DE LA SALLE UNIVERSITY MANILA

RVR – COB DEPARTMENT OF ACCOUNTANCY

REVDEVT 2nd Term AY 14-15

Theory of Accounts
TOA – Lecture 1 Prof. Francis H. Villamin

THE PHILIPPINE FINANCIAL REPORTING STANDARDS

The Global Financial Reporting Language

Accounting is the language of business. The global financial reporting language is the International
Financial Reporting Standards (IFRS). In the Philippines, the IFRS is known as the Philippine Financial
Reporting Standards [PFRS]. The PFRS include PFRS 1-13, PAS 1-41, the IFRIC and the SIC. The
PFRS and its implication to preparers, users, educators and other stakeholders have to be effectively
coordinated and communicated on a sustainable basis.

Accountants, Financial analysts, Financial Managers, Portfolio Managers, Securities Analysts,

Credit/Investment Banking Analysts Senior Managers, Auditors, Managers of small and medium-sized
enterprises, Tax accountants, are here to stay in good and bad times as well. Hence, IFRS knowledge is
critical to the efficient and effective delivery of financial undertakings in whatever format or language
used.

Understanding as well as keeping up with ongoing revisions and amendments in the PFRS is an important
responsibility of all users of PFRS-based financial statements.

The PFRS financial statements include the following:

1. Statement of Financial Position at the end of the period
2. A Statement of Comprehensive Income for the period
3. A Statement of Changes in Equity for the period
4. A Statement of Cash Flows for the period
5. Notes, comprising a summary of significant accounting policies and other explanatory information
6. A Statement of Financial Position as at the beginning of the earliest comparative period

Integration provides a bird’s eye-view of the PFRS as illustrated in the tables taken from the standards:

Asset Item Recognition Principle Measurement Principle

Inventory Cost Lower of Cost or Net Realizable Value
Property, Plant & Equipment Cost Cost Model or Revaluation Model
Intangibles Cost Cost Model or Revaluation Model
Investment Property Cost Cost Model or Fair Value Model
Financial Instruments Fair Value Amortized Cost or Fair Value Model
Biological Assets Fair Value less costs to Fair value less costs to sell
sell
Defined Benefits Fair value of plan assets Fair value of plan assets less Projected Unit
less Projected Unit Credit [PUC] plan obligation and arbitrary
Credit [PUC] plan rules
obligation and arbitrary
rules
TOA Lecture 1 Page 2

Liability Item Recognition Principle Measurement Principle

Leases [Lessee] Lower of the fair value of the Lower of the fair value of the leased
leased asset and present value asset and present value of leased
of leased payments payments
Other Liabilities Various Various

Contingent Liabilities Not recognized Not measured

Provisions Best estimate to settle at balance Best estimate to settle at balance
sheet date sheet date
Financial Liability Fair value Amortized Cost, Fair Value Model
and Other
Deferred Tax Tax Rate and undiscounted Tax rate and undiscounted
Defined Benefit Fair value of plan assets less Fair value of plan assets less
Projected Unit Credit [PUC[ plan Projected Unit Credit [PUC[ plan
obligation and arbitrary rules obligation and arbitrary rules

Summary of Philippine Financial Reporting Standards and Interpretations

Approved by the Board of Accountancy Applicable to Annual Period
on or before January 1, 2014.

Framework for the Preparation and Presentation of Financial Statements

Conceptual Framework Phase A: Objectives and qualitative characteristics – 2010

PFRSs Practice Statement Management Commentary

Philippine Financial Reporting Standards (PFRSs)

PFRS 1 (Revised) First-time Adoption of Philippine Financial Reporting Standards
Amendments to PFRS 1 and PAS 27: Cost of an Investment in a Subsidiary,
Jointly Controlled Entity or Associate
Amendments to PFRS 1: Additional Exemptions for First-time Adopters
Amendment to PFRS 1: Limited Exemption from Comparative PFRS
7 Disclosures for First-Time Adopters
Amendments to PFRS 1: Severe Hyperinflation and Removal of Fixed Date
for first-time Adopters
Amendments to PFRS 1: Government Loans
PFRS 2 Share-based Payment
Amendments to PFRS 2: Vesting Conditions and Cancellations
Amendments to PFRS 2: Group Cash-settled Share-based Payment
Transactions
PFRS 3 (Revised) Business Combinations
PFRS 4 Insurance Contracts
Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts
PFRS 5 Non-current Assets Held for Sale and Discontinued Operations
PFRS 6 Exploration for and Evaluation of Mineral Resources
PFRS 7 Financial instruments: Disclosures
Amendments to PFRS 7: Transition
Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets
Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets -
Effective Date and Transition
Amendments to PFRS 7: Improving Disclosures about Financial Instruments
Amendments to PFRS 7: Disclosures – Transfers of Financial Assets
Amendments to PFRS 7: Disclosures – Offsetting Financial Assets and
Financial Liabilities
Amendments to PFRS 7: Mandatory Effective Date of PFRS 9 and
Transition Disclosures
TOA Lecture 1 Page 3

PFRS 8 Operating Segments

PFRS 9 ª Financial Instruments
Amendments to PFRS 9: Mandatory Effective Date of PFRS 9 and
Transition Disclosures
PFRS 10 Consolidated Financial Statements
PFRS 11 Joint Arrangements
PFRS 12 Disclosure of Interests in Other Entities
PFRS 13 Fair Value Measurement

ª Applicable to Annual Period Beginning On or After January 1, 2015

Philippine Accounting Standards (PASs)
PAS 1 (Revised) Presentation of Financial Statements
Amendment to PAS 1: Capital Disclosures
Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and
Obligations Arising on Liquidation
Amendment to PAS 1: Presentation of Items of Other Comprehensive
Income
PAS 2 Inventories
PAS 7 Statement of Cash Flows
PAS 8 Accounting Policies: Changes in Accounting Estimates and Errors
PAS 10 Events after the Balance Sheet Date
PAS 11 Construction Contracts
PAS 12 Income Taxes
Amendment to PAS 12 – Deferred Tax Recovery of Underlying Assets
PAS 16 Property, Plant and Equipment
PAS 17 Leases
PAS 18 Revenue
PAS 19 (Revised) Employee Benefits
PAS 20 Accounting for Government Grants and Disclosure of Government
Assistance
PAS 21 The Effects of Changes in Foreign Exchange Rates
Amendment: Net Investment in a Foreign Operation
PAS 23 (Revised) Borrowing Costs
PAS 24 (Revised) Related Party Disclosures
PAS 26 Accounting and Reporting by Retirement Benefit Plans
PAS 27 (Amended) Separate Financial Statements
PAS 28 (Amended) Investments in Associates and Joint Ventures
PAS 29 Financial Reporting in Hyperinflationary Economies
PAS 31 Interests in Joint Ventures
PAS 32 Financial Instruments: Disclosure and Presentation
Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and
Obligations Arising on Liquidation
Amendment to PAS 32: Classification of Rights Issues
Amendments to PAS 32: Offsetting Financial Assets and Financial Liabilities
PAS 33 Earnings per Share
PAS 34 Interim Financial Reporting
PAS 36 Impairment of Assets
PAS 37 Provisions, Contingent Liabilities and Contingent Assets
PAS 38 Intangible Assets
Financial Instruments: Recognition and Measurement
PAS 39 Þ Amendments to PAS 39: Transition and Initial Recognition of Financial
Assets and Financial Liabilities
Amendments to PAS 39: Cash Flow Hedge Accounting of Forecast
Intragroup Transactions
Amendments to PAS 39: The Fair Value Option
Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts
Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets
Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets -
TOA Lecture 1 Page 4

Effective Date and Transition

Amendments to Philippine Interpretation IFRIC -9 and PAS 39: Embedded
Derivatives
Amendment to PAS 39: Eligible Hedged Items
PAS 40 Investment Property
PAS 41 Agriculture
Þ To be superseded by PFRS 9 effective January 1, 2015

International Financial Reporting Interpretations Committee (IFRIC) Issuances

IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities

IFRIC 2 Members’ Share in Co-operative Entities and Similar Instruments
IFRIC 4 Determining Whether an Arrangement Contains a Lease
IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and
Environmental Rehabilitation Funds
IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical
and Electronic Equipment
IFRIC 7 Applying the Restatement Approach under PAS 29 Financial Reporting in
Hyperinflationary Economies
IFRIC 8 Scope of PFRS 2
IFRIC 10 Interim Financial Reporting and Impairment
IFRIC 11 PFRS 2 –Group and Treasury Share Transactions
IFRIC 12 Service Concession Arrangements
IFRIC 13 Customer Loyalty Programmes
IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and
their Interaction
Amendments to Philippine Interpretation IFRIC -14, Prepayments of a
Minimum Funding Requirement
IFRIC 16 Hedgers of a Net Investment in a Foreign Operation
IFRIC 17 Distributions of Non-cash Assets to Owners
IFRIC 18 Transfers of Assets from Customers
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

Standards Interpretation Committee (SIC) issuances

SIC -7 Introduction to the Euro

SIC -10 Government Assistance – No Specific Relation to Operating Activities
SIC -15 Operating Leases – Incentives
SIC -25 Income Taxes – Changes in the Tax Status of an Entity or its Shareholders
SIC -27 Evaluating the Substance of Transactions Involving the Legal Form of a
Lease
SIC -29 Service Concession Arrangements; Disclosures
SIC -31 Revenue – Barter Transactions Involving Advertising Services
SIC -32 Intangible Assets – Web Site Costs

With the issuance of amended and revised standards, the following standards and interpretations
have been withdrawn:

Title Comment
PAS 19 Employee Benefits Superseded by PAS 19 (Revised)

Amendments to PAS 19: Actuarial Gains

and Losses, Group Plans and Disclosures
IFRIC 9 Reassessment of Embedded Derivatives Incorporated in PFRS 9
Amendments to Philippine Interpretation
IFRIC 9 and PAS 39: Embedded Derivatives
IFRIC 14 The Limit on a Defined Benefit Asset, Superseded by PAS 19
TOA Lecture 1 Page 5

Minimum Funding Requirements and Their

Interaction

Amendments to Philippine Interpretations

IFRIC -14, Prepayment of a Minimum
Funding Requirement
SIC 12 Consolidation – Special Purpose Entities Incorporated in PFRS 10
Amendment to SIC 12: Scope of SIC 12
SIC 13 Jointly Controlled Entities – Non monetary Incorporated in PAS 28 and PFRS 11
Contributions by Ventures
SIC 21 Income Taxes – Recovery of Revalued Incorporated in Revised PAS 12
Non-depreciable Assets

The IFRIC and SIC are interpretations linked to the PFRS and PAS as follows:

INTERPRETATIONS Standards

INTERNATIONAL FINANCIAL REPORTING INTERPRETATIONS COMMITTEE [IFRIC] ISSUANCES

IFRIC 1 Changes in Existing Decommissioning, Restoration PAS 37
and Similar Liabilities
IFRIC 2 Members’ Shares in Co-operative Entities and Similar PAS 32
Instruments
IFRIC 4 Determining whether an Arrangement contains a PAS 17
Lease
IFRIC 5 Rights to Interests arising from Decommissioning, PAS 8,27,28,31,37,
Restoration and Environmental Rehabilitation Funds 38
IFRIC 6 Liabilities arising from Participating in a Specific PAS 37
Market – Waste Electrical and Electronic Equipment
IFRIC 7 Applying the Restatement Approach under IAS 29 PAS 29
Financial Reporting in Hyperinflationary Economies
IFRIC 9 Reassessment of Embedded Derivatives PAS 39
IFRIC 10 Interim Financial Reporting and Impairment PAS 34
IFRIC 12 Service Concession Arrangements IAS 8, IFRS 1-7
11,16,17,18,20,23,32,36,37,38,39; Framework
IFRIC 13 Customer Loyalty Programs PAS 18,37,38
IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, PAS 19
Minimum Funding Requirements and their Interaction
IFRIC 15 Agreements for the Construction of Real Estate PAS 11,18
IFRIC 16 Hedges of a Net Investment in a Foreign Operation PAS 39
IFRIC 17 Distributions of Non-Cash Assets to Owners PAS 1,27,37
IFRIC 18 Transfers of Assets from Customers PAS 18
IFRIC 19 Extinguishing Financial Liabilities with Equity PAS 1,32,39
Instruments IFRS 2-3
IFRIC 20 Stripping Costs in the Production Phase of a Surface PAS 1,2,16-38
Mine
STANDARDS INTERPRETATION COMMITTEE [SIC] ISSUANCES
SIC - 7 Introduction of the Euro PAS 8, 10, 21
SIC – 10 Government Assistance – No Specific Relation to PAS 20
Operating Activities
SIC 12 Consolidation – Special Purpose Entities 1998 PAS 27
SIC 13 Jointly Controlled Entities – Non-Monetary PAS 31
Contributions by Venturers
SIC-15 Operating Leases – Incentives PAS 17
SIC 21 Income Taxes – Recovery of Revalued Non- PAS 12
Depreciable Assets 2000
SIC – 25 Income Taxes – Changes in the Tax Status of an PAS 12
Entity or its Shareholders
SIC-27 Evaluating the Substance of Transactions Involving the PAS 1,17,18
Legal Form of a Lease
SIC – 29 Service Concession Arrangements: Disclosures PAS 1
SIC – 31 Revenue – Barter Transactions Involving Advertising PAS 18
TOA Lecture 1 Page 6
Services
SIC – 32 Intangible Assets – Web Site Costs Due Process PAS 38
Handbook for the IFRS Interpretations Committee

The Statement of Financial Position is a tool to analyze liquidity and shows cash and working capital which
are the keys to survival and growth of an entity. Entities need to manage their cash and related assets and
liabilities in an efficient and cost effective way, in order to optimize liquidity, improve profitability and
respond to market conditions in a timely manner.

For a financially distressed company, cash release or preservation may mean survival. For a non-
distressed company, cash release can be used to reduce debt, fund growth and investment or provide a
better return to stakeholders. PFRS financial statements would show.

The interdependencies faced by entities [internally between functions and externally with suppliers,
customers and other stakeholders] makes the management of costs a highly complex issue that is best
addressed at a strategic level using the Statement of Performance. While there is broad understanding
that cost reduction is key to profitability, the scale of reductions and the scope of success vary widely
across industries and regions. Strategic plans need to be driven, tools built to track progress and a
cultural commitment must be created to minimize unnecessary costs. Managing entity risk in tough times
means taking a holistic view and are based on PFRS-based financial statements.

Sources of Accounting Standards

Setting financial reporting standards is a complex process occurring within a political environment that
influences both what reporting is required and when. Businesses, trade and consumer associations, courts,
public accounting firms, individual users and government can and do influence reporting practice. The
following provides the authoritative support for these accounting standards:

a. International Accounting Standards Board (IASB) {Formerly International Accounting Standards

Council (IASC)}

In an attempt to harmonize conflicting standards, the International Accounting Standards Council was
formed in 1973 to develop worldwide accounting standards. The original IASC was founded by
representatives of professional bodies in Australia, Canada, France, Germany, Japan, Mexico, the
Netherlands, the United Kingdom, Ireland, and the United States. By 2012, out of 196 countries, over
120 countries have either fully or partially adopted or permitted the use of International Financial
Reporting Standards.

The accounting standards produced by the IASB are referred to as International Financial Reporting
Standards (IFRSs) and International Accounting Standards (IASs). The difference between these two
sets of standards is merely one of timing; the IASB standards issued before 2001 are called IAS and
those issued since 2001 are called IFRS. In practice, the entire body of IASB standards is referred to
simply as IFRS. The International Financial Reporting Interpretations Committee (IFRIC) which was
called the Standing Interpretations Committee (SIC) before 2002 provides technical assistance and
support to the IASB in the implementation of the standards.

Rationale for the Adoption of International Financial Reporting Standards (IFRSs)

In view of the greatly magnified emphasis on international commerce and capital flows over the past
thirty years, the need for global accounting standards has been increasingly recognized. Multinational
companies have grown dramatically in both size and importance over this period, assuming very
important and dominant roles in many market segments and affecting almost every country, every
government and every person.

From a financial reporting perspective, both individual accountants and the professional bodies that
establish accounting and auditing standards, face a daunting challenge and difficulty because of the
complexity of conducting international business operations across borders each with a different set of
business regulations and often different accounting methods.
TOA Lecture 1 Page 7

Differences in applicable accounting, auditing and tax standards and regulations may negatively impact
the ability of the enterprise to prepare reliable financial information and for the evaluation of investment
opportunities vital to their further expansion or growth.

Hence, it was envisioned that IFRS which should be capable of worldwide acceptance can contribute to
a significant improvement in the quantity and comparability of corporate financial reports. They are the
set of standards that can be used by all companies regardless of where they are based. In fact, IFRSs
may eventually supplement or even replace standards set by national standard setters.

Standard-Setting Due Process

As part of its due process in developing new or revised Standards, the Board publishes an Exposure
Draft of the proposed Standard for public comment in order to obtain the views of all interested parties.
It also publishes a “Basis for Conclusions” to its Exposure Drafts and Standards to explain how it
reached its conclusions and to give background information. When one or more Board members
disagree with a Standard, the Board publishes those dissenting opinions with the Standard. To obtain
advice on major projects, the Board often forms advisory committees or other specialist groups and may
also hold public hearings and conduct field tests on proposed Standards.

b. Financial Reporting Standards Council (FRSC) {Formerly Accounting Standards Council (ASC)}

The Professional Regulations Commission (PRC) of the Republic of Philippines upon the
recommendation of the Board of Accountancy created an accounting standard setting body known as
the Financial Reporting Standards Council (FRSC) to assist the Board in carrying out its powers and
functions provided for in Article II, Section 9 (g) of the Philippine Accountancy Act of 2004 (R.A. 9298)
and Section 9 (a) of the Implementing Rules and Regulations of the said law.

The FRSC is composed of fifteen (15) members with a Chairman, who had been or presently a senior
accounting practitioner in any of the scope of accounting practice and fourteen (14) representatives
from the following:

a) Board of Accountancy 1
b) Securities and Exchange Commission 1
c) Bangko Sentral ng Pilipinas 1
d) Bureau of Internal Revenue 1
e) A major organization composed of preparers and users
of financial statements 1
f) Commission on Audit 1
g) Accredited National Professional Organization of CPAs
Public Practice 2
Commerce and Industry 2
Academe/Education 2
Government 2 8
14

The FRSC actively participates in the evaluation of deliberation of proposed IFRSs forwarded by the
IASB to the country’s standard setting body and submits to the Board of Accountancy its
recommendation for the adoption of the proposed IFRS. Once approved, the IFRS is designated as
Philippine Financial Reporting Standard (PFRS).

Other Organizations Influencing Financial and Reporting Standards

c. Securities and Exchange Commission (SEC). The Securities and Exchange Commission has the legal
authority to prescribe accounting principles and practices for usually all companies issuing publicly
traded securities. To date, the SEC has participated in the formulation of accounting principles. In
addition, the SEC administers the extensive disclosure requirements of the Securities Act.

d. Philippine Institute of Certified Public Accountants (PICPA). The Philippine Institute of Certified
Public Accountants, the PRC accredited professional organization is in the forefront in the standard
setting activities in the country. Representatives from the four sectors of the organization (public
practice, commerce and industry, education and government) are appointed to FRSC.
TOA Lecture 1 Page 8

e. Other Professional Associations also influence the development of accounting standards. The
Financial Executives Institute (FINEX) is composed mainly of high-level financial executives. The
Institute of Management Accountants (IMA) emphasizes managerial and cost accountancy. Each of
these organizations provides input to the Philippine Financial Reporting Standards (PFRS) through
representation in the FRSC. Technical papers and publications of accounting educators are also
included as sources of accounting standards.

f. Bureau of Internal Revenue (BIR). The Bureau of Internal Revenue administers the provisions of the
Internal Revenue Code. These provisions do not always reflect the goals of financial accounting. However,
they do at times influence the choice of accounting methods and procedures.

IFRS Structure

IFRS is a set of principles-based international accounting standards stating, how particular types of
transactions and other events should be reported in financial statements. IFRS are issued by the
International Accounting Standards Board (IASB). IFRS are principles-based set of reporting standards
that set broad rules as well as specific treatments and comprise the following: International Accounting
Standards [IAS] 1-41, International Financial Reporting Standards [IFRS] 1-13, Interpretations by the SIC
[Standard Interpretation Committee], and the IFRIC [International Financial Reporting Interpretation
Committee]. The International Accounting Standards are part of IFRS,

IFRS IAS
1-13 1-41

IFRS

IFRIC SIC

IFRS Beneficiaries

The Economy, Investors and Industry have benefited a lot from the IFRS. IFRS benefits an Economy by
increasing the growth of International Business. It facilitates the maintenance of orderly and efficient capital
markets. It also helps increase the generation of capital or funds which more or less, directly or indirectly
translate to the more popular word today, “economic growth.”

IFRS
Beneficiaries

Economy Investors

Industry
TOA Lecture 1 Page 9

Financial statements prepared using IFRS help investors better understand the investment opportunities as
opposed to financial statements prepared using another set of national accounting standards.

Investors need timely, reliable, relevant and comparable financial statements using a “global language” they
can understand for them to incur lesser costs in term of time, effort and money so that they can confidently and
timely compare as well as take advantage of opportunities along the way. Investor’s confidence would be
stronger if accounting standards used are globally acceptable, hence, the road to convergence, is the road to
IFRS. For convergence, simplifies the process of preparing financial statements and eventually reduces the
cost of preparing the same, among other reasons.

IFRS are a big help to industry. Entities stand a greater chance to raise capital from foreign markets if
financial statements fully comply with all the requirements of IFRS.

Principles-based Standards
Moving on, the IFRS are global principle-based standards of financial reporting today.

Conceptual Framework

The concepts that underlie the IFRS are objectives of general purpose financial statements, qualitative
characteristics, elements, recognition and measurement, presentation and disclosure. The Conceptual
Framework sets out agreed concepts that underlie financial reporting. The concepts of Recognition,
Measurement, Derecognition, Presentation and Disclosure are fundamentals in the preparation of financial
reports.

Financial reporting provides financial information about the reporting entity that is useful to existing and
potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
IFRS financial statements provide information about the financial position, performance and changes in
financial position.

In addition, the Framework is used to set standards, enhance consistency across standards, and provide
benchmark for judgments. Preparers of financial statements use the Conceptual Framework to develop
accounting policies in the absence of a specific standard or interpretation.

Recognition Measurement
Principle Principle

CONCEPTS

Derecognition Presentation
Principle and
Disclosure
Principles
TOA Lecture 1 Page 10

Philippine Financial Reporting Standards (PFRS)

PFRS in the Philippines are adopted by the Philippines Financial Reporting Standards Council (PFRSC) and
adopted by the Philippine Securities and Exchange Commission (PSEC). The PFRSC organized the
Philippine Interpretations Committee (PIC), which issues implementations guidance on PFRSs.

Publicly Accountable Entities

The PFRSC has adopted most of the IFRS, in some cases with modifications. These standards are known as
Philippine Financial Reporting Standards (PFRS) include the following:
1. Philippine Financial Reporting Standards (PFRS) 1-13
2. Philippine Accounting Standards (PAS) 1-41
3. Interpretations of the Interpretation of the International Financial Interpretation Committee (IFRIC)
4. Interpretations of the Standard Interpretation Committee (SIC)

General Guides to Financial Statements Presentation

Under Part 2 of Section 1 of the General Guides to Financial Statements Preparation of Rule 68 as amended,
the Philippine Securities and Exchange Commission (PSEC), provides a Financial Reporting Framework
(FRF) for the preparation of financial statements of entities covered by rule 68. For this reason, entities are
classified into: large and publicly accountable entities, small and medium-sized entities (SMEs), and micro
entities.

Financial Reporting Framework

The financial statements that shall be prepared and filed by entities covered by Rule 68 as amended shall be
in accordance with the financial reporting framework. FRF means a set of accounting principles, standards,
interpretations and pronouncements that must be adopted in the preparation and submission of the annual
financial statements of a particular class of entities. This includes but not limited to Philippine Financial
Reporting Standards for SMEs.

Large and/or
PFRS publicly-accountable
entities

Financial
Reporting
Framework
PFRS
for Others
SMEs

Small and Micro Entities

Medium-sized
Entities

Large and/or publicly-accountable entities

Large or publicly accountable entities are those that meet any of the following criteria:
(1) Total assets of more than P350 Million or total liabilities of more than 250 Million; or
(2) Are required to file financial statements under Part II of SRC Rule 68; or
(3) Are in the process of filing their financial statements for the purpose of issuing any class of instruments
in a public market; or
(4) Are holders of secondary license issued by authorized regulatory agencies.
TOA Lecture 1 Page 11

Large and publicly-accountable entities shall use as the financial reporting framework known as the full
Philippine Financial Reporting Standards [“PFRS’] as adopted by the PSEC.

A set of financial reporting framework other than the PFRS may be allowed by the PSEC for certain sub-class
(e.g., banks, insurance companies) of entities upon consideration of the pronouncements or interpretations.

Small and Medium-sized Entities

Small and medium-sized entities (SMEs) are those that meet all of the following criteria:
(1) Total assets of between P3M to P350 Million or total liabilities of between P3M to P250 Million. If the
entity is a parent company, the said amounts shall be based on the consolidated figures;
(2) Are not required to file financial statements under Part II of SRC Rule 68;
(3) Are not in the process of filing their financial statements for the purpose of issuing any class of
instruments in a public market; and
(4) Are not holders of secondary licenses issued by regulatory agencies.

SMEs shall use as their financial reporting framework the Philippine Financial Reporting Standards for
SMEs (“PFRS for SMEs”) as adopted by the PSEC.

Exemptions from PFRS for SME:

The following SMEs shall be exempt from the mandatory adoption of the PFRS for SMEs and may instead
apply at their option, the PFRS:
(1) An SME which is a subsidiary of a parent company reporting under the PFRS;
(2) An SME which is a subsidiary of a foreign parent company which will be moving towards International
Financial Reporting Standards (“IFRS”) pursuant to the foreign country’s published convergence plan;
(3) An SME which is a subsidiary of a foreign parent company and has been applying the standards for a
non-publicly accountable entity for local reporting purposes. It is considering moving to PFRS instead of
the PFRS for SMEs in order to align its policies with the expected move to full IFRS by its foreign parent
company pursuant to its country’s published convergence plan;
(4) An SME, either as a significant joint venture or associate, is part of a group that is reporting under the
PFRS;
(5) An SME which is a branch of office or regional operating headquarter of a foreign company reporting
under the IFRS;
(6) An SME which has a subsidiary that is mandated to report under the PFRS;
(7) An SME which has a short term projection that show that it will breach the quantitative thresholds set in
the criteria for an SME. The breach is expected to be significant and continuing due to its long-term
effect on the company’s asset or liability size;
(8) An SME which has a concrete plan to conduct an initial public offering within the next two (2) years;
(9) An SME which has been preparing financial statements using PFRS and has decided to liquidate;
(10) Such other cases that the PSEC may consider as valid exceptions from the mandatory of PFRS for
SMEs.

An SME availing of any of the above-mentioned grounds for exemption shall provide a discussion in its notes
to financial statements of the facts supporting its adoption of the PFRS instead of the PFRS for SMEs.

If an SME that uses the PFRS for SMEs in a current year, breaches the floor or ceiling of the size criteria at
the end of that current year, and the event that caused the change is considered “significant and continuing”,
the entity shall transition to the applicable financial reporting framework in the next accounting period. If the
event is not considered “significant and continuing”, the entity can continue to use the same financial
reporting framework it currently uses.

The determination of what is “significant and continuing” shall be based on management’s judgment taking
into consideration relevant qualitative and quantitative factors. As a general rule, 20% or more if the
consolidated total assets or total liabilities would be considered significant.
TOA Lecture 1 Page 12

Micro Entities

Micro entities are those that meet all of the following criteria:
(1) Total assets and liabilities are below P3 Million
(2) Are not required to file financial statements under Part 2 of SRC Rule 68;
(3) Are not in the process of fling their financial statements for the purpose of issuing any class of
instruments in a public market; and
(4) Are not holders of secondary licenses issued by a regulatory agency.

Micro entities have the option to use as their financial reporting framework either the income tax basis,
accounting standards in effect as of December 31, 2004 or PFRS for SMEs, provided however, that the
financial statements shall at least consist of the Statement of Management’s Responsibility, Auditor’s
Report, Statement of Financial Position, Statement of Income and Notes to Financial Statements, all of
which cover the two-year comparative periods, if applicable.

If an entity uses a basis of accounting other than the PFRS for SMEs in the preparation of its financial
statements, its management shall assess the acceptability of such basis of accounting in the light of the
nature of the entity and the objective of the financial statements, or the requirements of the law or
regulators.

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