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.B PFRS for SMEs

PFRS for SMEs Section by Section Summary

Preface

• The PFRS for SMEs is organized by topic, with each topic presented in a
separate section. All of the paragraphs in the standard have equal authority.
• The standard is appropriate for general purpose financial statements and other
financial reporting of all profit-oriented entities.
• The IASB intends to issue a comprehensively reviewed standard after two year's
implementation, to address issues identified and also, if appropriate, recent changes
to full IFRSs. Thereafter, an omnibus proposal of amendments will be issued, if
necessary, once every three years.

Section 1 - Small and Medium-sized Entities

• Defines SME as used by IASB.

• The standard does not contain a limit on the size of an entity that may use the PFRS
for SMEs provided that it does not have public accountability (take note that in the
Philippines, the SEC prescribes PFRS for SMEs for certain corporations)
• Nor is there a restriction on its use by a public utility, not-for-profit entity, or public
sector entity (take note that a public utility entity is not allowed to use the PFRS for
SMEs in the Philippines)
• A subsidiary whose parent or group uses full PFRSs may use the PFRS for SMEs if
the subsidiary itself does not have public accountability
• The standard does not require any special approval by the owners of an SME for it to
be eligible to use the PFRS for SME
• Listed companies, no matter how small, may not use the PFRS for SMEs

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 Section 2 - Concepts and Pervasive Principles

• Objective of SMEs' financial statements: To provide information about financial

position, performance, cash flows
• Also shows results of stewardship of management over resources
• Qualitative characteristics (understandability, relevance, materiality, reliability,
substance over form, prudence, completeness, comparability, timeliness, balance
between benefit and cost)
• Basic recognition concept – An item that meets the definition of an asset, liability,
income, or expense is recognised in the financial statements if:
o it is probable that future benefits associated with the item will flow to or from the entity,
and
o the item has a cost or value that can be measured reliably
• Basic measurement concepts
o Historical cost and fair value are described
o Basic financial assets and liabilities are generally measured at amortised cost
o Other financial assets and liabilities are generally measured at fair value through profit or
loss
o Non-financial assets are generally measured using a cost-based measure
o Non-financial liabilities are generally measured at settlement amount
• Concepts of profit or loss and total comprehensive income
• Offsetting of assets and liabilities or of income and expenses is prohibited unless
expressly required or permitted

Section 3 - Financial Statement Presentation

• Fair presentation: presumed to result if the PFRS for SMEs is followed

• State compliance with PFRS for SMEs only if the financial statements comply in full
• Does include 'true and fair override' but this should be 'extremely rare'
• PFRS for SMEs presumes the reporting entity is a going concern
• SMEs shall present a complete set of financial statements at least annually
• At least one year comparative prior period financial statements and note data
• Presentation and classification of items should be consistent from one period to the next
• Must justify and disclose any change in presentation or classification of items in financial
statements
• Materiality: an omission or misstatement is material if it could influence economic
• Complete set of financial statements:
o Statement of financial position
o Either a single statement of comprehensive income, or two statements: an income

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 statement and a statement of comprehensive income
o Statement of changes in equity
o Statement of cash flows
o Notes
• If the only changes to equity arise from profit or loss, payment of dividends, corrections of
errors, and changes in accounting policy, an entity may present a single (combined)
statement of income and retained earnings instead of the separate statements of
comprehensive income and of changes in equity (see Section 6)
• An entity may present only an income statement (no statement of comprehensive income) if it
has no items of other comprehensive income (OCI)
• The only OCI items under the PFRS for SMEs are:
o Some foreign exchange gains and losses relating to a net investment in a foreign
operation (see Section 30)
o Some changes in fair values of hedging instruments – in a hedge of variable
interest rate risk of a recognised financial instrument, foreign exchange risk or
commodity price risk in a firm commitment or highly probable forecast transaction, or
a net investment in a foreign operation (see Section 12)
o Some actuarial gains and losses (see Section 28)
o changes in the revaluation surplus for property, plant and equipment measured in
accordance with the revaluation model (see Section 17).

Section 4 - Statement of Financial Position (Balance Sheet)

• Current/non-current split is not required if the entity concludes that a liquidity approach
produces more relevant information
• Some minimum line items required. These include:
o Cash and equivalents
o Receivables
o Financial assets
o Inventories
o Property, plant, and equipment
o Investment property at cost
o Investment property at fair value
o Intangible assets
o Biological assets at cost
o Biological assets at fair value
o Investment in associates
o Investment in joint ventures
o Payables
o Financial liabilities
o

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 o Current tax assets and liabilities
o Deferred tax assets and liabilities
o Provisions
o Non-controlling interest
o Equity of owners of parent
• And some required items may be presented in the statement or in the notes
o Categories of property, plant, and equipment
o Info about assets with binding sale agreements
o Categories of receivables
o Categories of inventories
o Categories of payables
o Employee benefit obligations
o Classes of equity, including OCI and reserves
o Details about share capital
• Sequencing, format, and titles are not mandated

Section 5 - Statement of Comprehensive Income and Income Statement

• One-statement or two-statement approach – either a single statement of comprehensive

income, or two statements: an income statement and a statement of comprehensive income
• Must segregate discontinued operations
• Must present 'profit or loss' subtotal if the entity has any items of other comprehensive income
• Bottom line ('profit or loss' in the income statement and 'total comprehensive income' in the
statement of comprehensive income) is before allocating those amounts to non-controlling
interest and owners of the parent
• No item may be labelled 'extraordinary'
o But unusual items can be separately presented
o Expenses may be presented by nature (depreciation, purchases of materials, transport
costs, employee benefits, etc) or by function (cost of sales, distribution costs,
administrative costs, etc) either on face of the statement of comprehensive income (or
income statement) or in the notes

• Single statement of comprehensive income:

o Revenue
o Expenses, showing separately:
- finance costs
- profit or loss from associates and jointly controlled entities
- tax expense
- discontinued operations

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 o Profit or loss (may omit if no OCI)
o Items of other comprehensive income
o Total comprehensive income (may label Profit or Loss if no OCI)

• Separate statements of income and comprehensive income:

o Income Statement:
- Bottom line is profit or loss (as above)
o Statement of Comprehensive Income:
- Begins with profit or loss
- Shows each item of other comprehensive income
- Bottom line is Total Comprehensive Income

Section 6 - Statement of Changes in Equity and Statement of Comprehensive Income and

Retained Earnings

• Shows all changes to equity including

o total comprehensive income
o owners' investments
o dividends
o owners' withdrawals of capital
o treasury share transactions

• Can omit the statement of changes in equity if the entity has no owner investments or
withdrawals other than dividends and elects to present a combined statement of comprehensive
income and retained earnings

Section 7 - Statement of Cash Flows

• Presents information about an entity's changes in cash and cash equivalents for a period
• Cash flows are classified as operating, investing, and financing cash flows
• Option to use the indirect method or the direct method to present operating cash flows
• Separate disclosure is required of some non-cash investing and financing transactions
(for example, acquisition of assets by issue of debt)
• Reconciliation of components of cash

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 Section 8 - Notes to the Financial Statements

• Notes are normally in this sequence:

o Basis of preparation (ie PFRS for SMEs)
o Summary of significant accounting policies, including
- Information about judgements
- Information about key sources of estimation uncertainty
o Supporting information for items in financial statements
o Other disclosures
• Comparative prior period amounts are required by Section 3 (unless another section allows
omission of prior period amounts)

Section 9 - Consolidated and Separate Financial Statements

• Consolidated financial statements are required when a parent company controls another entity (a
subsidiary).
• Must consolidate all controlled special-purpose entities (SPEs)
• Consolidation procedures:
o Eliminate intracompany transactions and balances
o Uniform reporting date unless impracticable
o Uniform accounting policies
o Non-controlling interest is presented as part of equity
o Losses are allocated to a subsidiary even if non-controlling interest goes negative
• Guidance on separate financial statements (but they are not required).
o In a parent's separate financial statements, it may account for subsidiaries, associates,
and joint ventures that are not held for sale at cost or fair value through profit and
loss.
• Guidance on combined financial statements (but they are not required)
• If investor loses control but continues to hold some investment:
o If the subsidiary becomes an associate, follow Section 14
o If the subsidiary becomes a jointly controlled entity, follow Section 15
o If investment does not qualify as an associate or jointly controlled entity, treat it as
a financial asset under Sections 11 and 12

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 Section 10 - Accounting Policies, Estimates and Errors

• If the PFRS for SMEs addresses an issue, the entity must follow the PFRS for SMEs
• If the PFRS for SMEs does not address an issue:
o Choose policy that results in the most relevant and reliable information
o Try to analogize from standards in the PFRS for SMEs
o Or use the concepts and pervasive principles in Section 2
o Entity may look to guidance in full PFRSs (but not required)
• Change in accounting policy:
o If mandated, follow the transition guidance as mandated
o If voluntary, retrospective
• Change in accounting estimate: prospective
• Correction of prior period error: restate prior periods if practicable

Section 11 - Basic Financial Instruments

• PFRS for SMEs has two sections on financial instruments:

o Section 11 on Basic Financial Instruments
o Section 12 on Other FI Transactions
• Option to follow PAS 39 instead of sections 11 and 12
• Even if PAS 39 is followed, make Section 11 and 12 disclosures (not PFRS 7 disclosures)
• Essentially, Section 11 is an amortised historical cost model
o Except for equity investments with quoted price or readily determinable fair value.
These are measured at fair value through profit or loss.
• Scope of Section 11 includes:
o Cash
o Demand and fixed deposits
o Commercial paper and bills
o Accounts and notes receivable and payable
o Debt instruments where returns to the holder are fixed or referenced to an observable
rate
o Investments in nonconvertible and non-puttable ordinary and preference shares
o Most commitments to receive a loan

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 • Initial measurement:
o Basic financial assets and financial liabilities are initially measured at the transaction
price (including transaction costs except in the initial measurement of financial assets
and liabilities that are measured at fair value through profit or loss) unless the
arrangement constitutes, in effect, a financing transaction. A financing transaction
may be indicated in relation to the sale of goods or services, for example, if
payment is deferred beyond normal business terms or is financed at a rate of interest
that is not a market rate. If the arrangement constitutes a financing transaction,
measure the financial asset or financial liability at the present value of the future
payments discounted at a market rate of interest for a similar debt instrument.

• Measurement subsequent to initial recognition:

o Debt instruments at amortised cost using the effective interest method
o Debt instruments that are classified as current assets or current liabilities are
measured at the undiscounted amount of the cash or other consideration expected
to be paid or received (ie net of impairment) unless the arrangement constitutes, in
effect, a financing transaction. If the arrangement constitutes a financing transaction,
the entity shall measure the debt instrument at the present value of the future
payments discounted at a market rate of interest for a similar debt instrument.
o Investments in non-convertible preference shares and non-puttable ordinary or
preference shares:
- if the shares are publicly traded or their fair value can otherwise be measured
reliably, measure at fair value with changes in fair value recognised in profit or loss
- measure all other such investments at cost less impairment
• Must test all amortised cost instruments for impairment or uncollectibility
• Previously recognised impairment is reversed if an event occurring after the impairment was first
recognised causes the original impairment loss to decrease
• Guidance is provided on determining fair values of financial instruments
o The most reliable is a quoted price in an active market
o When a quoted price is not available the most recent transaction price provides evidence
of fair value
o If there is no active market or recent market transactions, a valuation technique may be
used
• Guidance is provided on the effective interest method

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 • Derecognise a financial asset when:
o the contractual rights to the cash flows from the financial asset expire or are settled;
o the entity transfers to another party all of the significant risks and rewards relating to
the financial asset; or
o the entity, despite having retained some significant risks and rewards relating to the
financial asset, has transferred the ability to sell the asset in its entirety to an unrelated
third party who is able to exercise that ability unilaterally and without needing to impose
additional restrictions on the transfer.
• Derecognise a financial liability when the obligation is discharged, cancelled, or expires
• Disclosures:
o Categories of financial
instruments o Details of debt and
other instruments o Details of
derecognitions
o Collateral
o Defaults and breaches on loans payable
o Items of income and expense

Section 12 - Additional Financial Instruments Issues

• Financial instruments not covered by Section 11 (and, therefore, are within Section 12) are
measured at fair value through profit or loss. This includes:
o Investments in convertible and puttable ordinary and preference shares
o Options, forwards, swaps, and other derivatives
o Financial assets that would otherwise be in Section 11 but that have 'exotic' provisions
that could cause gain/loss to the holder or issuer

Hedge accounting involves matching the gains and losses on a hedging instrument and
hedged item.
o It is allowed only for the following kinds of risks:
- interest rate risk of a debt instrument measured at amortised cost
- foreign exchange or interest rate risk in a firm commitment or a highly probable forecast
transaction
- price risk of a commodity that it holds or in a firm commitment or highly probable
forecast transaction to purchase or sell a commodity
- foreign exchange risk in a net investment in a foreign operation.
o Section 12 defines the type of hedging instrument required for hedge accounting.
o Hedges must be documented up front to qualify for hedge accounting
o Section 12 provides guidance for measuring assessing effectiveness

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 o Special disclosures are required

Section 13 – Inventories

• Measured at the lower cost and estimated selling price less costs to complete and sell
• Cost is determined using:
o specific identification is required for large items
o option to choose FIFO or weighted average for others
o LIFO is not permitted
• Inventory cost includes costs to purchase, costs of conversion, and costs to bring the asset to
present location and condition
• Inventory cost excludes abnormal waste and storage, administrative, and selling costs
• If a production process creates joint products and/or by-products, the costs are allocated on a
consistent and rational basis
• A manufacturer allocates fixed production overheads to inventories based on normal capacity
• Standard costing, retail method, and most recent purchase price may be used only if the result
approximates actual cost
• Impairment – write down to net realisable value (selling price less costs to complete and sell –
see Section 27)

Section 14 - Investments in Associates

• Option to use:
o Cost-impairment model (except if there is a published quotation – then must use fair value
through profit or loss)
o Equity method (investor recognises its share of profit or loss of the associate – detailed
guidance is provided)
o Fair value through profit or loss
• Investments in associates are always classified as non-current assets

Section 15 - Investments in Joint Ventures

• For investments in jointly controlled entities, there is an option for the venturer to use:
o Cost model (except if there is a published quotation – then must use fair value through
profit or loss)
o Equity method (using the guidance in Section 14)
o Fair value through profit or loss
• Proportionate consolidation is prohibited

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 • For jointly controlled operations, the venturer should recognise assets that it controls and
liabilities it incurs as well as its share of income earned and expenses that are incurred
• For jointly controlled assets, the venturer should recognise its share of the assets and liabilities
it incurs as well as income it earns and expenses that are incurred

Section 16 - Investment Property

• Investment property is investments in land, buildings (or part of a building), and some property
interests in finance leases held to earn rentals or for capital appreciation or both
• Property interests that are held under an operating lease may be classified as an
investment property provided the property would otherwise have met the definition of an
investment property
• Mixed use property must be separated between investment and operating property
• If fair value can be measured reliably without undue cost or effort, use the fair value through profit
or loss model
• Otherwise, an entity must use cost model in Section 17

Section 17 - Property, Plant and Equipment

• Historical cost-depreciation-impairment model or revaluation model

• Section 17 applies to most investment property as well (but if fair value of investment property
can be measured reliably without undue cost or effort then the fair value model in Section 16
applies)
• Section 17 applies to property held for sale – there is no special section on assets held for sale.
(Sale is an indicator of possible impairment.)
• Cost Model: Measurement is initially at cost, including costs to get the property ready for its
intended use. Subsequent to acquisition, the entity uses the cost-depreciation-impairment
model, which recognises depreciation and impairment of the carrying amount
• Revaluation model: Measurement is at fair value at the date of the revaluation less any
subsequent accumulated depreciation and subsequent accumulated impairment losses;
revaluations must be made with sufficient regularity

• The carrying amount of an asset, less estimated residual value, is depreciated over the asset's
anticipated useful life. The method of depreciation shall be the method that best reflects the
consumption of the asset's benefits over its life. Separate significant components should be
depreciated separately.
• Component depreciation only if major parts of an item of PP&E have 'significantly different
patterns of consumption of economic benefits'
• Review useful life, residual value, depreciation rate only if there is a significant change in the asset
or how it is used. Any adjustment is a change in estimate (prospective).

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 • Impairment testing and reversal – follow Section 27

Section 18 - Intangible Assets other than Goodwill

• No recognition of internally generated intangible assets. Therefore:

o Charge all research and development costs to expense
o Charge the following items to expense when incurred: Costs of internally generated
brands, logos, and masthead, start-up costs, training costs, advertising, and relocating
of a division or entity
• Amortisation model for intangibles that are purchased separately, acquired in a business
combination, acquired by grant, and acquired by exchange of other assets
• Amortise over useful life. If the entity is unable to estimate useful life, then use the
management’s best estimate but not more than 10 years.

Review useful life, residual value, depreciation rate only if there is a significant change in the asset
or how it is used. Any adjustment is a change in estimate (prospective)

• Impairment testing – follow Section 27

• Any revaluation of intangible assets is prohibited

Section 19 - Business Combinations and Goodwill

• Section does not apply to combinations of entities under common control
• Acquisition (purchase) method. Under this method:
o An acquirer must always be identified
o The cost of the business combination is measured. Cost is the fair value of assets given,
liabilities incurred or assumed, and equity instruments issued, plus costs directly
attributable to the combination
o At the acquisition date, the cost is allocated to the assets acquired and liabilities
and provisions for contingent liabilities assumed. The identifiable assets acquired and
liabilities and provisions for contingent liabilities assumed are measured at their fair
values. Any difference between cost and amounts allocated to identifiable assets and
liabilities (including provisions) is recognised as goodwill or so-called 'negative
goodwill'.
• All goodwill must be amortised. If the entity is unable to estimate useful life, then use 10 years.
• 'Negative goodwill' – first reassess original accounting. If that is ok, then immediate credit to
profit or loss
• Impairment testing of goodwill – follow Section 27
• Reversal of goodwill impairment is not permitted

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 Section 20 – Leases

• Scope includes arrangements that contain a lease [IFRIC 4]

• Leases are classified as either finance leases or operating leases.
o Finance leases result in substantially all the risks and rewards incidental to ownership
being transferred between the parties, while operating leases do not.
o Substantially all risks and rewards of ownership are presumed transferred if:
- the lease transfers ownership of the asset to the lessee by the end of the lease term
- the lessee has a 'bargain purchase option'
- the lease term is for the major part of the economic life of the asset even if title is
not transferred
- at the inception of the lease the present value of the minimum lease payments
amounts to at least substantially all of the fair value of the leased asset
- the leased assets are of such a specialised nature that only the lessee can use
them without major modifications
- the lessee bears the lessor losses if cancelled
- a secondary rental period at below market rates
- the residual value risk is borne by the lessee.

• Lessees – finance leases:

o The rights and obligations are to be recognised as assets and liabilities at fair value,
or, if lower, the present value of the minimum lease payments. Any direct costs of
the lessee are added to the asset amount recognised. Subsequently, payments are to
be spilt between a finance charge and reduction of the liability. The asset should be
depreciated either over the useful life or the lease term.

• Lessees – operating leases:

o Payments are to be recognised as an expense on the straight line basis, unless
payments are structured to increase in line with expected general inflation or another
systematic basis is better representative of the time pattern of the user's benefit.

• Lessors – finance leases:

o The rights are to be recognised as assets held, i.e. as a receivable at an amount
equal to the net investment in the lease. The net investment in a lease is the
lessor's gross investment in the lease (including unguaranteed residual value)
discounted at the interest rate implicit in the lease.
o For finance leases other than those involving manufacturer or dealer lessors, initial
direct costs are included in the initial measurement of the finance lease receivable
and reduce the amount of income recognised over the lease term.

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 o If there is an indication that the estimated unguaranteed residual value used in
computing the lessor's gross investment in the lease has changed significantly, the
income allocation over the lease term is revised, and any reduction in respect of
amounts accrued is recognised immediately in profit or loss.

• Lessors – finance leases by a manufacturer or dealer:

o A finance lease of an asset by a manufacturer or dealer lessor gives rise to two types of
income:
- profit or loss equivalent to the profit or loss resulting from an outright sale of the
asset being leased, at normal selling prices, reflecting any applicable volume or
trade discounts; and
- finance income over the lease term.
o The sales revenue recognised at the commencement of the lease term by a
manufacturer or dealer lessor is the fair value of the asset or, if lower, the present
value of the minimum lease payments accruing to the lessor, computed at a market
rate of interest.
o The cost of sale recognised at the commencement of the lease term is the cost, or
carrying amount if different, of the leased property less the present value of the
unguaranteed residual value. The difference between the sales revenue and the cost
of sale is the selling profit, which is recognised in accordance with the entity's policy
for outright sales.
o If artificially low rates of interest are quoted, selling profit shall be restricted to that
which would apply if a market rate of interest were charged. Costs incurred by
manufacturer or dealer lessors in connection with negotiating and arranging a lease
shall be recognised as an expense when the selling profit is recognised.

• Lessors – operating leases:

o Lessors retain the assets on their balance sheet and payments are to be recognised
as income on the straight line basis, unless payments are structured to increase in
line with expected general inflation or another systematic basis is better representative
of the time pattern of the user's benefit.

• Sale and leaseback:

o If a sale and leaseback results in a finance lease, the seller should not recognise any
excess as a profit, but recognise the excess over the lease term
o If a sale and leaseback results in an operating lease, and the transaction was at fair
value, the seller shall recognise any profits immediately.

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 Section 21 - Provisions and Contingencies
• Provisions:
o Provisions are recognised only when (a) there is a present obligation as a result of a
past event, (b) it is probable that the entity will be required to transfer economic
benefits, and (c) the amount can be estimated reliably
o The obligation may arise due to contract or law or when there is a constructive
obligation due to valid expectations having been created from past events. However,
these do not include any future actions that may create an expectation. Nor can
expected future losses be recognised as provisions.
o Initially recognised at the best possible estimate at the reporting date. This value
should take into any time value of money if this is considered material. When all or
part of a provision may be reimbursed by a third party, the reimbursement is to be
recognised separately only when it is virtually certain payment will be received.
o Subsequently, provisions are to be reviewed at each reporting date and adjusted to meet
the best current estimate. Any adjustments are recognised in profit and loss while
any unwinding of discounts is to be treated as a finance cost.

• Must accrue provisions for (examples):

o Onerous contracts
o Warranties
o Restructuring if legal or constructive obligation to restructure
o Sales refunds
• May NOT accrue provisions for (example):
o Future operating losses, no matter how probable
o Possible future restructuring (plan but not yet a legal or constructive obligation)
• Contingent liabilities:
o These are not recognised as liabilities
o Unless remote, disclose an estimate of the financial effect, indications of the
uncertainties relating to timing or amount, and the possibility of reimbursement
• Contingent assets:
o These are not recognised as assets.
o Disclose a description of the nature and the financial effect.

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 Section 22 - Liabilities and Equity
• Guidance on classifying an instrument as liability or equity
• An instrument is a liability if the issuer could be required to pay cash
• Puttable financial instruments are only recognised as equity if it has all of the
following features: o The holder is entitled to a pro rata share of the entity's net
assets in the event of liquidation. o The instrument is the most subordinate class.
o All financial instruments in the most subordinate class have identical features.
o Apart from the puttable features the instrument includes no other financial instrument
features.
o The total expected cash flows attributable to the instrument over the life of the
instrument are based substantially on the change in the value of the entity.
• Members' shares in co-operative entities and similar instruments are only classified as equity if
the entity has an unconditional right to refuse redemption of the members' shares or the
redemption is unconditionally prohibited by local law, regulation or the entity's governing
charter. If the entity could not refuse redemption, the members' shares are classified as
liabilities.
• Covers some material not covered by full IFRSs, including:
o original issuance of shares and other equity instruments. Shares are only recognised as
equity when another party is obliged to provide cash or other resources in exchange
for the instruments. The instruments are measured at the fair value of cash or
resources received, net of direct costs of issuing the equity instruments, unless the time
value of money is significant in which case initial measurement is at the present value
amount. When shares are issued before the cash or other resources are received, the
amount receivable is presented as an offset to equity in the statement of financial position
and not as an asset. Any shares subscribed for which no cash is received are not
recognised as equity before the shares are issued.
o sales of options, rights and warrants
o stock dividends and stock splits – these do not result in changes to total equity but, rather,
reclassification of amounts within equity.

• 'Split accounting' is required to account for issuance of convertible instruments

o Proceeds on issue of convertible and other compound financial instruments are split
between liability component and equity component. The liability is measured at its fair
value, and the residual amount is the equity component. The liability is subsequently
measured using the effective interest rate, with the original issue discount amortised
as added interest expense.
o A comprehensive example of split accounting is included

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 • If a liability is fully or partially extinguished by issuing equity instruments to the creditor,
the equity instruments issued are measuered at their fair value. If the fair value of the equity
instruments issued cannot be measured reliably without undue cost or effort, the equity
instruments is measured at the fair value of the financial liability extinguished.
• Treasury shares (an entity's own shares that are reacquired) are measured at the fair
value of the consideration paid and are deducted from the equity. No gain or loss is
recognised on subsequent resale of treasury shares.
• Minority interest changes that do not affect control do not result in a gain or loss being
recognised in profit and loss. They are equity transactions between the entity and its owners.
• Dividends paid in the form of distribution of assets other than cash are recognised when the
entity has an obligation to distribute the non-cash assets. The dividend liability is measured at
the fair value of the assets to be distributed.

Section 23 – Revenue

• Revenue results from the sale of goods, services being rendered, construction contracts
income by the contractor and the use by others of your assets
• Some types of revenue are excluded from this section and dealt with elsewhere:
o leases (section 20)
o dividends from equity accounted entities (section 14 and 15)

o changes in fair value of financial instruments (section 11 and 12)

o initial recognition and subsequent re-measurement of biological assets (section 34) and
initial recognition of agricultural produce (section 34)
• Principle for measurement of revenue is the fair value of the consideration received or
receivable, taking into account any possible trade discounts or rebates, including volume
rebates and prompt settlement discounts
• If payment is deferred beyond normal payment terms, there is a financing component to the
transaction. In that case, revenue is measured at the present value of all future receipts. The
difference is recognised as interest revenue.
• Recognition - sale of goods: An entity shall recognise revenue from the sale of goods when all
the following conditions are satisfied:
(a) the entity has transferred to the buyer the significant risks and rewards of ownership of the
goods.
(b) the entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold.
(c) the amount of revenue can be measured reliably.
(d) it is probable that the economic benefits associated with the transaction will flow to the entity.
(e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.

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 • Recognition - sale of services: Use the percentage of completion method if the outcome of the
transaction can be estimated reliably. Otherwise use the cost-recovery method.
• Recognition - construction contracts: Use the percentage of completion method if the outcome of
the contract can be estimated reliably. Otherwise use the cost-recovery method.
• Recognition - interest: Interest shall be recognised using the effective interest method as
described in Section 11
• Recognition - royalties: Royalties shall be recognised on an accrual basis in accordance with
the substance of the relevant agreement.
• Recognition - dividends: Dividends shall be recognised when the shareholder's right to receive
payment is established.
• Appendix of examples of revenue recognition under the principles in Section 23
o Award credits or other customer loyalty plan awards need to be accounted for
separately. The fair value of such awards reduces the amount of revenue initially
recognised and, instead, is recognised when awards are redeemed.

Section 24 - Government Grants

• This section does not apply to any 'grants' in the form of income tax benefits
• All grants are measured at the fair value of the asset received or receivable
• Recognition as income:
o Grants without future performance conditions are recognised in profit or loss when
proceeds are receivable
o If there are performance conditions, the grant is recognised in profit or loss only when the
conditions are met

Section 25 - Borrowing Costs

• Borrowing costs are interest and other costs arising on an entity's financial liabilities and
finance lease obligations
• All borrowing costs are charged to expense when incurred – none are capitalised

Section 26 - Share-based Payment

• Basic principle: all share-based payment must be recognised
• Equity-settled:
o Transactions with other than employees are recorded at the fair value of the goods and
services received, if these can be estimated reliably
o Transactions with employees or where the fair value of goods and services received
cannot be reliably measured are measured with reference to the fair value of the
equity instruments granted

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 • Cash-settled:
o Liability is measured at fair value on grant date and at each reporting date and
settlement date, with each adjustment through profit or loss.
o For employees where shares only vest after a specific period of service has been
completed, recognise the expense as the service is rendered.

• Share-based payment with cash alternatives:

o Account for all such transactions as cash settled, unless the entity has a past practice
of settling by issuing equity instruments or the option has no commercial substance
because the cash settlement amount bears no relationship to, and is likely to be lower
in value than, the fair value of the equity instrument.

• Fair value of equity instruments granted:

(a) Observable market price if available
(b) If no observable price, use entity-specific market data such as a recent share transaction or
valuation of the entity
(c) If (a) and (b) are impracticable, directors must use their judgement to estimate fair value

• Certain government-mandated plans provide for equity investors (such as employees) to

acquire equity without providing goods or services that can be specifically identified (or by
providing goods or services that are clearly less than the fair value of the equity instruments
granted). These are equity-settled share-based payment transactions within the scope of this
section.

Section 27 - Impairment of Assets

• Inventories – write down, in profit or loss, to lower of cost and selling price less costs to
complete and sell, if below carrying amount. When the circumstances that led to the impairment
no longer exist, the impairment is reversed through profit or loss.
• Other assets – write down, in profit or loss, to recoverable amount, if below carrying
amount. When the circumstances that led to the impairment no longer exist, the impairment is
reversed through profit or loss.
• Recoverable amount is the greater of fair value less costs to sell and value in use
• If recoverable amount of an individual asset cannot be determined, measure recoverable
amount of that asset's cash generating unit
• If an impairment indicator exists, the entity should review the useful life and the depreciation
methods even though an impairment may not be recognised
• Simplified guidance on computing impairment of goodwill when goodwill cannot be allocated
to cash generating units

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 Section 28 - Employee Benefits
• Short-term benefits:
o Measured at an undiscounted rate and recognised as the services are rendered.
o Other costs such as annual leave are recognised as a liability as services are
rendered and expensed when the leave is taken or used.
o Bonus payments are only recognised when an obligation exists and the amount can be
reliably estimated.

• Post-Employment Benefits – Defined Contribution Plans:

o Contributions are recognised as a liability or an expense when the contributions are
made or due.

• Post-Employment Benefits – Defined benefit plans

o Recognise a liability based on the net of present value of defined benefit obligations
less the fair value of any plan assets at balance sheet date.
o The projected unit credit method is only used when it could be applied without undue cost or
effort.
o Otherwise, en entity can simplify its calculation:
- Ignore estimated future salary increases
- Ignore future service of current employees (assume closure of plan)
- Ignore possible future in-service mortality
o Plan introductions, changes, curtailments, settlements: Immediate recognition (no deferrals)
o For group plans, consolidated amount may be allocated to parent and subsidiaries on a
reasonable basis
o Actuarial gains and losses may be recognised in profit or loss or as an item of other
comprehensive income – but...
- No deferral of actuarial gains or losses, including no corridor approach
- All past service cost is recognised immediately in profit or loss

• Other Long-Term benefits:

o The entity shall recognise a liability at the present value of the benefit obligation less
any fair value of plan assets.

• Termination benefits:
o These are recognised in profit and loss immediately as there are no future economic
benefits to the entity.

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 Section 29 - Income Tax
• Requires a temporary difference approach, similar to PAS 12
• Current tax:
o Recognise a current tax liability for tax payable on taxable profit for the current and past
period.
o Recognise a current tax asset for the benefit of a tax loss that can be carried back to
recover tax paid in a previous period.

o Measure the current tax liability (asset) at the amount expected to pay (recover) using
the tax rates and laws that have been enacted or substantively enacted by the
reporting date.
o Current tax assets and liabilities are not discounted.

• Deferred tax:
o Recognise a deferred tax asset or liability for tax recoverable or payable in future
periods as a result of past transactions or events.
o The tax base of an asset is the amount that will be deductible for tax purposes against
taxable economic benefits.
o The tax base of a liability is its carrying amount less any amount that will be deductible
for tax purposes in respect of that liability in future.
o Temporary difference arises if the tax basis of such assets or liabilities is different from
carrying amount.
o Recognise a deferred tax liability for most taxable temporary differences and recognise
a deferred tax asset for most deductible temporary differences to the extent that it is
probable that taxable profit will be available against which the deductible temporary
difference can be utilised.
o Measure deferred tax liabilities and assets using the tax rates and taxlaws that have
been enacted or substantively enacted by the reporting date.
o Deferred tax assets and liabilities are not discounted.
o At the end of each reporting period, reassess any unrecognised deferred tax
assets and recognise previously unrecognised deferred tax assets to the extent that it
has become probable that future taxable profit will allow the deferred tax asset to be
recovered.
o Deferred taxes are all presented as non-current.
• Recognition of changes in current or deferred tax must be allocated to the related components
of profit or loss, other comprehensive income and equity.
• Offsetting current tax assets and current tax liabilities or offsetting deferred tax assets and
deferred tax liabilities is only permissible if an entity has a legally enforceable right to set off
the amounts and the entity plans either to settle on a net basis or to realise the asset and settle
the liability simultaneously.

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 Section 30 - Foreign Currency Translation
• Functional currency approach similar to that in PAS 21
• An entity's functional currency, is the currency of the primary economic environment in which it
operates
• It is a matter of fact, not an accounting policy choice
o A change in functional currency is applied prospectively from the date of the change
• To record a foreign currency transaction in an entity's functional currency:
o On initial recognition, record the transaction by applying the spot rate at the date of
the transaction. An average rate may be used, unless there are significant fluctuations
in the rate.
o At reporting date, translate foreign currency monetary items using the closing rate.
For non-monetary items measured at historical cost, use the exchange at the date of
the transaction. For non-monetary items measured at fair value, use the exchange at
the date when the fair value was determined.
o For monetary and non-monetary item translations, gains or losses are recognised
where they were initially recognised – either in profit or loss, comprehensive income,
or equity
• Exchange differences arising from a monetary item that forms part of the net investment
in a foreign operation are recognised in equity and are not 'recycled' through profit or loss on
disposal of the investment
• Goodwill arising on acquisition of a foreign operation is deemed to be an asset of the
subsidiary, and translated at the closing rate at year end
• An entity may present its financial statements in a currency different from its functional
currency (a 'presentation currency'). If the entity's functional currency is not
hyperinflationary, translation of assets, liabilities, income, and expense from functional
currency into presentation currency is done as follows:
o Assets and liabilities for each statement of financial position presented are translated at
the closing rate at the date of that statement of financial position
o Income and expenses are translated at exchange rates at the dates of the transactions
o All resulting exchange differences are recognised in other comprehensive income.

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 Section 31 – Hyperinflation

• An entity must prepare general price-level adjusted financial statements when its functional
currency is hyperinflationary
• PFRS for SMEs provides indicators of hyperinflation but not an absolute rate. One
indicator is where cumulative inflation approaches or exceeds 100% over a 3 year period.
• In price-level adjusted financial statements, all amounts are stated in terms of the
(hyperinflationary) presentation currency at the end of the reporting period. Comparative
information and any information presented in respect of earlier periods must also be restated
in the presentation currency.
• All assets and liabilities not recorded at the presentation currency at the end of the reporting
period must be restated by applying the general price index (generally an index published by
the government).
• All amounts in the statement of comprehensive income and statement of cash flows must also
be recorded at the presentation currency at the end of the reporting period. These amounts are
restated by applying the general price index from the dates when they were recorded.
• The gain or loss on translating the net monetary position is included in profit or loss. However,
that gain or loss is adjusted for those assets and liabilities linked by agreement to changes in
prices.

Section 32 - Events after the End of the Reporting Period

• Adjust financial statements to reflect adjusting events – events after the balance sheet date
that provide further evidence of conditions that existed at the end of the reporting period.
• Do not adjust for non-adjusting events – events or conditions that arose after the end of the
reporting period. For these, the entity must disclose the nature of event and an estimate of its
financial effect.
• If an entity declares dividends after the reporting period, the entity shall not recognise those
dividends as a liability at the end of the reporting period. That is a non-adjusting event.

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 Section 33 - Related Party Disclosures
• Disclose parent-subsidiary relationships, including the name of the parent and (if any) the
ultimate controlling party.
• Disclose key management personnel compensation in total for all key management.
Compensation includes salaries, short-term benefits, post-employment benefits, other long-
term benefits, termination benefits and share-based payments. Key management personnel
are persons responsible for planning, directing and controlling the activities of an entity, and
include executive and non-executive directors.
• Disclose the following for transactions between related parties:
o Nature of the relationship
o Information about the transactions and outstanding balances necessary to
understand the potential impact on the financial statements
o Amount of the transaction
o Provisions for uncollectible receivables
o Any expense recognised during the period in respect of an amount owed by a related
party
• Government departments and agencies are not related parties simply by virtue of their normal
dealings with an entity

Section 34 - Specialized Activities

Agriculture:
• If the fair value of a class of biological asset is readily determinable without undue cost or effort,
use the fair value through profit or loss model.
• If the fair value is not readily determinable, or is determinable only with undue cost or effort,
measure the biological assets at cost less and accumulated depreciation and impairment.
• At harvest, agricultural produce is be measured at fair value less estimated costs to sell.
Thereafter it is accounted for as inventory.

Exploration for and evaluation of mineral resources:

• Determine an accounting policy that specifies which expenditures are recognised as
exploration and evaluation assets in accordance with paragraph 10.4 and apply the policy
consistently.
• Exploration and evaluation assets shall be measured on initial recognition at cost.
• (Subsequently) Tangible or intangible assets used in extractive activities are accounted for under
Section 17
Property, Plant and Equipment and Section 18 Intangible Assets other than Goodwill.
• Assess exploration and evaluation assets for impairment when facts and circumstances
suggest that the carrying amount of an exploration and evaluation asset may exceed its

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 recoverable amount. Measure, present and disclose any resulting impairment loss in
accordance with Section 27 Impairment of Assets.
• An obligation to dismantle or remove items or restore sites is accounted for using Section 17 and
Section 21

Provisions and Contingencies.

Service concession arrangements:

• Guidance is provided on how the operator accounts for a service concession arrangement.
The operator either recognises a financial asset or an intangible asset depending on whether
the grantor (government) has provided an unconditional guarantee of payment or not.
• A financial asset is recognised to the extent that the operator has an unconditional
contractual right to receive cash or another financial asset from or at the direction of the
grantor for the construction services.
• An intangible asset is recognised to the extent that the operator receives a right or license to
charge users for the public service.

Section 35 - Transition to the PFRS for SMEs

• First-time adoption is the first set of financial statements in which the entity makes an explicit and
unreserved statement of compliance with the IFRS for SMEs: '...in conformity with the
International Financial Reporting Standard for Small and Medium-sized Entities'.
• Can be switching from:
o National GAAP (PAS 101)
o Full PFRSs
o Or never published General Purpose Financial Statements in the past
• Date of transition is beginning of earliest period presented
• Select accounting policies based on PFRS for SMEs at end of reporting period of first-time
adoption
o Many accounting policy decisions depend on circumstances – not 'free choice'
o But some are pure 'free choice'
• Prepare current year and one prior year's financial statements using the PFRS for SMEs

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