Already existing in the Philippines as early as 2005, the Philippine Financial Reporting Standards (PFRS) helps businesses in terms of business decision making, data comparisons, and increase in accuracy on financial statements.
PFRS was adapted from the International Financial Reporting Standards (IFRS) for the country to have a standard when it comes to financial reporting practices. Ever since the existence of PFRS, businesses registered with the Securities and Exchange Commission (SEC) are required to integrate PFRS and use it as their financial reporting framework.
Ever since the adaptation, the standards have changed through the years, and it will continue to do so. One of the latest changes is the release of PFRS For Small Entities.
We know that you’re asking why there’s a new PFRS for small companies even though there’s already an existing PFRS for SMEs. That’s why in this article we will help you, small business owners, understand the changes.
In the latest memorandum from SEC, called SEC Memorandum Circular No. 05 (2018), small businesses must adopt the PFRS For Small Entities on or after January 1, 2019. If small enterprises are willing to integrate the standards earlier than the said date, SEC allows these entities to do so.
Who are eligible?
If your small business meets the following conditions will then you will be required to follow the PFRS For Small Entities, according to SEC.
- Those who have total assets or total liabilities of between ₱3 million to ₱100 million. If the entity is a parent company, the said amounts shall be based on the consolidated figures;
- Businesses eligible in not filing financial statements under Part II of SRC Rule 68;
- Small companies that are not within the process of filing their financial statements for issuing any class of instruments in a public market, and;
- Those who don’t possess secondary licenses issued by regulatory agencies.
What’s the purpose?
Yes, PFRS has many benefits for business. The government created the PFRS for SMEs for these entities to have a simpler framework than the full PFRS.
As for the smaller ones, it also makes the process simpler. According to SEC’s memorandum, the changes were based on the feedback of small entities on the complexity of PFRS for Small and Medium-sized Entities (PFRS for SMEs).
Here are what SEC says the key implications for the PFRS For Small Entities:
- Inventories are to be subsequently valued at the lower of cost and market value (i.e., the probable selling price to willing buyers as of reporting date),
- Investment properties can be carried either at cost or at fair value, depending on the policy choice made by the entity.
- There is no concept of “finance lease”. All lease receipts (payments) are recognized as income (expense) as earned (incurred).
- There is no accounting for onerous contracts. For equity-settled share-based payment transactions, an entity shall measure the goods or services received, and the corresponding increase in equity, with reference to the net asset value of the equity instruments granted. Net asset value is derived by dividing the total assets of the entity less any liabilities, by the number of shares outstanding at measurement date.
- For defined benefit plans, an entity is required to use the accrual approach in calculating benefit obligations in accordance with Republic Act (RA) 7641, The Philippine Retirement Pay Law, or company policy (if superior than RA 7641). Accrual approach is applied by calculating the expected liability as of reporting date using the current salary of the entitled employees and the employees’ years of service, without consideration of future changes in salary rates and service periods.
- Entities are given a policy choice of not recognizing deferred taxes in the financial statements.
- Biological assets can be carried either at cost or at current market price, depending on the policy choice made by the entity.
- Prior period adjustments are just captured in the opening balance of the current year, but with appropriate disclosures
Understanding a new or even old PFRS standards takes time as it presents requirements and standards every business registered under SEC must use. And now that a new PFRS is released, which is targeting small entities, it’s a new process of understanding.
If you’re a small business in need of a helping hand when it comes to the PFRS For Small Entities or other government-related needs, JCSN offers different Accounting Services Philippines and one is assistance for due diligence on different entities.
With our expertise with the subject at hand, we can deliver the tasks on time and accurately. Our goal is to lift the load off your shoulders so that you can focus more on your business.
We got your back. Call us at +63 2 8247961 (Landline) / +63 906 5586469 (Mobile Phone) or email firstname.lastname@example.org to get in touch with us.