasonable
CHARACTERISTICS
knowledge and willingness to study the information with reasonable diligence.
Relevance
Capable of influencing economic decisions of users.
Materiality
Misstatement could influence economic decision of users made on the basis
of financial statements.
 SECTION 2
Concepts and Pervasive Principles

Reliability
Free from material error and bias and represent faithfully.
Substance Over From
Transactions are accounted for in accordance with their substance and not
merely their legal form.
Prudence
Management may need to make judgments on estimates required under
conditions of uncertainty.
Completeness
Information must be complete within the bounds of materiality and costs.
Comparability
It should enable user to compare financial statements of an entity (a) intra-
comparability, or (b) inter-comparability.
Timeliness
Information is provied within the decision time frame.
 SECTION 2
Concepts and Pervasive Principles

Balance between Benefit and Cost

Benefit should exceed the cost providing it.

Undue Cost or Effort exemption is specidied for some requirements of the PFRS
UNDUE COST
for SMEs.

FINANCIAL Relationship of assets, liabilities and equity as of a specific date as presented in

POSITION the statement of financial position.

Relationship of Income and Expenses of an entity during a reporting period.

FINANCIAL Entities adopting PFRS for SMEs are permitted to present performance in:
POSITION
Single Financial Statements
Two Financial Statements
 SECTION 2
Concepts and Pervasive Principles

Meeting the definition of asset, liability, income or expense and satisfies the
RECOGNITION following criteria:
Probable that any future economic benefit associated with the item will flow
to or from the entity.
Can be measured reliably.
Failure to recognize an item that satisfies those criteria is not rectified by
disclosures of the accounting policies used or by notes or explanatory materials.

Entity shall prepare financial statements, except for cash flow information, using
ACCRUAL
the accrual basis of accounting.
 SECTION 2
Concepts and Pervasive Principles

Two common measurement are HISTORICAL COST and FAIR VALUE.

MEASUREMENT INITIAL MEASUREMENT: Historical Cost; unless PFRS for SMEs require initial
measurement at fair value.
SUBSEQUENT MEASUREMENT:
FINANCIAL ASSET AND FINANCIAL LIABILITIES - measured at amortized
cost less impairment.
NON-FINANCIAL ASSETS
INVENTORIES - Lower of Cost and Selling Price less Cost to Complete
and Sell.
PROPERTY, PLANT, AND EQUIPMENT - either at (a) lower of cost less
any accumulated depreciation and impairment and the recoverable
amount; or (2) lower of revalued amount and the recoverable amount.
IMPAIRMENT LOSS - recognize on non-financial assets that are in use or
held for sale.
 SECTION 2
Concepts and Pervasive Principles

Most liabilities other than financial liabilities are measured at the best estimate
of the amount that would be required to settle the obligation at the reporting
date.
An entity shall not offset asset and liabilities, or income and expenses, unless
OFFSETTING required or permitted by the PFRS for SMEs.
Entity shall offset the disposal costs from the next proceeds when computing for
the gain or loss on the sale of an item of PPE.
Measuring assets net of valuation allowance is not offsetting.
 SECTION 3
Financial Statement Presentation

Requires the faithful representation of the effects of transactions, other events

FAIR and condition in accordance with the definition and recognition criteria for asset,
PRESENTATION
liabilities, income and expense.
The application of the PFRS for SMEs, with additional disclosure if necessary, is
presumed to result in financial statements that achieve fair presentation/
Application of PFRS for SMEs by an entity with public accountability does not
result in a fair presentation.
Entity whose financial statements comply with the PFRS for SMEs shall make an
COMPLIANCE explicit and unreserve statement of such compliance in the notes.
When management concludes that compliance with the PFRS for SMEs would be
misleading that it would conflict with the objective of financial statements of
SMEs, entity shall depart from that requirements and shall disclose the following:
 SECTION 3
Financial Statement Presentation

Managements conclusion that financial statements are fairly presented.

Compliance with the PFRS for SMEs,except that it has departed from a
particular requirement to achieve fair presentation.
Nature and reason for departure.
If relevant regulatory framework prohibits such departure, the entity should
disclose the following:
Nature of the requirement in the PFRS for SMEs, and the reason why
management has concluded that complying with that requirement is so
misleading in the circumstances that it conflicts with the objective of financial
statements.
The adjustments to each item in the financial statements that management
has concluded would be necessary to achieve a fair presentation.
 SECTION 3
Financial Statement Presentation

An entity is going concern unless management either intends to liquidate the

GOING entity or to cease operation, or has no realistic alternative but to do so.
CONCERN
In assessing whether the going concern assumption is appropriate, management
takes into account all available information about the future, which is at least, but
is not limited to 12 months from the reporting date.
When management is aware of material uncertainties related to events or
conditions that cast significant doubt upon the entity’s ability to continue as going
concern, the entity shall disclose those uncertainties.
When entity dooes not prepare financial statements on going concern basis, it
shall disclose the fact, together with the basis on which it prepared the financial
statements and the reason why the entity is not regarded as going concern.
 SECTION 3
Financial Statement Presentation

It shall present complete set of financial statements annually.

FREQUENCY When the end of the reporting period changes and annual financial statements
are presented for a period longer or shorter than one year, entity shall disclose
the following:
The fact
The reason for using longer or shorter period
The fact that comparative amounts presented in the financial statements are
not entirely comparable.

Entity shall retain the presentation and classification of items in the financial
CONSISTENCY statements from one period to the next unless:
Another presentation or classification would be more appropriate
PFRS for SMEs requires change in presentation.
 SECTION 3
Financial Statement Presentation

The following shall be disclosed when comparative amounts are reclassified:

Nature of Reclassification
Amount of each item or class of item that is reclassified
Reason for the reclassification.

Comparative information for the previous comparable period for all amounts
COMPARATIVE
INFORMATION presented in the current period’s financial statements shall be disclosed, except
when the PFRS for SMEs permits and required otherwie.

Entity shall present separately each material class of similar items. An entity shall
MATERIALITY &
AGGREGATION present separately items of dissimilar nature or function unless they are
immaterial.
Omission or misstatement of items are material if they could, individually or
collectively, influence economic decision of users made on the basis of financial
statements.
 SECTION 3
Financial Statement Presentation

Complete set of financial statements of an entity shall include:

COMPLETE
SET OF F.S. Statement of Financial Position
Statement of Comprehensive Income
Statement of Changes in Equity
Statement of Cash Flow
Notes
Entity may omit the statement of changes in equity, and in lieu thereof, present a
single statement of income and retained earnings if only changes to equity
during the period for which financial statements are presented arise from:
Profit or Loss
Payment of Dividends
Correction of Prior Period Error
Changes in Accounting Policy
 SECTION 3
Financial Statement Presentation

COMPARATIVE A complete set of financial statements means that an entity shall present, as a
AMOUNTS minimum, two of each of the required financial statements and related notes.

An entity shall present each financial statements with equal prominence.

PRESENTATION Entity may use titles for the financial statements other than those used in the
PFRS for SMEs as long as they are not misleading.

The following information should be displayed prominently and repeatedly when

IDENTIFICATION necessary:
Name of the reporting entity
Financial Statements cover individual or group of entities.
The level of rounding, if any, used in presenting amounts in the financial
statements.
 SECTION 3
Financial Statement Presentation

Entity shall disclose the following in the notes:

Domicile and Legal Form of the entity, its country of incorporation and the
address of its registered office.
Description of the nature of the entity’s operations and its principal activities.
 SECTION 4
Statement of Financial Position

Cash and Cash Equivalent

MINIMUM
LINE ITEMS Trade and Other Receivables
Financial Assets
Inventories
Property, Plant, and Equipment
Investment Property carried at Cost less Accumulated Depreciation and
Impairment
Investment Property carried at Fair Value through Profit or Loss
Intangible Asset
Biological Asset carried at Cost less Accumulated Depreciation and Impairment
Biological Asset carried at Fair Value through Profit or Loss
Investment in Associates
Investment in Jointly Controlled Entities
Trade and Other Payables
 SECTION 4
Statement of Financial Position

Financial Liabilities
Liabilities and Asset for Current Tax.
Deferred Tax Liabilities and Deferred Tax Assets
Provisions
Non-Controlling Interest, presented within equity separate from the equity
attributable to the owners of the parent.

PFRS for SMEs does not prescribe the sequence or format which items are to be
SEQUENCING presented.
Entity may include additional line items when the size, nature, or function of an
item is such that separate presentation is relevant to an understanding of an
entity’s financial position.
Entity may amend description and sequencing of items to the nature of the entity
and its transaction, to provide information that is relevant to an understanding of
the entity’s financial position.
 SECTION 4
Statement of Financial Position

Current and Non-Current Assets and Liabilities shall be presented separately in

DISTINCTION the Statement of Financial Position except whrn presentation based on liquidity
provides information that is more reliable and more relevant.
 SECTION 5
Statement of Comprehensive
Income and Income Statement

Single Statement
PRESENTATION
Two Statement

OTHER
Comprises of:
COMPREHENSIVE Changes in revaluation surplus for PPE measured under revaluation model
INCOME
Some actuarial gains and losses
Some translation gains of a foreign operation
Some changes in fair values of hedging instrument.
Revenue
MINIMUM
LINE ITEMS Finance Cost
Share of the profit or loss of investment in associate and jointly controlled entities
accounted using equity method.
Tax expense excluding tax allocated to items
 SECTION 5
Statement of Comprehensive
Income and Income Statement

Single amount comprising the total of:

Post-tax profit or loss of discontinued operations
Post-tax gain or loss attributable to an impairment, or reversal of impairment, of
the asset in the discontinued operations.
Profit or Loss
Each item of OCI classified by nature shall be grouped as:
Those that will not be reclassified subsequently to profit or loss
Those that will be reclassified subsequently to profit or loss when specific
conditions are met.
Share of the OCI of associates and jointly controlled entities accounted for equity
method.
Total Comprehensive Income
 SECTION 5
Statement of Comprehensive
Income and Income Statement

EXTRAORDINARY Entity shall not present or describe any items of income and expense as
ITEMS
“extraordinary items” in the Statement of Comprehensive Income or in the Notes.

ANALYSIS Nature of Expense

OF EXPENSE Function of Expense
 SECTION 6
Statement of Changes in Equity and
Statement of Income and Retained Earnings

Includes information:
CHANGES
IN EQUITY Total Comprehensive Income for the period
Effects of Retrospective Application or Retrospective Restatement
Reconciliation between Carrying Amount at the beginning and end of the
period.

INCOME &
Entity may omit the statement of changes in equity, and in lieu, thereof, shall
RETAINED present statement of income and retained earning if the only changes to equity
EARNING
during the period for which financial statements arises from:
Profit or Loss
Payment of Dividends
Correction of Prior Period Errors
Changes in Accounting Policy
 SECTION 6
Statement of Changes in Equity and
Statement of Income and Retained Earnings

It shall also present information in addition to the information required to be

presented in a statement of income:
Retained Earnings at the beginning of the reporting period
Restatement of Retained Earnings for correction of prior period
Restatement of Retained Earnings for changes in accounting policy
Dividends declared and paid or payable during the period.
Retained Earnings at the end of the reporting period.
 SECTION 7
Statement of Cash Flow

Operating Activities - principal revenue-producing activity of entities.

CASH FLOW Investing Activities - acquisition and disposal of of long-term assets.
Financing Activities - changes in the size and composition of the contributed equity
and borrowing of an entity.

Direct Method
REPORTING
Indirect Method

FOREIGN Shall be translated to the entity’s functional currency using exchange rate at the
CURRENCY date of the cash flow.
 SECTION 7
Statement of Cash Flow

Interest paid and interest received may be classified as OPERATING because they
INTEREST &
DIVIDENDS are included in the profit or loss.
Alternatively, It may also classify as FINANCING AND INVESTING because they
are cost of obtaining financial resources or return on investment.
Dividends paid may be classified as FINANCING because they are cost obtaining
financial resources.
Alternatively, entity may classify as component of cash flow from OPERATING
activities because they are paid out of operating cash flow.

Classified as OPERATING unless specifically identified with financing and investing

INCOME TAX
activities.

NON-CASH Excluded and disclosed elsewhere in the financial statements.

TRANSACTIONS
 SECTION 8
Notes to the Financial Statements

Show information on basis of preparation of financial statements and specific

STRUCTURE accounting policies used.
Disclose required information not presented elsewhere in the financial statements.
Provide information that is not presented elsewhere in the financial statements but
are relevant to an understanding of any of them.

CROSS Entity shall cross-reference each item in the financial statements to any related
REFERENCING information in the notes.

Statement that financial statements have been prepared in compliance with PFRS
ORDER
for SMEs.
Summary of significant accounting policies applied.
Supporting information for items presented in financial statements.
Any other disclosures.
 SECTION 9
Consolidated and Separate Financial
Statements

Accounting for Business Combination

REFERENCE
Advance Accounting 2
 SECTION 10
Accounting Policies, Estimates, Error

PFRS for SME directly address a transaction - shall apply PFRS for SMEs but
HIERARCHY
need not to follow a requirement if effect would not be material.
PFRS for SME does not directly address a transaction - shall use judgments that
result in informattion that is relevant and reliable.
In making judgment, management shall consider the applicability, of the following in
descending order:
the requirements and guidance in the PFRS for SMEs.
the definition, recognition and measurement concepts for assets, liabilities,
income and expenses.
In making judgment, management shall also consider the requirement and
guidance in full PFRS dealing with similar and related issues.
 SECTION 10
Accounting Policies, Estimates, Error

Entity shall change accounting policy if the change:

CHANGE IN
ACCTNG. POLICY required by changes to the PFRS for SMEs, or
result in reliable and more relevant information.

Transitional provision
ACCOUNTING
Retrospective

Adjustment of the carrying amount of an asset or liability, or amount of periodic

CHANGE IN
ACCTNG. EST. consumption of asset that result from assessment of present status, and expected
future benefit and obligation, associated with asset and liabilities.
 SECTION 10
Accounting Policies, Estimates, Error

Entity shall correct a material prior period error retrospectively in the first financial
CORRECTION
PRIOR PERIOD statements authorized for issue after its discovery by:
restating the comparative amounts for prior period presented in which error
occurred
if error occurred before earliest prior period presented, restate opening balance
of asset, liabilities, and equity for earliest prior period presented.
If impracticable, entity shall restate opening balance of asset, liabilities, and equity
for the earliest period which retrospective restatement is practicable..
 SECTION 11
Basic Financial Instrument

Provision of both Section 11 and Section 12 of the PFRS for SMEs in full
ACCOUNTING
POLICY CHOICE Recognition and Measurement Provision of PAS 39 Financial Instruents: Recognition
and Measurement and the disclosure requirement of Section 11 and Section 12.

Non-Complex Financial Instruments.

FINANCIAL
INSTRUMENT
Shall be measured using amortized cost model except basic financial instruments
that are publicly traded or whose fair value can be measured reliably without undue
cost or effort.

Initially recognize at transaction price (plus transaction costs, except those that are
INITIAL
MEASUREMENT subsequently measured at fair value through profit or loss) unless arrangement
constitute financing transaction on either entity or counterparty.
 SECTION 11
Basic Financial Instrument

Debt instrument measured at amortized cost using effective interest method.

SUBSEQUENT
MEASUREMENT Commitment to receive a loan shall be measured at cost less impairment.
Investment in non-convertible preference shares and non-puttable ordinary shares
shall be measured at:
fair value with changes in fair value recognized in profit or loss if shares are
publicly traded.
other such investment are measured at cost less impairment.

If there is objective evidence of impairment, entity shall recognize immediately an

IMPAIRMENT impairment loss in profit or loss.
An entity shall assess the following financial asset individually for impairment:
all equity instrument regardless of significance.
other financial asset that are individually significant..
 SECTION 11
Basic Financial Instrument

Entity shall measure impairment loss at:

Amortized Cost
Cost less Impairment

Order of Priority:
FAIR VALUE Quoted Price in an active market
Prince in binding sale agreement
Estimate using Valuation Technique

Contractual rights to the cash flow from financial asset expires or settled.
DERECOGNITION
FIN. ASSET Entity transfer to another party substantially all the risks and rewards.
Entity has transferred control on asset to another party and the other party has
practical ability to sell the asset in its entirely.
 SECTION 11
Basic Financial Instrument

DERECOGNITION
FIN. LIABILITY Derecognize when it is extinguished.
 SECTION 12
OTHER FINANCIAL
INSTRUMENTS ISSUES

SECTION 11 SECTION 12
Section 11 applies to basic financial instruments Section 12 applies to other, more complex
and is relevant to all entities. financial instruments and transactions. If an
entity enters into only basic financial
instrument transactions then Section 12 is not
applicable. However, even entities with only
basic financial instruments shall consider the
scope of Section 12 to ensure they are
exempt.
 SECTION 12
OTHER FINANCIAL
INSTRUMENTS ISSUES

SECTION 11 SECTION 12
Section 11 applies to basic financial instruments Section 12 applies to other, more complex
and is relevant to all entities. financial instruments and transactions. If an
entity enters into only basic financial
instrument transactions then Section 12 is not
applicable. However, even entities with only
basic financial instruments shall consider the
scope of Section 12 to ensure they are
exempt.
 SECTION 12
Other Financial Instruments Issues

a. Asset-backed securities, such as collateralized mortgage obligations,

SCOPE repurchase agreements and securitized packages of receivables
b. Options, rights, warrants, future contracts, forward contracts and interest rate
swaps that can be settled in cash or by exchanging another financial instrument
c. Financial instruments that qualify and are designated as hedging instruments
d. Commitments to make a loan to another entity
e. Commitments to receive a loan if the commitment can be net settled in cash
f. An investment in another entity’s equity instruments other than non-convertible
preference shares and non-puttable ordinary and preference shares
 SECTION 12
Other Financial Instruments Issues

g. An interest rate swap that returns a cash flow that is positive or negative, or a
SCOPE forward commitment to purchase a commodity or financial instrument that is
capable of being cash-settled and that, on settlement, could have positive or
negative cash flow
h. Investments in convertible debt, because the return to the holder can vary with
the price of the issuer’s equity shares rather than just with market interest rates
i. A loan receivable from a third party that gives the third party the right or
obligation to prepay if the applicable taxation or accounting requirements change.
 SECTION 13
INVENTORIES
ASSETS MEASUREMENT
finished goods measured at the lower of cost and estimated
work-in-process selling price less costs to complete to sell
raw materials and manufacturing supplies

COSTS
Purchase costs
Conversion costs (DL and MOH)
Other costs incurred in bringing the
inventories to their present location and
condition
 SECTION 13
Inventories

COSTS a. Abnormal amounts of wasted materials, labor or other production costs

EXCLUDED FROM b. Storage costs, unless those costs are necessary during the production process
INVENTORIES
before a further production stage
c. Administrative overheads that do not contribute to bringing inventories to their
present location and condition
d. Selling costs

COSTS OF measured at initial recognition at fair value less estimated costs to sell at the
AGRICULTURAL
PRODUCE HARVESTED
FROM BIOLOGICAL point of harvest
ASSETS
 SECTION 13
Inventories

a. standard cost method - determine the cost of producing goods or services.

TECHNIQUES b. retail method - estimate the value of ending inventory by applying a
predetermined markup percentage to the retail selling prices of inventory items
c. most recent purchase price - the cost of acquiring inventory items at the time of
their most recent purchase
a. specific identification - inventories which are not ordinarily interchangeable and
COST
FORMULAS goods or services produced and segregated for specific projects
b. first-in, first-out (FIFO) - cost of goods sold consists of cost of inventories
acquired earlier and cost of ending inventory consists of inventories recently
acquired
c. weighted average cost - both cost of goods sold and cost of ending inventory
consists of the average cost of inventories acquired during a period
 SECTION 14
INVESTMENTS IN
ASSOCIATES

An associate is an entity over which the investor has significant influence.

-- the power to participate in the financial and operating decisions of the associate
-- presumed to exist when ownership interest is at least 20%, unless it can be
clearly demonstrated that this is not the case

** Investment in associates shall be classified as

non-current assets
 SECTION 14
Investment in Associates

An investor shall account for all of its investments in associates using one of the
MEASUREMENT following:
a. cost model
b. equity method
c. fair value model
 SECTION 14
Investment in Associates

EQUITY METHOD
Goodwill
The excess of acquisition cost of the investment in associate over the
investor’s interest in the net fair value of the identifiable assets, liabilities and contingent
liabilities shall be recognized as goodwill and shall be amortized over its estimated useful
life. If there is no reliable estimate of a useful life, the goodwill shall be amortized over a
period of 10 years.
 SECTION 14
Investment in Associates

EQUITY METHOD
Negative Goodwill
If the investor’s interest in the net fair value of the identifiable assets, liabilities,
and contingent liabilites exceeds the acquisition cost of the investment in associate, the
investor shall:

a.) Reassess the identification and measurement of the acquiree’s assets, liabilities and
provisions for contingent liabilities and the measurement of the acquisition cost of the
investment, and
b.) Recognize immediately in profit or loss any excess remaining after that reassessment.
 SECTION 14
Investment in Associates

EQUITY METHOD
Adjustment to share in associate’s profits or losses
An investor shall adjust its share of the associate’s profits or losses after
acquisition to account for additional depreciation or amortization of the associate’s
depreciable or amortizable assets (including goodwill) on the basis of the excess of their
fair values over their carrying amounts at the same time the investment was acquired.

The amortization/depreciation of undervaluation of assets is deducted from the

investor’s share in associate’s profit and from the carrying amount of the investment in
associate.
 SECTION 14
Investment in Associates

EQUITY METHOD
Investor’s transactions with associates
If an associate is accounted for using the equity method, the investor shall
eliminate unrealized profits and losses resulting from upstream and downstream
transactions to the extent off the investor’s interest in the associate.

Associate’s accounting policies

The investor shall adjust the associates financial statements to reflect the
investor’s accounting policies for the purpose of applying the equity method unless it is
impracticable to do so.
 SECTION 14
Investment in Associates

EQUITY METHOD
Losses in excess of investment
The investor shall discontinue recognizing its share of further losses.
After the investor’s interest is reduced to zero, the investor shall recognize additional
losses by a provision only to the extent that

a.) the investor has incurred legal or constructive obligations or

b.) has made payments on behalf of the associate.

If the associate subsequently reports profits, the investor shall resume recognizing its
share of those profits only after its share of the profits equals the share of losses not
recognized.
 SECTION 14
Investment in Associates

EQUITY METHOD
Discontinuing the equity method
An investor shall cease using the equity method from the date that significant
influence ceases.

a.) If the associate become a subsidiary of joint venture, the investor shall remeasure its
previously held equity interest to fair value and recognize the resulting gain or loss, if any,
in profit or loss.
 SECTION 14
Investment in Associates

EQUITY METHOD
Discontinuing the equity method
b.) If an investor loses significant influence over an associate as a result of a full or partial
disposal, it shall derecognize that associate and recognize in profit or loss the different
between
(1) The sum of the proceeds received plus the fair value of any retained interest, and
(2) The carrying amount of the investment in the associate at the date significant
influence is lost.
 SECTION 14
Investment in Associates

EQUITY METHOD
Discontinuing the equity method
c.) If an investor loses significant influence for reasons other than a partial disposal of its
investment, the investor shall regard the carrying amount of the investment at that date as
a new cost basis and shall account for the investment using Sections 11 and 12 or PFRSs
for SMEs, as appropriate.
 SECTION 14
Investment in Associates

-- the investment in associate is initially measured at the transaction price

FAIR VALUE
MODEL excluding transaction costs

Dividends received are treated as reduction to the carrying amount of investment

in the associate
Potential voting shares are considered when determining the existence of
significant influence
Present ownership interest shall be used when computing for the investor’s share
in associate’s profit or loss and other comprehensive income
 SECTION 16
INVESTMENT
PROPERTY

Investment Property is property held by the owner or by the lessee under a

finance lease to earn rentals or for capital appreciation or both, rather than for :

a.) Use in the production or supply of goods or

services or for administrative purposes, or

b.) Sale in the ordinary course of business.

 SECTION 16
Investment Property

PROPERTY A property interest that is held by a lessee under an operating lease may be
INTEREST IN
classified and accounted for as investment property if the property would
OPERATING LEASE
otherwise meet the definition of an investment property and the lessee can
measure the fair value of the property interest without undue cost or effort on an
ongoing basis. This classification alternative is available on a property-by-property
basis.
 SECTION 16
Investment Property

MEASUREMENT
Initial Subsequent

measured at cost -- purchase price and measured at fair value -- at each

any directly attributable expenditure reporting date with changes in fair value
investment property acquired through recognized in profit or loss, unless fair
lease -- measured at the lower of the fair value cannot be determined reliably
value of the property and the present without undue cost or effort
value of the minimum lease payments. cost less accumulated depreciation and
impairment -- if fair value cannot be
determined reliably without undue cost or
effort
 SECTION 16
Investment Property

If a reliable measurement of fair value becomes unavailable, the investment

TRANSFERS property is reclassified to investment property carried at cost less accumulated
depreciation and impairment until such time that fair value can be determined
reliably without undue cost or effort.
 SECTION 17
PROPERTY, PLANT AND
EQUIPMENT

Property, plant and equipment are tangible assets that are:

a.) Held for use in the production or supply of

goods or services, for rental to others, or for
administrative purposes, and

b.) Expected to be used during more than one

period
 SECTION 17
PROPERTY, PLANT AND
EQUIPMENT

Property, plant and equipment do not include:

a.) Biological assets related to agriculture

activity, or

b.) Mineral rights and mineral reserves, such

as oil, natural gas and similar non-
regenerative sources
 SECTION 17
Property, Plant and Equipment

SPARE PARTS -- recognized as PPE when they meet the definition of property, plant and
AND SERVICING equipment. Otherwise, such items are classified as inventory.
EQUIPMENT

The following are recognized as property, plant and equipment:

a. Major spare parts
b. Stand-by equipment expected to be used for more than one period
c. Spare parts and servicing equipment that can be used only in conjunction with
an item of PPE
 SECTION 17
Property, Plant and Equipment

When a part is replaced:

REPLACEMENT
OF PARTS
a. The cost of the replacement is recognized if the replacement part is expected to
provide incremental future benefits to the entity
b. The carrying amount of the replaced part is derecognized
c. If it is not practicable for an entity to determine the carrying amount of the
replaced part, the cost of the replacement may be used as an indication of what
the cost of the replacement part was at the time it was acquired or constructed
 SECTION 17
Property, Plant and Equipment

REGULAR Major regular inspections may be required for the continuing operation of an item
MAJOR of PPE. On each regular major inspection, the cost of the current inspection is
INSPECTIONS
recognized and the carrying amount of the previous inspection is derecognized.

LAND AND
Land and buildings are separable assets and shall be accounted for separately.
BUILDINGS This is because land is normally non-depreciable while buildings are depreciable.
 SECTION 17
Property, Plant and Equipment

SUBSEQUENT MEASUREMENT

Subsequent to initial recognition, an entity shall choose either the cost model or the
revaluation model as its accounting policy and shall apply that policy to an entire class of
PPE.

The cost model shall be applied to investment property whose fair value cannot be
measured reliably without undue cost or effort.
Costs of day-to-day servicing of an item of PPE shall be expensed when incurred.
 SECTION 17
Property, Plant and Equipment

SUBSEQUENT MEASUREMENT
Cost Model
an item of PPE is subsequently measured at cost less any accumulated depreciation
and any accumulated impairment losses
 SECTION 17
Property, Plant and Equipment

SUBSEQUENT MEASUREMENT
Revaluation Model
an item of PPE is subsequently measured at a revalued amount, being its fair value at
the date of the revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses.

Revaluations shall be made with sufficient regularity to ensure that the carrying amount
does not differ materially from that which would be determined using fair value at the end
of the reporting period.

If an item of PPE is revalued, the entire class of PPE to which that asset belongs shall
be revalued.
 SECTION 17
Property, Plant and Equipment

SUBSEQUENT MEASUREMENT
Revaluation Model
If, as a result of a revaluation, the asset’s carrying amount is:

Increased - the increase is recognized in other comprehensive income and

accumulated in equity under the heading of revaluation surplus. However, if the
increase represents a reversal of an impairment loss, the increase is recognized in
profit or loss.
Decreased - the decrease is recognized in profit or loss. However, the decrease is
recognized in other comprehensive income to the extent of any credit balance in that
asset’s revaluation suprlus.
 SECTION 17
Property, Plant and Equipment

Allocation of Cost for PPE:

DEPRECIATION If major components have significantly different consumption patterns of
economic benefits:
Allocate initial cost to major components.
Depreciate each component separately over its useful life.
Other assets depreciated over their useful lives as a single asset.
Exceptions for certain assets like quarries and landfill sites.
Land:
Land has unlimited useful life.
Not depreciated.
Depreciation Recognition:
Depreciation charge recognized in profit or loss.
Unless it forms part of another asset's cost.
 SECTION 17
Property, Plant and Equipment

DEPRECIABLE Depreciation Allocation:

AMOUNT AND
Allocate depreciable amount of asset systematically over its useful life.
DEPRECIATION
PERIOD Changes in Depreciation:
Change in method, useful life, or residual value treated as change in accounting
estimate.
Accounted for prospectively.
Depreciation Start and End:
Depreciation starts when asset is available for use.
Asset in location and condition for intended operation.
Depreciation stops when asset is recognized.
Depreciation and Idle Assets:
Depreciation doesn't cease when asset becomes idle or retired unless fully
depreciated.
Under usage methods, depreciation charge can be zero during non-production.
 SECTION 17
Property, Plant and Equipment

An entity shall derecognize an item of PPE:

DERECOGNITION a. on disposal, or
b. when no future economic benefits are expected from its use or disposal.

The difference between the net disposal proceeds and the carrying amount of
the item of PPE derecognized represents the gain or loss on derecognition which
shall be recognized in profit or loss in the period of derecognition.
 SECTION 18
INTANGIBLE ASSETS OTHER
THAN GOODWILL

An intangible asset is an identifiable non-monetary asset without physical

substance.

An intangible asset is identifiable when:

a.) it is separable, or

b.) it arises from contractual or other legal

rights
 SECTION 18
INTANGIBLE ASSETS OTHER
THAN GOODWILL

An intangible asset is an identifiable non-monetary asset without physical

substance.

Intangible assets do not include:

a.) financial assets, or

b.) mineral rights and mineral reserves, and

similar non-generative resources
 SECTION 18
Intangible Assets other than
Goodwill

General Principle for Recognizing Intangible Assets

An intangible asset shall be recognized if ALL of the following conditions are met:

a. it is probable that the expected future economic benefits that are attributable to the
asset will flow to the entity;
b. the cost or value of the asset can be measured reliably; and
c. the asset does not result from expenditure incurred internally on an intangible item.

The probability recognition criterion is always considered satisfied for intangible assets
that are separately acquired.
 SECTION 18
Intangible Assets other than
Goodwill

Acquisition as part of a business combination

An intangible asset acquired in a business combination shall be recognized unless its
fair value cannot be measured reliably without undue cost or effort at the acquisition
date.

If an intangible asset is acquired in a business combination, the cost of the intangible

asset is its fair value at the acquisition date.

Acquisition by way of a government grant

If an intangible asset is acquired by way of a government grant, the cost of that
intangible asset is its fair value at the date the grant is received or receivable.
 SECTION 18
Intangible Assets other than
Goodwill

iNITIAL
Intangible assets are initially measured at cost.
MEASUREMENT

SEPARATE
The cost of a separately acquired intangible asset comprises:
ACQUISITION a. its purchase price, including duties and non-refundable purchase taxes, after
deducting trade discounts and rebates, and
b. any directly attributable cost of preparing the asset for its intended use
 SECTION 18
Intangible Assets other than
Goodwill

When acquired in an exchange transaction with commercial substance, the

EXCHANGES OF
ASSETS intangible asset acquired is measured using the following order of priority:

a. Fair value of asset given up (plus cash paid / minus cash received)
b. Fair value of asset received
c. Carrying amount of the asset given up (plus cash paid / minus cash received)

When the exchange transaction lacks commercial substance, the intangible asset
acquired is measured at the carrying amount of the asset given up (plus cash paid
/ minus cash received).
 SECTION 18
Intangible Assets other than
Goodwill

Research and development costs incurred on internal generation of intangible

INTERNALLY
GENERATED assets shall be recognized as expense in the period incurred unless they form part
of the cost of another asset.

The following costs are expensed in the period incurred:

a. Internally generated brands, logos, publishing titles, customer lists and items
similar in substance
b. Internally generated goodwill
c. Start-up activities, which include establishment costs such as legal and
secretarial costs incurred in establishing a legal entity, expenditure to open a new
facility or business, and expenditure for starting new operations or launching new
products or processes
 SECTION 18
Intangible Assets other than
Goodwill

Research and development costs incurred on internal generation of intangible

INTERNALLY
GENERATED assets shall be recognized as expense in the period incurred unless they form part
of the cost of another asset.

The following costs are expensed in the period incurred:

d. Training activities
e. Advertising and promotional activities
d. Relocating or reorganizing part or all of an entity
 SECTION 18
Intangible Assets other than
Goodwill

Past expenses not to be recognized as an asset

Expenditure on an intangible item that was initially recognized as an expense shall not be
recognized at a later date as part of the cost of an asset.

Subsequent Measurement
An entity shall measure intangible assets at cost less any accumulated amortization and
any accumulated impairment losses.
 SECTION 18
Intangible Assets other than
Goodwill

Amortization over Amortization period and

useful life amortization method

Finite Useful Life: Depreciable Cost Allocation:

All intangible assets considered to have a finite Allocate depreciable cost of intangible asset
useful life. systematically over its useful life.
Useful life cannot exceed legal life, if Useful life not to exceed legal life.
applicable. Amortization Recognition:
Amortization charge recognized as expense for each
Renewal Periods: period.
If contractual or legal rights conveyed for a Unless amortization forms part of cost of another asset.
limited term with renewal option: Amortization Start and End:
Include renewal periods in useful life if Amortization begins when intangible asset is available
evidence supports renewal by entity for use.
without significant cost. Asset in location and condition for intended use by
Determining Useful Life: management.
If useful life can't be reliably established: Amortization ceases when asset is derecognized.
Determine based on management's best Amortization Method:
estimate. Choose amortization method reflecting expected
Useful life not to exceed 10 years. consumption pattern of asset's future economic benefits.
If pattern can't be reliably determined, use straight-line
method.
 SECTION 18
Intangible Assets other than
Goodwill

The residual value of an intangible asset is assumed to be zero, unless

RESIDUAL a. A third party committed to purchase the asset at the end of its useful life, or
VALUE b. There is an active market for which the asset may be sold at the end of its useful
life

A change in the amortization method, useful life, or residual value shall be treated
as change in accounting estimate to be accounted for prospectively.

RETIREMENTS
An intangible asset is derecognized and the gain or loss on derecognition is
& DISPOSALS recognized in profit or loss:
a. On disposal, or
b. When no future economic benefits are expected from its use or disposal.
 SECTION 20
LEASES
Classification of Leases:

Finance Lease - it transfers substantially all

the risks and rewards incidental to ownership

Operating Lease - it does not transfer

substantially all the risks and rewards
incidental to ownership
 SECTION 20
Leases

a. The lease transfers ownership of the asset to the lessee by the end of the lease
FINANCE
LEASE term
b. The lease offers a bargain purchase option to the lessee
c. The lease term is for the major part (at least 75%) of the economic life of the
asset
d. The present value of the minimum lease payments amounts to at least
substantially all (at least 90%) of the fair value of leased asset at the inception of
the lease
e. The leased asset is specialized in nature that only the lessee can use it without
major modification
 SECTION 20
Leases

a. If the lessee can cancel the lease, the lessor’s losses associated with the
FINANCE
LEASE cancellation are borne by the lessee
b. Gains or losses from the fluctuation in the residual value of the leased asset
accrue to the lessee
c. The lessee has the ability to continue the lease for a secondary period at a rent
that is substantially lower than market rent

Lease classification is made at the inception of the lease and is not changed
during the term of the lease unless the lessee and the lessor agree to change the
provisions of the lease, in which case the lease classification shall be re-evaluated.
 SECTION 20
Leases

FINANCE LEASES - LESSEES

Initial Recognition and Measurement
At the commencement of the lease, a lessee under a finance lease shall recognize a
leased asset and a finance lease liability equal to the lower of the following:
a. Present value of minimum lease payments at inception of lease
b. Fair value of the leased property at inception of lease

Initial direct costs of the lessee are added to the amount recognized as an asset.

The present value of the minimum lease payments should be calculated using the interest
rate implicit in the lease. If this cannot be determined, the lessee’s incremental borrowing
rate shall be used.
 SECTION 20
Leases

FINANCE LEASES - LESSEES

Subsequent Recognition and Measurement
Subsequent minimum lease payments shall be apportioned to both interest expense and
as reduction of the outstanding liability using the effective interest method.

Contingent rents and executory costs are expensed in the period incurred and shall be
excluded from the minimum lease payments.

If the lease qualified as finance lease under the “transfer of ownership” or “bargain
purchase option” criterion, the leased asset shall be depreciated over its useful life.

If the leased qualified as finance lease under any of the other criteria, the leased asset
shall be depreciated over the shorter of its useful life and the remaining lease term.
 SECTION 20
Leases

FINANCE LEASES - LESSORS

Initial Recognition and Measurement
At the commencement of the lease, a lessor under a finance lease shall recognize a
lease receivable at an amount equal to the net investment in the lease. The net
investment in a lease is the lessor’s gross investment in the lease discounted at the
interest rate implicit in the lease

Initial direct costs are included in the initial measurement of the finance lease receivable
and reduce the amount of income recognized over the lease term. However, initial direct
costs incurred by a lessor under a sales-type lease are expensed immediately.
 SECTION 20
Leases

FINANCE LEASES - LESSORS

Initial Recognition and Measurement
Gross investment in the lease Net investment in the lease
Minimum lease payments Present value of Gross Investment in the lease
+ Unguaranteed residual value x Interest rate implicit in the lease

Unearned interest income

Gross investment in the lease
-- Net investment in the lease
 SECTION 20
Leases

FINANCE LEASES - LESSORS

Subsequent Recognition and Measurement
The recognition of finance income shall be based on a pattern reflecting a constant
periodic rate of return on the lessor’s net investment in the finance lease.

Lease payments relating to the period, excluding costs for services, are applied against
the gross investment in the lease to reduce both the principal and the unearned finance
income.

if there is an indication that the estimated unguaranteed residual value used in

computing the lessor's gross investment in the lease has changed significantly, the
income allocation over the lease term is revised, and any reduction in respect of amounts
accrued is recognized immediately in profit or loss.
 SECTION 20
Leases

FINANCE LEASES - LESSORS

Manufacturer or Dealer Lessors
Manufacturers or dealers often offer to customers the choice of either buying or leasing an asset. A
finance lease of an asset by a manufacturer or dealer lessor gives rise to two types of income:

a. Gross profit, and

b. Finance income over the lease term

Sales revenue is the lower of the present value of the MLP accruing to the lessor, computed at a
market rate of interest, and the fair value of the asset.
Cost of sale is the carrying amount of the leased property less the present value of the
unguaranteed residual value.
Initial direct costs are expensed in the period the gross profit from the sale is recognized.
 SECTION 20
Leases

A lessor and a lessee shall recognize lease payments under operating leases as
OPERATING
LEASE rent income or rent expense on a straight-line basis unless either:

a. another systematic basis is representative of the time pattern of the user’s

benefit
b. lease payments are structured to increase in line with expected general inflation

If payments vary because of factors other than general inflation, then straight-line
method may still be used.
 SECTION 20
Leases

OPERATING LEASE
Leased asset
A lessor shall present assets subject to operating leases in its statement of financial position
according to the nature of the asset.
The lessor recognizes the depreciation charges on the depreciable assets subject to operating
leases.
Initial direct costs incurred by a lessor under an operating lease shall be added to the carrying
amount of the leased asset and shall be recognized as expense over the least term on the same
basis as the least income.
If the leased asset is depreciable, the lessor shall recognize the depreciation charges.
A manufacturer or dealer lessor does not recognize any selling profit on entering into an operating
lease because it is not the equivalent of a sale.
 SECTION 20
Leases

SALE AND A sale and leaseback transaction involves the sale of an asset and the leasing
LEASEBACK
back of the same asset. The lease payment and the sale price are usually
TRANSACTIONS
interdependent because they are negotiated as a package. The accounting
treatment of a sale and leaseback transaction depends on the type of lease.
 SECTION 20
Leases

SALE AND LEASEBACK TRANSACTION

finance lease
a. defer any gain from the sale and amortize it over the lease term
b. recognize immediately any loss from the sale

operating lease
a. if the sale price is established at fair value, any gain or loss from the sale shall be recognized
immediately
.b. if the sale price is below fair value, any gain or loss from the sale shall be also recognized
immediately. However, when the loss is compensated for by future lease payments a below market
price, the temporary loss is deferred and amortized over the lease term
c. if the sale price is above fair value, the excess of the sale price over the fair value is deferred and
amortized over the lease term. On the other hand, the excess of fair value over the carrying amount
of the asset sold is recognized immediately
 SECTION 21
PROVISIONS AND
CONTINGENCIES
Initial Recognition
An entity shall recognize provision only when:
a. The entity has a present obligation at the
reporting date as a result of a past event;
b. It is probable that the entity will be required to
transfer economic benefits in settlement; and
c. The amount of the obligation can be
estimated reliably.
 SECTION 21
PROVISIONS AND
CONTINGENCIES

Present obligation arises either from legal obligation or

constructive obligation resulting from a past event. obligations that
will arise from the entity’s future actions do not give rise to
present obligation, no matter how likely they are to occur and even
if they are contractual.

A provision is recognized both as a liability and as an expense,

unless the provision is recognized as part of the cost of the asset
 SECTION 21
Provisions and Contingencies

Measurement of Provision:
INITIAL Measure provision at best estimate of amount required to settle obligation at reporting date.
MEASUREMENT Large Population of Items:
When provision involves large population of items:
Estimate reflects weighting of all possible outcomes by associated probabilities.
Single Obligation:
If provision arises from single obligation:
Most likely outcome may be best estimate.
Consider other possible outcomes.
Best estimate adjusts for outcomes mostly higher or lower than most likely.
Time Value of Money:
If time value of money effect is material:
Provision amount is present value of expected settlement amount.
Discount rate is pre-tax rate.
Exclusion of Gains:
Exclude gains from expected disposal of assets from provision measurement.
 SECTION 21
Provisions and Contingencies

When a portion or the entire amount required to settle a provision may be

REIMBURSEMENT reimbursed by another party, the entity shall recognize the reimbursement as a
separate asset only when it is virtually certain that the entity will receive the
reimbursement on settlement of the obligation.

The reimbursement receivable recognized as an asset shall not exceed the amount
of the provision and shall be presented separately and not be offset against the
provision. however, in the statement of comprehensive income, the gain on the
reimbursement may be offset against the expense relating to the provision.
 SECTION 21
Provisions and Contingencies

When a provision is measured at the present value of the amount expected to be

SUBSEQUENT
required to settle the obligation, the unwinding of the discount shall be recognized
MEASUREMENT
as a finance cost in profit or loss in the period it arises.
 SECTION 21
Provisions and Contingencies

Contingent Liabilities Contingent Assets

A contingent liability is either a possible but A contingent asset shall not be recognized as
certain obligation or a present obligation that asset but disclosed only if they are probable.
is not recognized because it is either not No disclosure is necessary if the contingent
probable or not measured reliably. assets are either reasonably possible or
Contingent liabilities shall not be accrued but remote.
disclosed only unless they are remote. When the flow of future economic benefits to
the entity is virtually certain, then the related
asset is not a contingent asset, and its
recognition is appropriate.
 SECTION 22
LIABILITIES
AND EQUITY

LIABILITY EQUITY
-- a present obligation of the entity arising from -- is the residual interest in the assets of an
past events, the settlement of which is entity after deducting all its liabilities. Equity
expected to result in an outflow from the entity includes investments by the owners of the
of resources embodying economic benefits. entity, plus additions to those investments
earned through profitable operations and
retained for use in the entity’s operations,
minus reductions to owners’ investments as a
result of unprofitable operations and
distributions to owners.
 SECTION 22
Liabilities and Equity

INSTRUMENTS Some financial instruments that meet the definition of a liability are classified as
CLASSIFIED AS equity because they represent the residual interest in the net assets of the entity.
EQUITY
Puttable Instruments:
Puttable instrument gives holder right to sell back to issuer.
Automatically redeemed on uncertain future event, death, or retirement of
holder.
Subordinate Instruments:
Instruments subordinate to all others.
Classified as equity if they obligate entity to deliver pro rata share of net
assets on liquidation.
 SECTION 22
Liabilities and Equity

INSTRUMENTS The distribution of net assets on liquidation of an instrument is subject to a

CLASSIFIED AS maximum amount.
LIABILITIES
A puttable instrument is classified as equity if, when the put option is exercised,
the holder receives a pro rata share of the net assets of the entity measured in
accordance with the PFRS for SMEs. However, if the holder is entitled to an
amount measured on some other basis, the instrument is classified as a
liability.
It obliges the entity to make payments to the holder before liquidation, such as
a mandatory dividend.
A puttable instrument that is classified as equity in a subsidiary’s financial
statements is classified as liability in the consolidated group of FS
 SECTION 22
Liabilities and Equity

INSTRUMENTS A preference share that provides for mandatory redemption by the issuer for a
CLASSIFIED AS fixed or determinable amount at a fixed or determinable future date, or gives
LIABILITIES
the holder the right to require the issuer to redeem the instrument at or after a
particular date for a fixed date or determinable amount
 SECTION 22
Liabilities and Equity

MEMBERS’ Members’ shares in cooperative entities and similar instruments are equity if:
SHARES IN a. The entity has an unconditional right to refuse redemption of the members’ shares, or
COOPERATIVES
b. Redemption is unconditionally prohibited by local law, regulation or the entity’s
governing charter.

CLASSIFICATION As a rule of thumb, if the issuing entity is obliged under the terms of the instrument to
OF F.I. AS LIABILITY settle the instrument by transferring cash, other financial instruments, or other
OR EQUITY
resources to the holder thereof, regardless of whether or not the entity is under
liquidation, the instrument is classified as liability and not equity.
On the other hand, if the instrument represents a residual interest in the net assets of
the issuing entity such that the holder thereof is entitled to settlement equal to a pro
rata share of the net assets of the entity only upon liquidation, the instrument is
classified as equity.
 SECTION 22
Liabilities and Equity

ORIGINAL ISSUE OF a. If the equity instruments are issued before the entity receives the cash or other
SHARES OR OTHER
EQUITY resources, the entity shall present the amount receivable as an offset to equity in its
INSTRUMENTS
statement of financial position, not as an asset
b. If the entity receives the cash or other resources before the equity instruments are
issued, and the entity cannot be required to repay the cash or other resources
received, the entity shall recognize the corresponding increase in equity to the extent
of consideration received
c. To the extent that the equity instruments have been subscribed for but not issued,
and the entity has not yet received the cash or other resources, the entity shall not
recognize an increase in equity

Options, rights, and warrants qualify as equity instruments. Their outstanding balances are part of share premium.
 SECTION 22
Liabilities and Equity

CAPITALIZATION OR BONUS ISSUES OF SHARES AND SHARE SPLITS

Capitalization Share Split

Capitalization or share bonus issue (stock Share split (stock split) is the dividing of
dividend) is the issue of new shares to an entity’s existing shares into multiple
shareholders in proportion to their shares.
existing holdings.

Capitalization and bonus issues and share splits do not change total equity. An equity shall reclassify
amounts within equity as required by applicable laws.
 SECTION 22
Liabilities and Equity

EXTINGUISHING The equity instruments issued constitutes consideration paid and shall be measured as
FINANCIAL
LIABILITIES WITH follows:
EQUITY INSTRUMENTS
a. Fair value of the equity instruments issued, or
b. Fair value of the liability extinguished
If the transaction constitutes modification of terms, the consideration paid is allocated, on
a reasonable basis, between the part of liability extinguished and the part that remains
outstanding. If the remaining liability has been substantially modified, the original liability is
extinguished and a new liability is recognized.
The foregoing shall not be applied if:
a. The creditor is a shareholder acting in its capacity as a shareholder;
b. The creditor and the entity are controlled by the same party or parties; or
c. The extinguishment of the liability is in accordance with the original terms of the liability.
 SECTION 22
Liabilities and Equity

-- the equity instruments of an entity that have been issued and subsequently reacquired
TREASURY
by the entity. An entity shall deduct from equity the fair value of the consideration given for
SHARES
the treasury shares. The entity shall not recognize a gain or loss in profit or loss on the
purchase, sale, issue or cancellation of treasury shares.

-- Dividends declared shall be recognized as reduction in equity.

DISTRIBUTION
TO OWNERS

-- measured at fair value, unless FV cannot be measured reliably without undue cost or
PROPERTY
effort.
DIVIDENDS
-- If the FV of the assets to be distributed cannot be measured reliably without undue cost
or effort, the dividend payable shall be measured as the carrying amount of the assets to
be distributed.
 SECTION 23
REVENUE
Revenue arises from the following transactions and events:

a.) sale of goods

b.) rendering of services
c.) Construction contracts in which the entity
is the contractor
d.) Use by others of entity assets yielding
interest, royalties, or dividends
 SECTION 23
Revenue

measured at the fair value of the consideration received or receivable

MEASUREMENT trade accounts
prompt discounts
volume rebates
excluded from revenue:
amounts collected on behalf of third parties
sales taxes
value added taxes
agency relationship -- the agent recognizes revenue only up to the extent of its
commission. The portion collected on behalf of the principal is recognized as a liability.
 SECTION 23
Revenue

When the inflow of cash or cash equivalents is deferred, and the arrangement constitutes
DEFERRED
in effect a financing transaction, the fair value of the consideration is the present value of
PAYMENT
all future receipts determined using a imputed rate of interest.
A financing transaction arises when, as consideration, an entity:
a. Provides interest-free credit to the buyer
b. Accepts a note receivable bearing a below-market interest rate
The imputed rate of interest is the more clearly determinable of either:
a. The prevailing rate for a similar instrument of an issuer with a similar credit rating, or
b. A rate of interest that discounts the nominal amount of the instrument to the current
cash sales price of the goods or services.
The difference between the present value of all future receipts and the nominal amount of
the consideration is recognized as interest revenue using the effective interest method.
 SECTION 23
Revenue

EXCHANGES Revenue is not recognized when goods or services are exchanged for goods or services
OF GOODS OR that are:
SERVICES a. of similar nature and value, or
b. dissimilar but under a transaction that lacks commercial substance
Revenue is recognized when goods are sold or services are exchanged for dissimilar
goods or services in a transaction that has commercial substance. In such case, the
transaction is measured at:
a. the FV of goods or services received adjusted by the amount of any cash or cash
equivalents transferred;
b. if the amount under (a) cannot be measured reliably, then at the fair value of any cash
or cash equivalents transferred; or
c. if the FV of neither the asset received nor the asset given up can be measured reliably,
then at the carrying amount of the asset given up adjusted by the amount of any cash or
cash equivalents transferred.
 SECTION 23
Revenue

CUSTOMER When an entity offers loyalty awards to customers as part of a sales transaction, it must
LOYALTY account for these awards as a distinct component of the initial sale. The entity should
PROGRAM allocate the fair value of the consideration received for the sale between the award credits
and other components of the transaction. The value allocated to the award credits should
be based on their fair value, which is the amount they could be sold for separately.

a. the entity has transferred to the buyer the significant risks and rewards of ownership of
SALE OF
the goods
GOODS
b. the entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold
c. the amount of revenue can be measured reliably
 SECTION 23
Revenue

d. it is probable that the economic benefits associated with the transaction will flow to the
SALE OF entity
GOODS e. the costs incurred or to be incurred in respect of the transaction can be measured
reliably

Examples of situations in which the entity may retain the significant risks and rewards of
ownership:
a. when the entity retains an obligation for unsatisfactory performance not covered by
normal warranties
b. when the receipt of the revenue from a particular sale is contingent on the buyer selling
the goods
c. when the goods are shipped subject to installation and the installation is a significant
part of the contract that has not yet been completed
d. when the buyer has the right to rescind the purchase for a reason specified in the sales
contract, or at the buyer’s sole discretion without any reason, and the entity is uncertain
about the probability of return
 SECTION 23
Revenue

If an entity retains only an insignificant risk of ownership, the transaction is a sale and the
SALE OF entity recognizes the revenue. For example, revenue is recognized when:
GOODS a. the seller retains legal title to the goods solely to protect the collectability of the amount
due, or
b. the seller offers a refund if the customer finds the goods faulty or is not satisfied for
other reasons, and the entity can estimate the returns reliably. In which case, a provision
should be recognized for the estimated returns.
The outcome of a transaction can be estimated reliably when all the following conditions
RENDERING are satisfied:
OF SERVICES a. the amount of revenue can be measured reliably
b. it is probable that the economic benefits associated with the transaction will flow to the
entity
c. the stage of completion of the transaction at the end of the reporting period can be
measured reliably
d. the costs incurred for the transaction and the costs to complete the transaction can be
measured reliably
 SECTION 23
Revenue

When a contract covers a number of assets, the construction of each asset shall be
CONSTRUCTION
treated as a separate construction contract when:
CONTRACTS
a. separate proposals have been submitted for each asset;
b. each asset has been subject to separate negotiation, and the contractor and
customer are able to accept or reject that part of the contract relating to each asset;
and
c. the costs and revenues of each asset can be identified

A group of contracts, whether with a single customer or with several customers, shall be
treated as a single construction contract when:
a. the group of contracts is negotiated as a single package
b. the contracts are so closely interrelated that they are, in effect, part of a single
project with an overall profit margin, and
c. the contracts are performed concurrently or in a continuous sequence
 SECTION 23
Revenue

PERCENTAGE OF -- revenue and expenses are recognized based on the estimated percentage of
COMPLETION completion services being rendered or a construction contract.
METHOD
-- an entity shall determine the stage of completion of a transaction or contract using
the method that measures most reliably the work performed. Possible methods include:
a. the ratio of costs incurred for work performed to date over to the estimated total
costs.
b. surveys of work performed
c. completion of a physical proportion of the service transaction or contract work

-- when the outcome of a construction contract cannot be estimated reliably:

a. revenue shall be recognized only to the extent of contract costs incurred that it is
probable will be recoverable, and
b. contract costs are recognized as expenses in the period in which they are incurred
 SECTION 23
Revenue

INTEREST, Revenue from interest, royalties and dividends shall be recognized on the following
ROYALTIES AND bases:
DIVIDENDS
a. Interest shall be recognized using the effective interest method
b. Royalties shall be recognized on an accrual basis in accordance with the
substance of the relevant agreement
c. Dividends shall be recognized when the shareholder’s right to receive payment is
established.
 SECTION 24
GOVERNMENT GRANTS

Government Grants exclude the following:

a.) Government Assistance that cannot
reasonably have a value placed upon them.

b.) Transactions with the government that cannot

be extinguished from the normal trading
transactions of the entity.

c. Income tax holidays, investment tax credits,

accelerated depreciation allowances and reduced
income taxes
 SECTION 24
Government grants

MEASUREMENT
Initial Subsequent
Fair Value of the Asset Received. Fair Value of the Asset Received.
 SECTION 4
Financial Statement Presentation

Recognition Government grants are recognized as follows:

a. A grant that does not impose specified future performance conditions on the
recipient is recognized in income when the grant proceeds are receivable.

b. A grant that imposes specified future performance conditions on the recipient

is recognized in income only when the performance conditions are met.

c. Grants received before the revenue recognition criteria are satisfied are
recognized as a liability.
 SECTION 25
BORROWING COSTS

Borrowing Costs include:

a.) Interest expense calculated using the
effective interest method.

b.) Finance charges in respect of finance

leases.

c.) Exchange differences arising from foreign

currency borrowing to the extent that they are
regarded as an adjustment to interest cost.
 SECTION 3
Financial Statement Presentation

COMPARATIVE A complete set of financial statements means that an entity shall present, as a
AMOUNTS minimum, two of each of the required financial statements and related notes.

An entity shall present each financial statements with equal prominence.

PRESENTATION Entity may use titles for the financial statements other than those used in the
PFRS for SMEs as long as they are not misleading.

The following information should be displayed prominently and repeatedly when

IDENTIFICATION necessary:
Name of the reporting entity
Financial Statements cover individual or group of entities.
The level of rounding, if any, used in presenting amounts in the financial
statements.
 SECTION 26
SHARE-BASED PAYMENT

Property, plant and equipment do not include:

a.) Biological assets related to agriculture

activity, or

b.) Mineral rights and mineral reserves, such

as oil, natural gas and similar non-
regenerative sources
 SECTION 27
IMPAIRMENT OF ASSETS

Property, plant and equipment do not include:

a.) Biological assets related to agriculture

activity, or

b.) Mineral rights and mineral reserves, such

as oil, natural gas and similar non-
regenerative sources
 SECTION 28
EMPLOYEE BENEFITS

Property, plant and equipment do not include:

a.) Biological assets related to agriculture

activity, or

b.) Mineral rights and mineral reserves, such

as oil, natural gas and similar non-
regenerative sources
 SECTION 29
INCOME TAX

Property, plant and equipment do not include:

a.) Biological assets related to agriculture

activity, or

b.) Mineral rights and mineral reserves, such

as oil, natural gas and similar non-
regenerative sources
 SECTION 30
FOREIGN CURRENCY
TRANSLATION

Property, plant and equipment do not include:

a.) Biological assets related to agriculture

activity, or

b.) Mineral rights and mineral reserves, such

as oil, natural gas and similar non-
regenerative sources
 SECTION 31
HYPERINFLATION

Property, plant and equipment do not include:

a.) Biological assets related to agriculture

activity, or

b.) Mineral rights and mineral reserves, such

as oil, natural gas and similar non-
regenerative sources
 SECTION 32
EVENTS AFTER END OF
REPORTING PERIOD

Property, plant and equipment do not include:

a.) Biological assets related to agriculture

activity, or

b.) Mineral rights and mineral reserves, such

as oil, natural gas and similar non-
regenerative sources
 SECTION 33
RELATED PARTY
DISCLOSURES

Property, plant and equipment do not include:

a.) Biological assets related to agriculture

activity, or

b.) Mineral rights and mineral reserves, such

as oil, natural gas and similar non-
regenerative sources
 SECTION 34
SPECIALIZED ACTIVITIES

Specialized Activities include:

a.)

b.) Mineral rights and mineral reserves, such

as oil, natural gas and similar non-
regenerative sources
 SECTION 35
TRANSITION TO THE FPRS
FOR MSME’S

Property, plant and equipment do not include:

a.) Biological assets related to agriculture

activity, or

b.) Mineral rights and mineral reserves, such

as oil, natural gas and similar non-
regenerative sources