University of San Jose – Recoletos

School of Business and Management

Accountancy and Finance Department
Updates to Financial Reporting Standards
Mr. Jun Brian Alenton
CPA, CMA, CAT, RCA, MICB, MBA

Module 1.A
PFRS for Small Entities

DISCUSSION PROBLEMS
1. The Securities and Exchange Commission (SEC) has issued SEC Memorandum Circular No. 05 (2018)
adopting, as part of its financial reporting rules and regulations, the Philippine Financial Reporting
Standards For Small Entities (PFRS for SEs). This is in line with the corporate regulator’s
a. Run After Tax Evaders initiatives
b. Public Private Partnership initiatives
c. Build Build Build initiatives
d. Ease of Doing Business initiatives

2. In accordance with SEC Memorandum Circular No. 5 Series of 2018, small entities are those that:
I. Have total assets of between P3M to P100M or total liabilities of between P3M to P100M
II. Are not required to file financial statements under Part II of SRC Rule 68
III. Are not in the process of filing their financial statements for the purpose of issuing any class of
instruments in a public market
IV. Are not holders of secondary licenses issued by regulatory agencies

a. I, II, III and IV c. I and IV only

b. I, II and III only d. I only

3. An entity that is required to file financial statements under Part II of SRC Rule 68 shall use as its financial
reporting framework
a. Full PFRS c. PFRS for SEs
b. PFRS for SMEs d. Income tax basis

4. An entity with total assets of below P3 million is considered as

a. Large entity c. Small entity
b. Medium-sized entity d. Micro entity

5. Which of the following entity shall apply the PFRS for SEs?
a. Finance company
b. Insurance company
c. Securities brokers/dealers
d. A non-publicly accountable entity with total liabilities of P3 million.

6. Entities who have operations or investments that are based or conducted in a different country with a
different functional currency should apply
a. Full PFRS c. PFRS for SEs
b. PFRS for SMEs d. Either a or b

7. The following SMEs shall be exempt from the mandatory adoption of the PFRS for SEs and may instead
apply, as appropriate, the full PFRS or the PFRS for SMEs, except
a. A small entity which is a subsidiary of a parent company reporting under the full PFRS or PFRS for SMEs.
b. A small entity which is a subsidiary of a foreign parent company which will be moving towards IFRS or
IFRS for SMEs pursuant to the foreign country’s published convergence plan.
c. A small entity, either as a significant joint venture or associate, is part of a group that is reporting under
full PFRS or PFRS for SMEs.
d. A small entity which has a short term projection that show that it will breach the quantitative thresholds
set in the criteria for a small entity. The breach is not expected to be significant and continuing.

Module 1 ACCTG107 Page 1 of 6

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8. Which of the following small entities may apply the full PFRS or PFRS for SMEs?
a. A small entity which is a branch office or regional operating headquarter of a foreign company reporting
under the full IFRS or IFRS for SMEs.
b. A small entity which has been preparing financial statements using full PFRS or PFRS for SMEs and has
decided to liquidate.
c. Both a and b.
d. Neither a nor b.

9. In relation to the change in financial reporting framework of a small entity, 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, what would be considered as significant?
a. 20% or more of the consolidated total assets.
b. 20% or more of the consolidated total liabilities.
c. Either a or b.
d. Neither a nor b.

10. If a small entity that uses the PFRS for SEs 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 not considered “significant and
continuing”, the entity
a. Should transition to the applicable financial reporting framework in the next accounting period.
b. Should transition to the applicable financial reporting framework in the current accounting period.
c. Should transition to the applicable financial reporting framework from the previous accounting period.
d. Can continue to use the same financial reporting framework it currently uses.

11. The PFRS for SEs was developed in response to feedback of small entities that PFRS for SMEs is too
complex to apply. The PFRS for SEs allows small entities to comply with the financial reporting
requirements without undue cost or burden by
I. Reducing choices for accounting treatment
II. Eliminating topics that are not generally relevant to small entities
III. Simplifying methods for recognition and measurement
IV. Reducing disclosure requirements

a. I, II, III and IV c. I and III only

b. I, II and III only d. I only

12. Simplifications introduced by the PFRS for SEs include

a. Entities are given a policy choice of not recognizing deferred taxes in the financial statements.
b. Prior period adjustments are just captured in the opening balance of the current year, but with
appropriate disclosures.
c. 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).
d. All of these.

13. Which the following topics in PFRS for SMEs apply to small entities?
a. Finance leases c. Hedge accounting
b. Onerous contracts d. None of these

14. Items of other comprehensive income of small entities include

I. Some gains and losses arising on translating the financial statements of a foreign operation.
II. Some actuarial gains and losses.
III. Changes in revaluation surplus.
IV. Some changes in fair values of hedging instruments.

a. I, II, III and IV c. II and IV only

b. II, III and IV only d. None of them
15. Section 2 of the PFRS for SEs Concepts and Pervasive Principles provides guidance on
I. Objective of financial statements
II. Information provided by the financial statements
III. Recognition of the elements of financial statements
IV. Use of accrual basis
V. Fair value of an asset
VI. Offsetting of the elements of financial statements

a. I, II, III, IV, V and VI c. I, III and VI only

b. I, II, III, IV and VI only d. I and III only

16. In accordance with Section 3 of the PFRS for SEs, which of the following financial statements is not
applicable to a small entity?
a. Statement of financial position
b. Statement of comprehensive income
c. Statement of changes in equity
d. Statement of cash flows

17. In accordance with Section 4 of the PFRS for SEs, an entity shall account for all its investments in
subsidiaries using
I. Cost model
II. Equity method
III. Fair value model
IV. Consolidation method

a. I, II, III or IV c. II or IV only

b. I or II only d. IV only

18. In accordance with Section 6 of the PFRS for SEs, basic financial instruments exclude
a. Cash
b. Trade receivables and payables
c. Loans receivable and payable
d. Investments in convertible preference shares

19. In accordance with Section 6 of the PFRS for SEs, a financial asset or liability is measured initially at
a. Transaction price, including transaction costs
b. Transaction price, excluding transaction costs
c. Fair value, including transaction costs
d. Fair value, excluding transaction costs

20. In accordance with Section 6 of the PFRS for SEs, investments in shares that are traded in an active market
shall be measured subsequently at
a. Cost c. Lower of a or b
b. Fair value d. Amortized cost

21. In accordance with Section 7 of the PFRS for SEs, a financial asset or liability is measured initially at
a. Transaction price, including transaction costs
b. Transaction price, excluding transaction costs
c. Fair value, including transaction costs
d. Fair value, excluding transaction costs

22. In accordance with Section 7 of the PFRS for SEs, financial instruments within the scope of the section shall
be measured subsequently at
a. Cost
b. Amortized cost
c. Fair value though profit or loss
d. Fair value through other comprehensive income
23. In accordance with Section 8 of the PFRS for SEs, Inventories are required to be measured at the
a. Lower of cost and net realizable value.
b. Lower of cost and estimated selling price less costs to complete and sell.
c. Lower cost or market value.
d. Lower of cost and fair value less costs to sell.

24. In accordance the PFRS for SEs, ‘market value’ is

a. The amount for which an asset could be exchanged, a liability settled or an equity instrument granted
could be exchanged, between knowledgeable, willing parties in an arm’s length transaction.
b. The amount obtainable from the sale of an asset or cash-generating unit in an arm’s length transaction
between knowledgeable, willing parties, less the costs of disposal.
c. The price paid to acquire the asset.
d. The probable selling price to willing buyers as of reporting date.

25. In accordance with Section 9 of the PFRS for SEs, an investor shall account for all its investments in
associates using
I. Cost less impairment model
II. Equity method
III. Fair value model

a. I, II or III c. I only
b. I or II only d. II or III only

26. In accordance with Section 10 of the PFRS for SEs, a venturer shall account for all its investment in
ventures using
I. Cost model
II. Equity method
III. Fair value model

a. I, II or III c. I only
b. I or II only d. II or III only

27. Which statement is correct regarding measurement after recognition of investment property in accordance
with Section 11 of the PFRS for SEs?
a. An entity is required to use the cost model.
b. An entity has a choice to use either the cost model or the fair value model.
c. Investment property whose fair value cannot be measured reliably without undue cost or effort shall be
measured using the cost-depreciation- impairment model.
d. Investment property whose fair value can be measured reliably without undue cost or effort shall be
measured at fair value at each reporting date with changes in fair value recognized in profit or loss.

28. Which statement is correct regarding measurement after recognition of property, plant and equipment
(PPE) in accordance with Section 12 of the PFRS for SEs?
a. An entity is required to use the cost model.
b. An entity has a choice to use either the cost model or the fair value model.
c. PPE whose fair value cannot be measured reliably without undue cost or effort shall be measured using
the cost-depreciation- impairment model.
d. PPE whose fair value can be measured reliably without undue cost or effort shall be measured at fair
value at each reporting date with changes in fair value recognized in profit or loss.

29. Section 16 of the PFRS for SEs applies to

a. Executory contracts
b. Provision for depreciation, impairment of assets and uncollectible receivables
c. Contingent assets and contingent liabilities
d. None of these

30. Section 18 of the PFRS for SEs applies to accounting for revenue arising from
I. Sale of goods
II. Rendering of services
III. Construction contracts in which the entity is the contractor
IV. Deposits or receivables yielding interest
V. Dividends from investments in shares of stock that are not accounted for using the equity method
 a. I, II, III, IV and V c. I and II only
b. I, II and III only d. I only

31. In accordance with Section 18 of the PFRS for SEs, which of the following conditions must be satisfied
before revenue from the sale of goods is recognized?
I. The entity has transferred to the buyer the significant risks and rewards of ownership of the goods.
II. The entity retains neither continuing managerial involvement to the degree usually associated with
ownership nor effective control over the goods sold.
III. The amount of revenue can be measured reliably.
IV. It is probable that the economic benefits associated with the transaction will flow to the entity.
V. The costs incurred or to be incurred in respect of the transaction can be measured reliably.

a. I, II, III, IV, and V c. I, III, and IV only

b. I, II, III, and IV only d. I, III, IV, and V only

32. Lin Co. (a small entity), a distributor of machinery, bought a machine from the manufacturer in November
for P10,000. On December 30, Lin sold this machine to Lang Hardware for P15,000 under the following
terms: 2% discount if paid within 30 days, 1% discount if paid after 30 days but within 60 days, or payable
in full within 90 days if not paid within the discount periods. However, Lang has the right to return this
machine to Lin if Lang is unable to resell the machine before expiration of the 90-day payment period, in
which case Lang’s obligation to Lin is canceled. Which statement is correct?
a. The sale is treated as a consignment sale since the buyer is acting, in substance, as an agent of the
seller.
b. The seller recognizes revenue when the buyer sells the goods to a third party.
c. Both a and b.
d. Neither a nor b.

33. A small entity sold goods for P8 million cash to a finance company. The cost of these goods was P6 million.
The finance company has the option to require the entity to repurchase these goods within one month of
year-end at their original selling price plus a facilitating fee of P250,000. How much revenue should the
entity recognize at the time of sale?
a. P8,000,000 c. P1,750,000
b. P2,000,000 d. Nil

34. When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue
associated with the transaction shall be recognized by reference to the stage of completion of the
transaction at the end of the reporting period. The outcome of a transaction can be estimated reliably
when which the following conditions are satisfied?
I. The amount of revenue can be measured reliably.
II. It is probable that the economic benefits associated with the transaction will flow to the entity.
III. The stage of completion of the transaction at the balance sheet date can be measured reliably.
IV. The costs incurred for the transaction and the costs to complete the transaction can be measured
reliably.

a. I, II, III, and IV c. I, II and IV only

b. I, II, and III only d. I and II only

35. On 1 January 2019, a small entity signs a four-year fixed-price contract to provide services for a customer.
The contract value is P550,000. At 31 December 2019 the contract is thought to be 30% complete.
Costs to complete the contract cannot be reliably estimated and costs incurred to date of P152,000 are
recoverable from the customer. What is the revenue to be recognized in profit or loss for the year ended 31
December 2019? a. P 13,000 c. P137,500
b. P152,000 d. P165,000

36. A small entity provides service contracts to customers for maintenance of their electrical systems. On 1
October 2019 it agrees a four-year contract with a major customer for P154,000. Costs over the period of
the contract are reliably estimated at P51,333. How much revenue should the company recognize in profit
or loss in the year ended 31 December 2019?
a. P38,500 c. P9,625
b. P12,833 d. P3,208
37. In accordance with Section 20 of the PFRS for SEs, 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
a. 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.
b. Fair value of the goods or services received, unless that fair value cannot be estimated reliably.
c. Fair value of the equity instruments granted, if fair value of the goods or services received cannot be
estimated reliably.
d. Par value of equity instruments granted.

38. In accordance with Section 22 of the PFRS for SEs, for defined benefit plans, an entity is required to
a. Calculate 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.
b. See each period of service as giving rise to an additional unit of benefit entitlement and measure each
unit of benefit entitlement separately to build up the final obligation.
c. Either a or b.
d. Neither a nor b.

39. Which the following Specialized Activities of SMEs apply to small entities?
a. Service concession arrangements
b. Extractive activities
c. Agriculture
d. None of these

40. Which statement is correct regarding measurement of biological assets in accordance with Section 27 of the
PFRS for SEs?

a. An entity is required to use the current market price model.

b. An entity has a choice to use either the current market price model or the cost model.
c. Biological assets whose fair value cannot be measured reliably without undue cost or effort shall be
measured using the cost-depreciation- impairment model.
d. Biological assets whose fair value can be measured reliably without undue cost or effort shall be
measured at their current market price or the probable selling price to willing buyers at each reporting
date with changes in current market price recognized in profit or loss.

41. In accordance with Section 28 of the PFRS for SEs, an entity shall account for a non-monetary government
grant by
a. Not recognizing the non-monetary grant.
b. Recognizing the non-monetary grant at fair value.
c. Either a or b.
d. Neither a nor b.

42. In accordance with Section 29 of the PFRS for SEs, an entity can be a first-time adopter of PFRS for SEs
a. Only once c. Only thrice
b. Only twice d. Without limit