PFRS for SMEs should be used by entities in the Philippines that are not publicly accountable, have total assets between PHP 3 million and PHP 350 million (or total liabilities of PHP 3 million to PHP 250 million), and publish general-purpose financial statements for external users. It is a simplified framework for entities below full PFRS thresholds.
In this PFRS for SMEs, many of the principles in full Philippine Financial Reporting Standards (PFRS) for recognizing and measuring assets, liabilities, income and expenses have been simplified, topics that are not relevant to small and medium entities (SMEs) have been omitted, and the required disclosures have been ...
The Securities and Exchange Commission (SEC) has adopted a specific set of financial reporting rules for small-to-medium entities (SMEs), or firms with assets of between P3 million and P350 million.
In terms of the Company's Act a company only needs to apply IFRS if the company is a state-owned company as defined by the Act or if the company is a public company listed on an exchange such as the JSE or AltX for example, all other companies are able to apply IFRS for SMEs.
PFRS for Small and Medium-Sized Entities (SMEs)
The Philippines has adopted the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) issued by the IASB as PFRS for SMEs. This simplified framework reduces reporting burdens while maintaining essential transparency requirements.
As of June 2024, 17 states, including California, Illinois, New York and New Jersey require businesses with more than five employees to offer a retirement plan benefit, with 30 additional states considering state-mandated plans. Noncompliance can lead to fines of up to $250- $500 per employee per year.
It is known as the Philippine Financial Reporting Standard for SMEs (PFRS for SMEs). In the Philippines, listed companies, large unlisted companies, financial institutions, and public utilities are all required to use full PFRSs, which are nearly identical to full IFRSs.
All entities apart from public companies, state- owned companies and certain non-profit companies are allowed to apply the IFRS for SMEs. Profit companies, other than state owned or public companies, whose public interest score for the particular financial year is at least 350.
The four pillars of IFRS S1 and S2 are governance, strategy, risk management and metrics and targets.
A subsidiary that is part of a consolidated group that uses full IFRSs is not prohibited from using the IFRS for SMEs in its individual financial statements, provided that the subsidiary itself does not have public accountability.
A subsidiary of a parent reporting under full IFRS is exempted from the mandatory adoption of PFRS for SMEs. An entity that has a subsidiary that is mandated to report under full IFRS is also exempted from the mandatory adoption of PFRS for SMEs.
The IASB has determined that any entity that does not have public accountability may use the IFRS for SMEs Accounting Standard.
Classification by Revenue or Employee Size
Typically, SMEs are categorised based on criteria like revenue or the number of employees. In most countries, a business with fewer than 500 employees is considered an SME.
Small and medium enterprises (SMEs) are categorized into four groups: supporting industries, export-oriented industries, domestic market-oriented industries and cottage industries.
In addition, there are certain accounting treatments that are not allowable under the SMEs Standard. Examples of these disallowable treatments are the revaluation model for property, plant and equipment and intangible assets, and proportionate consolidation for investments in jointly controlled entities.
The four core financial statements are the Balance Sheet (snapshot of assets, liabilities, equity), the Income Statement (revenues, expenses, profit over time), the Cash Flow Statement (cash inflows/outflows over time), and the Statement of Shareholders' Equity (changes in owner investment over time), all crucial for understanding a company's financial health.
IFRS 5 applies to a non-current asset (or disposal group) that is classified as held for distribution to owners. A discontinued operation is a component of an entity that has either been disposed of or is classified as held for sale.
The Ps refer to People, Planet, and Profit, also often referred to as the triple bottom line. Sustainability has the role of protecting and maximising the benefit of the 3Ps.
IFRS S1 and IFRS S2 become mandatory when regulators in jurisdictions integrate them into financial reporting frameworks and regulatory requirements.
New framework: PFRS for small entities (SEs)
Among the other requisites for adoption, PFRS for SEs is available for companies with total assets or total liabilities of over P3 million but not more than P100 million.
The standard IAS 2 Inventories does not permit using LIFO (last-in-first-out).
IFRS allows for the recognition of internally generated intangible assets where certain conditions are met. IFRS for SMEs does not allow for the recognition of these intangible assets. Borrowing costs under IFRS for SMEs are expensed as opposed to IFRS which requires them to be capitalised where applicable.
Some key differences include: 1) Full PFRS provides more guidance around indicators of significant influence and consequences when an investment ceases to be an associate. 2) PFRS for SMEs allows cost and fair value models in addition to the equity method, while full PFRS requires the equity method.
PFRS explanations are more concise and in essay form. Overall, IFRS conceptual framework provides more comprehensive and in-depth explanations of concepts compared to the more high-level overview in PFRS.
GAAP requires organizations to charge development costs as incurred expenses. However, IFRS provides organizations with the flexibility to classify costs as either capitalized or amortized over time. This approach is beneficial since it leads to cost deferments that organizations can list as expenses.