SMALL AND MEDIUM-SIZED ENTITIES (SMEs)

PRE-REV
LECTURE NOTES PROF. LAURENCE JAKE S. TADO, CPA

Definition
o The IASB describes small and medium-sized entities as entities that:
(a) do not have public accountability (not publicly listed and without fiduciary
capacity to hold assets); and
(b) publish general-purpose financial statements for external users.
SME is an entity:
✓ With total assets between P3,000,000 and P350,000,000.
✓ With total liabilities between P3,000,00 and P250,000,000.
✓ That is not required to file financial statements under SRC Rule 68.1. This SRC Rule
68.1 pertains to “listed entities” whose shares are traded in a public market.
✓ That is not in the process of filing financial statements for the purpose of issuing
any class of instruments in a public market.
✓ That is not a holder of a secondary license issued by a regulatory agency.
✓ That is not a public utility.
Micro-Business Entities
o Micro-business entities are entities whose total assets or total liabilities are
below the P3,000,000 floor threshold.
o Micro-business entities have the option to use any of the following bases of
accounting in the preparation of financial statements.
✓ Full PFRS
✓ PFRS for SMEs
✓ Another acceptable basis of accounting
o Other acceptable basis of accounting
Micro entities may use any of the following bases of accounting:
✓ Income tax basis of accounting, or
✓ Cash basis of accounting
SIGNIFICANT DIFFERENCES OF PFRS FOR SMEs FROM FULL PFRS
1. Components of financial statements – when the only changes to the equity are
a result of profit or loss, payment of dividends, prior period errors, changes in
accounting policy, and SME is permitted but not required to present a “single
statement of income and retained earnings” instead of both a statement of
comprehensive income and statement of changes in equity.
2. Statement of financial position – Same line items for SMEs and Full PFRS, except
that the following line items are not required for SMEs:
a) Total assets classified as held for sale
b) Total liabilities included in the disposal group, classified as held for sale.
PFRS for SMEs requires presentation of both investment in associates and
investment in joint ventures as separate line items.
3. Other comprehensive income - under PFRS for SMEs, the components of other
comprehensive income include:
• Reclassified to retained earnings
a) Translation gain or loss of a foreign operation
b) Revaluation surplus of property, plant, and equipment
c) Actuarial gain or loss
• Reclassified to profit or loss
a) Change in fair value of hedging instrument
4. Inventories - an SME shall measure inventories at the lower of cost and estimated
selling price less cost to complete and sell. If the estimated selling price less cost to
 complete and sell is lower than cost, the write-down is recognized as impairment
loss.
5. Initial measurement of basic financial instruments – the PFRS for SMEs
provides that the basic financial instruments are initially measured at the transaction
price, including transaction cost. However, if the instrument is measured at fair
value through profit or loss, the transaction cost is expensed immediately.
6. Subsequent measurement of basic financial instruments
a) Basic debt instruments are measured at amortized cost.
b) Investments in nonputtable ordinary shares and investments in nonconvertible
and nonputtable preference shares are measured at fair value through profit or
loss if the share is publicly traded or if the fair value can be measured reliably
without undue cost or effort otherwise; such investments shall be measured at
cost less impairment.
7. Impairment of basic financial instruments – the PFRS for SMEs provides that
for a basic financial instrument measured at cost less impairment, the impairment
loss is the difference between the carrying amount of the asset and the best estimate
of the amount that would be recovered if the asset were sold.
8. Investments in associates – SMEs shall account for investments in associates
using any of the cost model, the equity method or fair value model and using the
same accounting policy for all investments in associates.
9. Investment property – Under PFRS for SMEs, investment property is measured at
fair value if the fair value can be measured reliably without undue cost or effort on
an ongoing basis. The cost model is used when the fair value cannot be measured
reliably without undue cost or effort.
10. Government grant
a) Under the PFRS for SMEs, a government grant is recognized when the condition
are actually satisfied. Grant received before the recognition criteria are met is
recognized as liability. A government grant that does not impose conditions on
the SME is recognized as income when the grant proceeds are receivable.

b) PFRS for SMEs does not allow an entity to match the grant recognized as income
over the periods with the expense for which it is intended to compensate or the
cost of the asset that it is used to finance.

c) PFRS for SMEs does not have as option to treat a grant related to asset as either
as deferred income or a reduction in the carrying amount of the asset.
11. Borrowing costs – PFRS for SMEs treats all borrowing costs as outright expense.
12. Intangible assets
a) Under PFRS for SMEs, intangible assets are measured subsequently using the
cost model only.
b) Under PFRS for SMEs, the useful life of an intangible asset is considered to be
finite. If the useful life of an intangible asset cannot be estimated reliably, the
useful life is determined by the best estimate of management but not exceeding
10 years.
c) Under PFRS for SMEs, ALL INTANGIBLE ASSETS, INCLUDING GOODWILL, ARE
AMORTIZED.
13. Research and development costs – Under PFRS for SMEs, all research and
development costs are expensed immediately when incurred.
14. Impairment of assets – under the PFRS for SMEs, intangible assets, including
goodwill, are tested for impairment when there is an indication that the asset may be
impaired.
15. Defined benefit liability
 a) Actuarial gains and losses – Under PFRS for SMEs, actuarial gains or losses are
recognized either in profit or loss or other comprehensive income.
16. Lease accounting – Under PFRS for SMEs, the lessee shall classify the lease as
operating or finance based on the transfer of risks and rewards incidental to
ownership.
17. Share-based payment transactions – Under PFRS for SMEs, the share options
must be measured at fair value on the date of grant. The intrinsic value is not
mentioned as an alternative.
18. Exploration and evaluation of mineral resources – Under PFRS for SMEs, the
intangible exploration and evaluation asset is measured using the cost model only.
However, the tangible exploration and evaluation asset is measured using either cost
model or revaluation model.
19. Reconciliations required
a) Reconciliation of equity under the previous accounting basis to the equity under
PFRS for SMEs both at the:

• Date of transition to PFRS for SMEs

• End of the latest reporting period

b) Reconciliation of profit or loss under the previous accounting basis to the profit or
loss under PRFS for SMEs at the end of the latest reporting period.
Practice Questions:
SME provided the following data on December 31, 2024:

Cash 25,000
Accounts receivable 530,000
Prepayments 60,000
Inventories 60,000
Investment in associate 110,000
Property, plant, and equipment 3,250,000
Accumulated depreciation and impairment 700,000
Software – net of amortization and impairment 10,000
Deferred tax asset 5,000
Bank overdraft 80,000
Bank loan, payable in 2019 and prepayable without penalty 50,000
Trade payables 430,000
Interest payable 2,000
Current tax liability 270,000
Provision for warranty 4,000
Employee benefit obligation, current portion P4,000 10,000
Finance lease liability, current portion P20,000 44,000
Share capital 30,000
Retained earnings 2,430,000

1. What is the total amount of current assets?

a. 675,000
b. 615,000
c. 785,000
d. 725,000
2. What is the total amount of current liability?
a. 810,000
b. 860,000
c. 786,000
d. 806,000
3. What is the total shareholders’ equity?
a. 2,460,000
b. 2,400,000
c. 2,430,000
d. 2,700,000
SME provided the following information in relation to the preparation of a statement of
cash flows for the current year:

Profit for the year 380,000

Noncash finance costs, finance cost paid P25,000 1,000
Noncash tax expense, income tax paid P190,000 79,000
Depreciation of property, plant, and equipment 270,000
Impairment loss 30,000
Amortization of intangibles 2,000
Gain on sale of equipment 60,000
Increase and other trade receivables 10,000
Decrease in inventories 9,000
Increase in trade payables, including unrealized foreign exchange loss of 11,000
P1,000 charged to other expenses
Increase in current and long-term benefits payable 3,000
Proceeds from sale of equipment 100,000
Purchase of equipment 485,000
Payment of finance lease liability 19,000
Repayment of borrowings 100,000
Dividends paid 150,000
 1. What is the cash provided by operating activities?
a. 715,000
b. 635,000
c. 714,000
d. 565,000
2. What is the net cash used in investing activities?
a. 485,000
b. 385,000
c. 585,000
d. 100,000
3. What is the net cash used in financing activities?
a. 269,000
b. 119,000
c. 250,000
d. 169,000
SME provided the following information and expenses for the current year:

Revenue 5,500,000
Other income 100,000
Raw materials purchased 1,100,000
Net decrease in inventory 130,000
Wages, salaries, and benefits 2,260,000
Depreciation 520,000
Other expenses 380,000
Advertising 150,000
Finance cost 60,000
Income tax expense 300,000
Exchange difference on translating foreign operation, net of tax 10,000
– credit
Decrease in the fair value of hedging instruments, net of tax – 6,000
loss

1. What is the profit for the year?

a. 1,000,000
b. 1,260,000
c. 700,000
d. 882,000
2. What net amount should be reported as component of other comprehensive income?
a. 10,000
b. 16,000
c. 6,000
d. 4,000
3. What is the total comprehensive income for the year?
a. 684,000
b. 716,000
c. 710,000
d. 704,000
An SME prepared the following post-closing trial balance at the current year-end:

Property, plant, and equipment 2,300,000

Intangible assets 850,000
Investment in associate 1,100,000
Deferred tax asset 40,000
Inventory 500,000
Trade receivables 600,000
Cash on hand 1,150,000
Investment in nonputtable ordinary shares – listed 550,000
Investment in non-convertible and nonputtable preference 500,000
shares – unlisted
Investment in term bonds 400,000
Demand deposit in bank 200,000
Loan receivable from employee – fixed term 10,000
Loan receivable from associate – on demand 300,000
Bank loans 1,100,000
Other long-term employee benefits 250,000
Obligations under finance leases 400,000
Trade payables 550,000
Warranty obligation 20,000
Rent payable 10,000
Interest payable 20,000
Current tax liability 210,000
Bank overdraft – on demand 40,000
Share capital 4,000,000
Retained earnings 1,900,000

1. What is the total amount of basic financial assets?

a. 4,810,000
b. 3,710,000
c. 3,750,000
d. 3,160,000
2. What is the total amount of basic financial liabilities?
a. 2,330,000
b. 2,120,000
c. 1,720,000
d. 1,930,000
On January 1, 2024, an SME acquired goods for sale in the ordinary course of business
for P1,000,000, including P50,000 refundable purchase taxes.
The supplier usually sold the goods on 30 days' interest-free credit. An appropriate
discount rate is 10%.
However, as a special promotion, the purchase agreement for these goods provided for
payment to be made in full on December 31, 2024
In acquiring the goods, transport charges of P20,000 were incurred.
1. What is the cost of purchase?
a. 1,020,000
b. 863,550
c. 970,000
d. 883,550