QAU Memo

No. 1, s2020

In this issue:
The Securities and Exchange Commission (SEC) recently issued the Revised SRC Rule 68. Revisions made in the
previous reporting guidelines include interpretations and clarifications issued thru Financial Reporting Bulletins,
and definition of commonly used terms such as fraud, error, and significant subsidiary. Entity and accreditation
categories and test of materiality were also revised. Furthermore, Registration of Securities Pursuant to the
ASEAN Capital Market Integration (ACMI) was added.

TAKING YOU FURTHER

 GENERAL FINANCIAL REPORTING REQUIREMENTS
Companies that meet the following threshold are required to file financial statements in
SEC:

• Stock corporations with total assets or total liabilities of P600,000 or more.

(Previously, those with paid up capital stock of P50,000 or more.)
• Non-stock corporations with total assets or total liabilities of P600,000 or more.
(Previously, those with total assets of P500,000 or more, or with gross annual
receipts of P100,000 or more.)
*For branch offices, representative offices and regional operating headquarters of
foreign corporations, the threshold remains the same.

Some definition of terms used in the Rule were revised as follows:

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 The Revised SRC Rule 68 distinguished large entity from publicly-accountable entity. Small
and medium-sized entity is also separated into medium-sized and small entity. Accordingly,
PFRS for Small Entities is also adopted in the Revised Rule as the reporting standards for
entities that qualify as small entities.

❑ Large and/or Publicly-Accountable Entities

However, a set of financial reporting framework other than the full PFRSs may be allowed
by the Commission for certain sub-class (e.g., banks, insurance companies) of these
entities upon consideration of the pronouncements or interpretations of any of the
regulatory bodies.

❑ Medium-sized, Small and Micro Entities

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 ✓ Are not required to file the financial statements under Part II of SRC Rule 68;
✓ Are not in the process of filing their financial statements for the purpose of issuing
any class of instruments in a public market; and
✓ Are not holders of secondary licenses issued by regulatory agencies.

Entities shall be exempt from the mandatory adoption of the PFRS for SMEs/PFRS for SEs
when they meet certain criteria in which case they have an option to use PFRS/PFRS for
SMEs.

In the event where an entity breached the prescribed threshold in terms of total assets or
total liabilities and this it falls within a different classification, the Audited Financial
Statements of said entity shall be prepared in accordance with the higher framework.

Responsibility for Financial Statements

The Statement of Management’s Responsibility (SMR) for Financial Statements shall be

attached to the financial statements.

The SMR shall cover the comparative financial statements and shall indicate therein such
periods. It shall be attached to the consolidated financial statements and stand-alone
financial statements. The SMR of companies covered under Part II of this Rule shall, in
addition to the requirements, be signed under oath. The Chairman of the Board, Chief
Executive Officer and Chief Financial Officer shall all sign the SMR. Failure to any of the
prescribed signatories to sign the SMR constitute a material deficiency in the financial
statements. For registrants of securities, the SMR shall be attached to both audited annual
financial statements and reviewed interim financial statements.
In case of branch offices, representative offices or regional operating headquarters of
foreign corporations, the SMR shall be signed by its local manager who is in charge of its
operations within Philippines.

Accreditation Categories

The following regulated entities shall have independent auditors accredited by the
Commission under the appropriate category:

❑ Group A

➢ Issuers of registered securities which have sold a class of securities pursuant to a

registration under Section 12 of the SRC except those issuers of registered
timeshares, proprietary and non- proprietary membership certificates which are
covered in Group B. This category shall also cover corporations applying for the
registration of their securities; (Previously, this is not included.)
➢ Issuers with a class of securities listed for trading in an Exchange;
➢ Public companies or those which have total assets of at least Fifty Million Pesos (P50
Million) or such other amount as the Commission shall prescribe, and having two
hundred (200) or more holders each holding at least one hundred (100) shares of a
class of its equity securities;

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 Previously, the following entities are under Group B category:
➢ Clearing agency and clearing agency as depository; and
➢ Stock and securities exchange/s and other Self- Regulatory Organizations.

❑ Group B

➢ Issuers of registered timeshares, proprietary and non-proprietary membership

certificates, and corporations applying for the registration of such
securities;(Previously, corporations applying for the registration of such securities is
not included.)
➢ Investment houses;
➢ Brokers and dealers of securities;
➢ Investment companies that are not in the process of registering securities or have no
registered securities yet; (Previously, it was Investment companies only.)
➢ Government securities eligible dealers;
➢ Universal banks registered as underwriters of securities;
➢ Investment company advisers;
➢ Special purpose corporations registered under the Securitization Act of 2004 and its
implementing rules; and
➢ Such other corporations which may be required by law to be supervised by the
Commission.

❑ Group C

➢ Transfer agents;
Previously, the following entities have different description:
➢ Financing companies whose assets in the preceding year are above Ten Million Pesos
(P10 Million); and
➢ Lending companies whose assets in the preceding year are above Five Million Pesos
(P5 Million);
Previously, the following entities are not part of Group C category:
➢ Non-stock, non-profit corporations including foundations which solicit or receive
annual donations or contributions and/or with fund balance amounting to more than
Twenty-Five Million Pesos (P2S Million) and One Hundred Million Pesos (P100
Million), respectively, over the preceding three (3) years, or such higher amount that
the Commission may set through order or guidelines; and
➢ Such other corporations that the Commission may consider as imbued with public
interest regardless of the lack of a requirement to obtain a secondary license from
the Commission.

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 Scope and Limitation of Accreditation

There are no changes in some provisions except for the following:

❑ The auditing firms including their respective signing partners who shall be engaged
by companies under Groups A, B and C must be accredited by the Commission in
accordance with this Rule.
❑ Sole practitioners may be accredited by the Commission and may engaged by Group
C companies provided that such auditors have proven their capacity and resources
for establishing and implementing adequate audit quality controls in accordance
with applicable standards and such other rules and regulations as the Commission
may prescribe.
Sole practitioners, however, are expected to convert from a Sole Proprietorship to a
Partnership structure by 20 June 2022 in order to continue being accredited by the
Commission.
❑ The evaluation on the financial statements, which are randomly selected using a risk-
based approach, of the applicant’s corporate clients during the processing of his
application covers only the companies’ compliance with the applicable financial
reporting framework and such is made only on the face of the financial statements
and attached schedules and not its supporting documents. The Commission,
however, is not precluded from obtaining copies of the audit work papers to support
the auditor’s responses to the comments on the evaluated AFS.
❑ The Commission shall subject to SOAR Inspection Program the accredited auditing
firms engaged by companies with equity or debt securities listed in an Exchange and
review portions of these firms’ audit work for the listed companies. The Commission,
however, is not precluded from subjecting the Independent Auditors of other
companies for inspection as the circumstances would warrant.
❑ The accreditation of an auditing firm, partner or sole practitioner shall be effective
unless any of the following occurs:
o The auditing firm or auditor’s request for withdrawal of accreditation is
approved by the Commission;
o The accreditation is suspended or revoked by the Commission, after due
notice and hearing, for failure to comply with the SOAR requirements or for
such other grounds as provided in this Rule; or
o The BOA registration and license have expired and no application for renewal
has been filed with the BOA.
❑ Accreditation under Group A shall be considered a general accreditation which shall
allow the independent auditor to also audit companies under Groups B and C.
Independent auditors with Group B accreditation can likewise audit companies
under Group C. Only accredited partners, with accreditation under the appropriate
group category, are allowed to certify financial statements of the firm’s clients with
secondary licenses.

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 Mutual Recognition Policy

The Mutual Recognition Policy was revised to recognize the Memorandum of Agreement
between and among the commission, Board of Accountancy, Bangko Sentral ng Pilipinas
(BSP), and Insurance Commission.
The mutual recognition policy, as prescribed in the Memorandum of Agreement between
and among the Commission, BOA, BSP and IC and any of its subsequent amendments,
covering auditors of Group C companies is subject to the BSP restriction that for banks and
their subsidiaries and affiliate banks; quasi-banks: trust entities: non-stock savings and loan
associations and their subsidiaries and affiliates engaged in allied activities: and other
financial institutions which, under special laws, are subject to the BSP’s consolidated
supervision, only one (1) independent auditor or auditing firm shall audit their individual
and consolidated financial statements.

Reportorial Requirements

There are no changes in some provisions except for the following:

Additional disclosure on the findings on the entity is required. It must be disclosed by the
Audit Committee, or if there is no such committee, by the company’s Chairman of the Board
to the Commission:
✓ Any finding of: (i) violation of SRC Rule 68: (ii) offering of securities without prior
registration with the Commission under the SRC: or (iii) engaging in the business of
financing or lending without a secondary license; (Previously, this is not included.)
✓ Any material finding involving fraud or error;
✓ Losses or potential losses the aggregate of which amounts to at least ten per cent
(10%) of the consolidated total assets of the company;
✓ Any finding to the effect that the consolidated assets of the company, on a going
concern basis, are no longer adequate to cover the total claims of creditors; and
✓ Material weaknesses in internal control which may lead to financial reporting
problems.

Rotation of External Auditors

The independent auditors or key audit partners shall comply with the provisions on long
association of personnel (including partner rotation) with an audit client as prescribed in the
Code of Ethics for Professional Accountants in the Philippines as adopted by the BOA and
PRC and such other standards as may be adopted by the Commission. (Previously, the
signing partner shall be rotated after every five (5) years of engagement and shall observe a
two-year cooling off period.)

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 Other Documents to be Filed with the Financial Statements

Kindly refer to QAU Memo 2019-15 for the summary of the documents needed to be filed
with the Financial Statements for certain types of entities such as:
➢ Non-Stock and Non-Profit Organizations Including Foundations;
➢ Issuers of Securities to the Public and Stock Corporations with Unrestricted Retained
Earnings in Excess of 100% of Paid-in Capital Stock;
➢ Regulated Entities Enumerated in Section 3 (B) (i) of Part I of the Rule;
➢ Financing Companies;
➢ Mutual Funds;
➢ Investment Houses;
➢ Listed Companies and Investment Houses that are part of a Conglomerate or Group
of Companies; and
➢ Listed Companies that recently offered securities to the public (either as initial or
additional offering)

Additional Requirements for Issuers of Securities to the Public

Registration of Securities Pursuant to the ASEAN Capital Market

The revised rule added a section for the Registration of Securities Pursuant to the ASEAN
Capital Market Integration (ACMI). This states that the registration of securities pursuant to
the ACMI Framework will follow Rule 68, subject to the adoption of the International
Financial Reporting Standard for the basis of financial statements of foreign companies that
look to pursue cross boarder offerings or listings in the Philippines.
Specific requirements:
✓ Adoption of the IFRS as the basis of financial statements of foreign companies that
will undergo cross border offerings or listings in the Philippines.
✓ Submission by the foreign issuer’s financial statements that are audited by a foreign
audit firm are subject to the following requirements:
o The foreign audit firm should be accredited or licensed and/or recognized in
its home jurisdiction as qualified to audit issuers of securities to the public.
o The foreign audit firm should be affiliated with a local firm that is accredited
by the Commission under Group A category.
o The SMR, schedules and other attachments required under SRC Rule 68
should be submitted with the financial statements.
✓ Modification of financial statement requirements in cases where the subject of a
registration statement is asset-backed securities in order to align with those in other
ASEAN countries.

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 Periodic Presentation
A. Registration Statements
❑ Consolidated Statements of Financial Position
a. If the registrant has been in existence for less than one (1) fiscal year,
there shall be filed an audited Statement of Financial Position as of a
date within one hundred eighty (180) days of the date of filing the
registration statement. (In SRC Rule 68, as amended, it was one
hundred thirty-five (135) days.)
b. If a filing on SEC Form 12-1 is made within one hundred eighty (180)
days after the end of the most recently ended fiscal year, the filing
shall include Audited Consolidated Statements of Financial Position as
of the end of each of the two (2) most recently ended fiscal years. (In
SRC Rule 68, as amended, it was one hundred five (105) days.)
c. If a filing on SEC Form 12-1 is made more than one hundred eighty
(180) days but not more than two hundred seventy-four (274) days
after the end of the most recently ended fiscal year, the filing shall
include Audited Consolidated Statements of Financial Position as of
the end of each of the two (2) most recently ended fiscal years and a
separate Interim Statement of Financial Position as of the end of the
first (1st) fiscal quarter subsequent to the most recent fiscal year end.
(In SRC Rule 68, as amended, it was one hundred five (105) days.)
d. If a filing on Form 12-1 is made more than two hundred seventy-four
(274) days after the end of the most recently ended fiscal year, the
filing shall include Audited Consolidated Statements of Financial
Position as of the end of each of the two (2) most recently ended
fiscal years and a separate Interim Statement of Financial Position as
of the end of the second (2nd) fiscal quarter subsequent to the most
recent fiscal year end. (In SRC Rule 68, as amended, it was one
hundred thirty-five (135) days.)
❑ Interim Financial Statements
The interim financial statements need not be audited. However, in
case of an IPO of securities by a company, such interim financial
statements shall be audited by an independent auditor accredited by
the Commission under the prescribed category and shall be complete
in details as in a full fiscal year financial report. (In SRC Rule 68, as
amended, it should be under Group A category.)
Reviewed Interim Financial Statements may be accepted by the
Commission provided that the registrant submits a written
justification citing its constraints for having the interim financial
statements audited and a certification that there has been no
material event or transactions during the interim period that would
necessitate the conduct of audit procedures.

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 Pro-forma Financial Information
✓ There are no changes in the provisions of pro forma financial information except for
the Report of Independent Auditor.
SRC Rule 68 as amended
Attestation of Independent Auditor
The pro forma financial information that shall be submitted with the registration
statement shall be accompanied by a report of an independent auditor accredited by
the Commission under Group A category. The said auditor shall comply with the
requirements provided under SEC Memorandum Circular No. 2, Series of 2008
(Guidelines for Reporting and Attestation on Pro Forma Financial Information) or any
amendments thereto.

Revised SRC Rule 68, 2019

Report of Independent Auditor
The pro forma financial information that shall be submitted with the registration
statement shall be accompanied by a report of an independent auditor accredited by
the Commission under Group A category. The said auditor shall comply with the
requirements under Philippine Standard on Assurance Engagements No. 3420
(Assurance Engagements to Report on the Compilation of Pro Forma Financial
Information Included in the Prospectus).

Consolidated Financial Statements

❑ The Disclosure about Subsidiaries Not Consolidated and 50 Percent or Less Owned
Persons section was deleted in the revised SRC Rule.
In addition to those required under the applicable financial reporting framework, the
following requirements shall be complied with by companies covered by Part II of this Rule:
a. A company covered by Part II of this Rule that has a significant foreign subsidiary or
subsidiaries shall submit to the Commission copies of the financial statements of said
subsidiaries.
b. A parent company covered by Part II of this Rule shall submit consolidated AFS
accompanied by its separate AFS that is duly received by the BIR or its authorized
banks, unless the BIR allows an alternative proof of submission for its authorized
banks (e.g., bank slips) or prohibits acceptance of the financial statements in certain
cases (e.g., on-going examination).

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 Penalties and Other General Implementing Provisions
Penalties
There is no change in some provision except for the following:
Violations of Companies subject to penalty:
✓ Material misrepresentation in the financial statements;
✓ Any material misstatement in the financial statements for failure to comply with the
applicable financial reporting framework, such as:
• Failure to adopt the prescribed financial reporting framework or any
accounting standard resulting in a material misstatement; and
• Failure to disclose required information and other relevant or material
information.
✓ Failure to submit any basic component of the financial statements;
✓ Failure to submit financial statements audited by a qualified independent certified
public accountant;
✓ Failure to submit a complete SMR; and
✓ Failure to comply with any other requirements under Part I or II of this Rule.
*Previously, failure to present the required comparative figures is included.

Test of Materiality
❑ Omissions or misstatements of items shall be material if they could individually or
collectively, influence the economic decisions that users make on the basis of the
financial statements. (Previously, materiality is based on the tests set by the
Commission in SEC Memorandum Circular No. 8, Series of 2009)
Quantitative Test
1. Deficiency or Inconsistency
Failure to submit any component of the financial statements prescribed under this
Rule shall be considered a material deficiency.
2. Misstatement
A misstatement of the financial statements may result from a deviation from
prescribed policy, misrepresentation, fraud or error.
Qualitative Considerations
Whether the misstatement or error:
✓ Affects compliance with debt covenants or other contractual requirements.
✓ Relates to the incorrect selection or application of an accounting policy that has an
immaterial effect on the current period’s financial statements but is likely to have a
material effect on future periods’ financial statements.
✓ Masks a change in earnings or other trends, especially in the context of general
economic and industry conditions.
✓ Affects ratios used to evaluate the entity's financial position, results of operations or
cash flows.

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 ✓ Affects segment information presented in the financial statements.
✓ Has the effect of increasing management compensation, for example, by ensuring
that the requirements for the award of bonuses or other incentives are satisfied.
✓ Is significant having regard to the auditor’s understanding of known previous
communications to users, for example, in relation to forecast earnings.
✓ Affects compliance with regulatory requirements (including BIR, BSP and other
government agencies).
✓ Relates to items involving particular parties (for example, whether external parties to
the transaction are related to members of the entity’s management).
✓ Is an omission of information not specifically required by the applicable financial
reporting framework but which, in the judgment of the auditor, is important to the
users’ understanding of the financial position, financial performance or cash flows of
the entity.
✓ Affects other information that will be communicated in documents containing the
AFS (for example, information to be included in a "Management Discussion and
Analysis" or an "Operating and Financial Review") that may reasonably be expected
to influence the economic decisions of the users of the financial statements.
Re-issuance of Financial Statements
❑ Except for banks, the Commission shall make a determination whether misstatement
or incompleteness is significantly material that it would necessitate the re-issuance
of such financial statements. Any re-issuance shall be required within forty-five (45)
calendar days from receipt of the order of the Commission. Such amendment shall
comply with the re-issuance requirements under applicable auditing standards. The
issue on whether or not the financial statements of a bank and an insurance
company should be re-issued shall be endorsed by the Commission to the BSP and
the IC, respectively, for appropriate action.
❑ For corporations not covered by the above provisions, they may re-issue their
financial statements subject to compliance with the requirements under existing
standards. However, issuers of securities to the public shall not re-issue their AFS
without prior request from and approval by the Commission, BSP and IC, as
applicable.
❑ A corporation covered by SRC Rule 68 Part II and re-issuing its AFS shall notify all
concerned parties, such as its stockholders, creditors and investors of such
amendment through publication of a notice in a newspaper of general circulation
indicating the reason for the amendment and the fact that the financial statements
have been submitted to the Commission.
❑ An amendment or re-issuance of the financial statements shall not exonerate the
company and the auditors from the penalty that may be assessed by the Commission
against a corporation due to the material deficiency or misstatement of the original
financial statements.

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 The are no changes in the following sections of the Rule:
❑ Qualifications and Reports of Independent Auditors
o Independence of the Auditors
o Engagement of Independent Auditors
o Audit Reports of Independent Auditors
o Supplemental Written Statement of Auditor
o Comparative Financial Statements
❑ Periodic Presentation
o Registration Statements
▪ Consolidated Statements of Comprehensive Income
▪ Consolidated Statements of Changes in Equity
▪ Consolidated Statements of Cash Flows
▪ Age Requirement for Financial Statements
o Annual Reports (SEC Form 17-A)
o Information Statements (SEC Form 20-IS)
❑ Interim Financial Statements
❑ Pro-forma Financial Information (except for the Report of Independent Auditor)
Effectivity and Transition
✓ Unless otherwise specified, the Revised SRC Rule 68, shall become effective for
Audited Financial Statements covering periods ending 31 December 2019 and
onwards, and for interim financial statements starting the first quarter of 2020,
and thereafter.
✓ The financial statement requirements for registration of securities under Part II
of this Rule shall be effective starting 1 January 2020 unless an earlier application
for pending registration statements is requested and approved by the
Commission.
Compliance with the Two (2) Partner Requirement
✓ Auditing firms which have less than two (2) partners as of the date of the
effectivity of this Rule shall be given until 30 June 2022 within which to comply
with the new two (2) partner requirement.
Compliance with the Transition from Sole Proprietorship to Partnership
✓ Sole practitioners as of the date of the effectivity of this Rule shall be given until
30 June 2022 within which to comply with the requirements to convert to a
Partnership structure from Sole Proprietorship in order to continue being
accredited by the Commission.
-XXX-

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 Editorial Board
QAU Memo is the official publication of R.S.
▪ Rose Angeli S. Bernaldo
Bernaldo & Associates to keep the Firm’s
Partner | Quality and Compliance/
professional staff informed of the issues affecting
Training Partner
the practice. The information contained herein is of
[email protected]
a general nature and is not intended to address the
circumstances of any particular individual or entity.
▪ Anthony D. Paño
Although we endeavour to provide accurate and
Quality Assurance Senior Manager/
timely information, there can be no guarantee that
Quality Assurance Leader
such information is accurate as of the date it is
[email protected]
received or that it will continue to be accurate in
the future. No one should act on such information
▪ Mary Rose A. Lorilla
without appropriate professional advice after a
Senior Quality Assurance Auditor/
thorough examination of the particular situation.
Assistant Quality Assurance Leader
The Firm cannot be held liable for any losses [email protected]
suffered as a result of reliance upon information
contained in this memo. ▪ Jean S. Losloso
This is a property of R.S. Bernaldo & Associates. Quality Assurance Associate/
Reproduction of any material included in the memo Engagement Quality Control Review
should be subject to the approval of the Editorial Leader
Board. [email protected]

R.S. Bernaldo & Associates is a member firm of the ▪ Nikka Hazel M. Mendoza
PKF International Limited family of legally Quality Assurance Associate/
independent firms and does not accept any Consultation Leader
responsibility or liability for the actions or inactions [email protected]
of any individual member or correspondent firm or
firms. ▪ Charmaine S. De Guzman
Comments and suggestions are welcome. Quality Assurance Associate/
Learning and Training Leader
[email protected]

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