Scope: who may qualify as SMEs
- An entity may qualify as an SME if it meets the SME definitions in PFRS for SMEs and the applicable SEC En Banc Resolution dated 13 August 2009 (“SEC En Banc Resolution”).
- Entities that previously used full PFRS may qualify as SMEs and may adopt PFRS for SMEs if they qualify under the SME definitions and the SEC En Banc Resolution.
- Non-Publicly Accountable Entities (NPAEs) using PAS 101 may qualify as SMEs and may adopt PFRS for SMEs if they qualify under PFRS for SMEs and the SEC En Banc Resolution.
- NPAEs using PAS 101 that do not qualify as SMEs (for example, entities that crossed the ceiling threshold for total assets of P350 million) shall follow the required alternative framework rules.
Framework transitions: first-time adopter rules
- Entities that qualify as SMEs and adopt PFRS for SMEs shall be treated as “first-time adopters” of the PFRS for SMEs.
- A first-time adopter of PFRS for SMEs must apply Section 35 (Transition to the PFRS for SMEs).
- Section 35.1 states that Section 35 applies to a first-time adopter regardless of whether the entity’s previous accounting framework was full IFRS or another set of generally accepted accounting principles (GAAP), such as national standards, or another framework such as the local income tax basis.
- Section 35.2 provides that an entity can be a first-time adopter of the IFRS for SMEs only once.
Transition scenarios for NPAEs and full PFRS users
- Entities using full PFRS may transition to PFRS for SMEs only if they qualify as SMEs under the SME definitions and the SEC En Banc Resolution; once qualified and adopted, they are treated as first-time adopters under Section 35.
- NPAEs using PAS 101 may transition to PFRS for SMEs if they qualify as SMEs under the SME definitions and the SEC En Banc Resolution; once qualified and adopted, they are treated as first-time adopters and must apply Section 35.
- NPAEs using PAS 101 that do not qualify as SMEs (such as those that crossed the ceiling threshold for total assets of P350 million) shall use the appropriate framework determined by eligibility and whether they qualify as micro-business entities.
- NPAEs using PAS 101 that (a) no longer qualify as SMEs and (b) are not micro-business entities shall use full PFRS, and if it is their first time adopting full PFRS, they shall apply PFRS 1, First time Adoption of Philippine Financial Reporting Standards.
Micro-business entities and alternative accounting bases
- Micro-business entities have the option to use any of these bases of accounting for their financial statements: (a) full PFRS, (b) PFRS for SMEs, or (c) another acceptable basis of accounting.
- If an entity uses a basis of accounting other than full PFRS and PFRS for SMEs, management shall assess the acceptability of such basis in light of (a) the nature of the entity and (b) the objective of the financial statements, and (c) the requirements of law or regulators and standard-setters.
- Tax regulations permit taxpayers to use the income tax basis of accounting.
- The SEC allows the use of the cash basis of accounting by micro-business entities.
Size criteria: timing and breach/continuance logic
- PFRS for SMEs is effective for annual periods beginning on or after January 1, 2010.
- The revenue guidance in applying Section 23 (Revenue) for recognizing revenue from agreements for the construction of real estate applies to annual periods beginning on or after January 1, 2012.
- Total assets and total liabilities for applying the size criteria must be based on the entity’s audited financial statements as of December 31, 2009.
- An SME whose accounting period begins on January 1, 2010 applies the size criteria based on audited total assets or audited total liabilities as of December 31, 2009.
- An SME whose accounting period begins on a date other than January 1, 2010 applies the size criteria using audited financial statements for the immediately preceding fiscal year.
- If an SME using PFRS for SMEs breaches the floor or ceiling of the size criteria at the end of the current year (for example, at December 31, 2010) and the event that caused the change is “significant and continuing,” the entity shall transition to the applicable financial reporting framework in the next accounting period (or calendar year), using full PFRS if the ceiling threshold is breached or another acceptable accounting basis if the floor threshold is breached.
- If the event is not significant and continuing, the entity may continue using the same financial reporting framework.
- The determination of whether an event is “significant and continuing” is based on management’s judgment using relevant qualitative and quantitative factors; as a general rule, 20% or more of total assets or total liabilities is considered significant.
- If an entity opts to apply PFRS for SMEs early (for example, in calendar year 2009), it shall apply the size criteria using audited financial statements for the immediately preceding calendar year (i.e., the calendar year ended December 31, 2008).
Subsidiaries under parent full PFRS
- A subsidiary qualifies to use PFRS for SMEs even if its parent company uses full PFRS, provided the subsidiary by itself does not have public accountability.
- Paragraph 1.6 of Section 1 requires that a subsidiary whose parent uses full IFRS (or is part of a consolidated group that uses full IFRS) is not prohibited from using IFRS for SMEs in its own financial statements if that subsidiary by itself does not have public accountability.
- If a subsidiary’s financial statements are described as conforming to IFRS for SMEs, the subsidiary must comply with all provisions of IFRS for SMEs.
- When preparing consolidated financial statements, differences in accounting policies used by group members for similar transactions and events require appropriate adjustments in the financial statements of the entity before consolidation so group uniform policies are reflected.
Disclosures and early adoption requirements
- If an SME’s first financial statements use PFRS for SMEs, the SME shall make required disclosures including (a) an explanation of the transition under paragraph 35.12 and (b) reconciliations under paragraphs 35.13 to 35.15 of Section 35.
- If an SME does not opt for early application of PFRS for SMEs, the SME shall disclose the impact on its financial statements of the future adoption or application of PFRS for SMEs.
- PFRS for SMEs is effective for periods beginning January 1, 2010, and early adoption is available only for SMEs capable—through systems and resources—to efficiently transition to PFRS for SMEs for financial statements as of 31 December 2009.
- SMEs that early adopt shall be treated as first-time adopters and must apply Section 35 (Transition to the PFRS for SMEs).
- SMEs that early adopt shall discuss in their financial statements the impact of such early adoption.
Relationship to SEC and implementing framework rules
- The adoption guidance ties SME eligibility to the SME definitions in PFRS for SMEs and the SEC En Banc Resolution dated 13 August 2009.
- For first-time adoption of PFRS for SMEs, entities must apply Section 35 of PFRS for SMEs (Transition to the PFRS for SMEs).
- For first-time adoption of full PFRS by entities required to move from PAS 101 under the described conditions, entities must apply PFRS 1, First time Adoption of Philippine Financial Reporting Standards.
Corporate filing and complete financial set reference
- For stock corporations with paid-up capital stock of more than P50,000.00, and for non-stock corporations with total assets of more than P500,000.00 and total contributions of more than P100,000.00, SRC Rule 68 requirements must be complied with.
- SRC Rule 68 compliance includes submission of a complete set of financial statements consisting of (i) Balance Sheet, (ii) Income Statement, (iii) Cash Flow Statement (if cash basis, not mandatory), (iv) Statement of Changes in Equity/Fund Balance, (v) Notes to Financial Statements, (vi) Statement of Management’s Responsibility, and (vii) Auditor’s Report.