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UNIVERSITY OF SAINT LOUIS

Tuguegarao City
School of Accountancy, Business and Hospitality
ACCOUNTANCY DEPARTMENT

PRE-ASSESSMENT EXAM
Review in Financial Accounting and Reporting (FAR)
1st Semester, S.Y. 2019-2020

SMALL AND MEDIUM-SIZED ENTITIES (SMEs)

Instruction: Write your answers in a separate sheet of papers. The following items are mix of “True or False”
questions, multiple choice questions, identification, and straight problems. For “True or False” questions, write the
word TRUE if the statement is correct, otherwise write FALSE. For MCQs, choose the letter of your choice that
best corresponds to the best answer. For straight problems, supporting computations are not required to be
presented. GODBLESS! #CPADream # KeepTheFaith

DEFINITION

1. The PFRS for SMEs is effective for annual periods beginning on or after January 1, 2010.

ANSWER: TRUE

October 13, 2009 – FRSC approved the adoption of IFRS for SMES issued by the International Accounting
Standards Board (IASB) as Philippine Financial Reporting Standards for Small Medium Enterprises (PFRS
for SMEs)

December 3, 2009 – When SEC’s en banc resolved to adopt PFRS for SMEs as part of their Rules and
Regulations.

PFRS for SMEs covers 35 sections.

2. IASB defines SME as an entity with total assets between P3,000,000 and P350,000,000, OR with total
liabilities between P3,000,000 and P250,000,000.

ANSWER: FALSE

DEFINITION:

According to IASB, SMEs are entities that:

a. Do not have public accountability; and
b. Publish general purpose financial statements for external users.

An entity has public accountability if:

a. its debt or equity instruments are traded in a public market or it is in the process of issuing
such instruments for trading in a public market (a domestic or foreign stock exchange or an
over-the-counter market, including local and regional markets), or

b. it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary
businesses. This is typically the case for banks, credit unions, insurance companies,
securities brokers/dealers, mutual funds and investment banks.

FIDUCIARY CAPACITY – the capacity of an entity or a person to handle money and

property to benefit another party.

According to SEC, SMEs are entities that:

a. With total assets between P3M and P350M OR with total liabilities between P3M to P250M.
b. That is not required to file financial statements under SRC Rule 68.1
c. That is not in the process of filing financial statements for the purpose of issuing any class of
instruments in a public market.
d. That is not a holder of secondary license issued by a regulatory agency such as bank (all type of
banks), an investment house, finance company, securities broker or dealer, a mutual fund and
pre need company.
e. That is not a public utility.
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3. IASB’s definition of SME includes those entities that do not have public accountability or those entities that
publish general purpose financial statements for external users.

ANSWER: FALSE

4. A mutual fund company may qualify as SME so long as it meets the criteria provided by SEC.

ANSWER: FALSE

Mutual fund companies have fiduciary capacity.

5. An entity that meets the SME criteria as defined by Philippine Securities and Exchange Commission are
required to apply the PFRS for SMEs

ANSWER: TRUE

6. A company, which has no public accountability but publishes general purpose financial statements for
external users are called small and medium-sized entities.

ANSWER: TRUE

7. An entity that holds assets in a fiduciary capacity incidental to a primary business is considered as not
publicly accountable.

ANSWER: TRUE

Some entities may also hold assets in a fiduciary capacity for a broad group of outsiders because they
hold and manage financial resources entrusted to them by clients, customers or members not involved in
the management of the entity. However, if they do so for reasons incidental to a primary business (as, for
example, may be the case for travel or real estate agents, schools, charitable organisations, co-operative
enterprises requiring a nominal membership deposit, and sellers that receive payment in advance of
delivery of the goods or services such as utility companies), that does not make them publicly accountable.

8. If a parent by itself does not have public accountability, it may use PFRS for SMEs as a basis in preparing
separate financial statements notwithstanding the fact that the group as a whole has public
accountability and consolidated financial statements are prepared using full PFRS.

ANSWER: TRUE

9. A subsidiary of a parent reporting under full IFRS is exempted from the mandatory adoption of the PFRS
for SMEs.

ANSWER: TRUE

The Philippine SEC resolved to exempt from the mandatory adoption of the PFRS for SMEs small medium
sized entity that meets any of the following criteria:

a. It is a subsidiary of a parent reporting under full PFRS.

b. It is a subsidiary of a foreign parent that will be moving toward full IFRS pursuant to the foreign
country’s published convergence plan.
c. It is a subsidiary of a foreign parent that has been applying the standards of for a nonpublicly
accountable entity for local reporting purposes, and is considering moving to full PFRS instead of the
PFRS for SMEs in order to align its policies with the expected move to full IFRS by its foreign parent
pursuant to the foreign country’s published convergence plan.
d. It has short term projections that show that it will breach the quantitative thresholds set in the criteria
for SME, and the breach is expected to be significant and continuing due to its long term effect on the
entity’s asset or liability size.
e. It is a part of a group, either as a significant joint venture or associate, that is reporting under full
PRFS.
f. It is a branch office of a foreign entity reporting under full IFRS,
g. It has concrete plans to conduct and IPO within the next two years.
h. It has a subsidiary that is mandated to report under full PFRS.
i. It has been preparing financial statements using full PFRS and has decided to liquidate its assets.

10. 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.

ANSWER: TRUE

11. Entities considered as holders of secondary licenses issued by a regulatory agency are not considered as
SMEs. Which of the following is not among this type of entities?
a. Insurance and pre-need companies
b. Public utility companies
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c. Commercial banks, investment houses and finance companies

d. Security dealer/broker and mutual fund companies

12. An entity whose total assets or liabilities are below the P3,000,000 floor threshold may elect to use full
PFRS.

ANSWER: TRUE

These entities are otherwise known as micro – entities. These entities have option whether to adopt full
PFRS, PFRS for SMEs or another acceptable basis of accounting.

13. Which of the following statements is false concerning application of the size criteria for SMEs?
I. The amount of total assets and total liabilities shall be based on the entity’s audited financial statements
at the end of the preceding calendar year.
II. If an SME is using the fiscal year, the entity shall apply the size criteria using the audited financial
statements of the preceding fiscal year.
a. I only
b. b. II only
c. c. Both I and II
d. d. Neither I nor II

14. The date of transition to PFRS for SME is the current reporting period for which full comparative
information is presented in accordance with PFRS for SMEs in the first annual financial statements that
conform to PFRS for SMEs.

ANSWER: FALSE

The date of transition to PRS for SMEs is the beginning of the earliest period for which full comparative
information is presented in accordance with PFRS for SMEs in the first annual financial statements that
conform with PFRS for SMEs.

15. If an SME that uses the PFRS for SMEs in the current year breaches the ceiling of the size criteria at the
end of the current year, the entity is required to transition to full PFRS in the next year if the event that
caused the change is significant and continuing.

ANSWER: TRUE

16. What is considered “significant” change in the size criteria that requires transition to or from the PFRS for
SMEs?
a. 20% or more of the total assets or total liabilities
b. 50% or more of the total assets or total liabilities
c. 10% or more of the total assets or total liabilities
d. No quantitative thresholds can be made

As a general rule, 20% or more of total assets or total liabilities would be considered significant.

17. Retrospective application of PFRS for SMEs is mandatory except for: ( Choose among the list which is
not given a mandatory exception to retrospective application)
a. Biological assets.
b. Derecognition of financial assets and financial liabilities
c. Hedge accounting
d. Accounting estimates
e. Discontinued operations
f. Measuring noncontrolling interest

A first-time adopter does not change the accounting that it followed previously for any of the following
transactions:

a. Derecognition of financial assets and financial liabilities

b. Hedge accounting
c. Accounting estimates
d. Discontinued operations
e. Measuring noncontrolling interest

18. An entity’s first financial statements that conform to the PFRS for SMEs are presented for the year ended
31 December 20X4. Those financial statements include only one year of comparative information (i.e.,
20X3). The entity’s financial statements for the year ended 31 December 20X3 were presented in
accordance with local GAAP. The entity is required to explain how the transition from the previous financial
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reporting framework to the PFRS for SMEs affected its reported financial position, financial performance
and cash flows. To comply with this requirement, an entity’s first financial statements that conform to the
PFRS for SMEs must present a number of reconciliations. Which one of the following four reconciliations is
not required to be disclosed?
a. A reconciliation of its equity under its previous financial reporting framework to its equity in accordance
with the PFRS for SMEs at 31 December 20X3
b. A reconciliation of its profit or loss in accordance with its previous financial reporting framework for
20X3 to its profit or loss in accordance with the PFRS for SMEs for 20X3
c. A reconciliation of its profit or loss in accordance with its previous financial reporting framework for
20X4 to its profit or loss in accordance with the PFRS for SMEs for 20X4
d. A reconciliation of its equity under its previous financial reporting framework to its equity in accordance
with the PFRS for SMEs at 1 January 20X3

RECONCILIATION

A first-time adopter shall make the following reconciliation in the financial statements:
1. Reconciliation of equity reported under the previous reporting framework to equity under
PFRS for SMEs for both:
a. The transition date.
b. The end of the latest period presented in the entity’s most recent annual financial
statements.
2. Reconciliation of the profit or loss determined in accordance with the previous reporting
framework for the latest period in the entity’s annual financial statements to the profit or loss
determined in accordance with PFRS for SMEs for the same period.

19. An SME that presents the first financial statements that conform to IFRS for SMEs is known
as__________________.

ANSWER: First –time adopter

20. IFRS for SMEs contains exemptions for comparative information and the restatement of the opening
statement of financial position. What is the basis for such exemptions?
a. Cost
b. Impracticability
c. Materiality
d. Relevance

Opening statement of financial position

The opening statement of financial position is the statement of financial position on the date of transition
to PFRS for SMEs.

In the opening statement of financial position, a first-time adopter shall:

a. Recognize all assets and liabilities whose recognition is required by PFRS for SMEs.
b. Not recognize as assets or liabilities if the PFRS for SMEs does not permit such recognition.
c. Reclassify items that it recognized under the previous accounting framework as one type of asset,
liability or component of equity, but a different type of asset, liability or equity under PFRS for SMEs.
d. Apply PFRS for SMEs in measuring all recognized assets and liabilities.

First-time adopters require full retrospective application of PFRS for SMEs effective at the
reporting date for an entity’s first annual financial statements that conform with PFRS for SMEs.

First-time adopter shall recognize those adjustments directly in retained earnings or another
category of equity if appropriate.

21. The reconciliation of equity under the previous reporting framework to the equity under IFRS for SMEs is
made at
a. The date of transition to IFRS for SMEs
b. The end of current reporting period
c. The date of transition to IFRS for SMEs and at the end of the current reporting period.
d. The end of the preceding comparative period

Discussion previously presented in Item No. 18

22. The reconciliation of profit or loss under the previous reporting framework to the profit or loss under IFRS
for SMEs is made at
a. The date of transition to IFRS for SMEs
b. The end of the current reporting period
c. The end of the preceding comparative period
d. No reconciliation of profit or loss is made.

Discussion previously presented in Item No. 18

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QUALITIES & GENERAL FEATURES

23. IFRS for SMEs mentions two fundamental qualitative characteristics of useful financial information -
Relevance and Faithful Representation.

ANSWER: FALSE

Under the Conceptual Framework for Financial Reporting (full PFRS), the fundamental qualitative
characteristics of useful financial information are:

a. Relevance

Ingredient of Relevance
To be relevant, financial information must have:
1. Predictive Value
2. Confirmatory Value

Generally, the relevance of an information is affected by its nature and

materiality.

b. Faithful Representation

Ingredient of Faithful Representation

To be a perfectly faithful representation, the financial information should possess the following
characteristics:
1. Completeness
2. Neutrality
3. Free from error

Moreover, the Conceptual Framework also mentions enhancing qualitative

characteristics that would increase the usefulness of financial information, namely:

1. Understandability
2. Comparability
3. Verifiability
4. Timeliness

On the other hand, according to IFRS for SMEs, the principal qualitative characteristics that
makes the information provided in financial statements of an SME useful to the users include the following:

1. Understandability

Financial information must be comprehensible or intelligible if it is to be most

useful.

Information should be presented in a form and expressed in terminologies that a

user can understand.

2. Relevance

The capacity of financial information to influence economic decision.

3. Materiality

Information is material—and therefore has relevance—if its omission or

misstatement could influence the economic decisions of users made on the basis
of the financial statements. Materiality depends on the size of the item or error
judged in the particular circumstances of its omission or misstatement. However,
it is inappropriate to make, or leave uncorrected, immaterial departures from the
IFRS for SMEs to achieve a particular presentation of an entity’s financial position,
financial performance or cash flows.

4. Reliability

The information provided in financial statements must be reliable.

Reliability is the quality of information that assures users that the information is
free from bias and error, and faithfully represents what it purports to represent.
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5. Substance over form

Transactions and other events and conditions should be accounted for and
presented in accordance with their substance and not merely their legal form. This
enhances the reliability of financial statements.

If there is a conflict between the economic substance of a transaction and its

legal form, the economic substance shall prevail.

*insert example

6. Prudence

Otherwise known as, conservatism.

The uncertainties that inevitably surround many events and circumstances are
acknowledged by the disclosure of their nature and extent and by the exercise of
prudence in the preparation of the financial statements. Prudence is the inclusion of
a degree of caution in the exercise of the judgements needed in making the estimates
required under conditions of uncertainty, such that assets or income are not
overstated and liabilities or expenses are not understated. However, the exercise of
prudence does not allow the deliberate understatement of assets or income, or the
deliberate overstatement of liabilities or expenses. In short, prudence does not
permit bias.

Prudence – is the desire to exercise care and caution when dealing with the
uncertainties in the measurement process such that assets and income are not
overstated, or liabilities and expenses are not understated.

“In case of doubt, record any loss and do not record any gain”

7. Completeness

To be reliable, the information in financial statements must be complete within

the bounds of materiality and cost. An omission can cause information to be false or
misleading and thus unreliable and deficient in terms of its relevance.

8. Comparability

Comparability – the ability to bring together for the purpose of noting points of
likeness and difference.

Users must be able to compare the financial statements of an entity through time to
identify trends in its financial position and performance.

Comparability may be made within an entity or between and across entities.

Comparability within an entity – the quality of information that allows comparisons

within a single entity through time or from one accounting period to the next.

Comparability between and across entities – the quality of information that allows
comparisons between two or more entities engaged in the same industry.

9. Timeliness

Timeliness involves providing the information within the decision time frame.
If there is undue delay in the reporting of information it may lose its relevance.

Management may need to balance the relative merits of timely reporting and the
provision of reliable information. In achieving a balance between relevance and
reliability, the overriding consideration is how best to satisfy the needs of users in
making economic decisions.

10. Balance between benefit and cost

The benefit derived from the information should exceed the cost incurred in obtaining
the information.
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24. A publicly accountable entity is prohibited from making explicit and unreserved statement of compliance
with PFRS for SMEs even if it is required by law to prepare the financial statements in accordance with
PFRS for SMEs.

ANSWER: TRUE

According to Paragraph 1.5, Section 1 of IFRS for SMEs, If a publicly accountable entity uses this
IFRS, its financial statements shall not be described as conforming to the IFRS for SMEs—even if law or
regulation in its jurisdiction permits or requires this IFRS to be used by publicly accountable entities.

STATEMENT OF FINANCIAL POSITION

25. An SME is allowed not to present a statement of comprehensive income and statement of changes in equity
and as an alternative may present a single statement of income and retained earnings if the only
changes to the equity are the result of (a) profit or loss, (b) payment of dividends; (c) prior period errors; (d)
changes in accounting policy; and (e) revaluation surplus.

ANSWER: TRUE

According to PFRS for SMEs, a complete set of financial statement of an SME shall include all of the
following:

1. Statement of financial position.

Financial position - The financial position of an entity is the relationship of its assets, liabilities and
equity as of a specific date as presented in the statement of financial position. These are defined as
follows:

a. An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
b. A liability is a present obligation of the entity arising from past events, the settlement of which
is expected to result in an outflow from the entity of resources embodying economic benefits.
c. Equity is the residual interest in the assets of the entity after deducting all its liabilities.

2. Either a single statement of comprehensive income OR a separate income statement and a

separate statement of comprehensive income.

Performance – is the relationship of the income and expenses of an entity during a reporting period.

Income and expenses are defined as follows:

a. Income is increases in economic benefits during the reporting period in the form of inflows
or enhancements of assets or decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity investors.

Income encompasses both revenue and gains.

a. Revenue is income that arises in the course of the ordinary activities of an entity and
is referred to by a variety of names including sales, fees, interest, dividends, royalties
and rent.
b. Gains are other items that meet the definition of income but are not revenue. When
gains are recognised in the statement of comprehensive income, they are usually
displayed separately because knowledge of them is useful for making economic
decisions.

b. Expenses are decreases in economic benefits during the reporting period in the form of
outflows or depletions of assets or incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to equity investors.

Expenses encompasses losses as well as those expenses that arise in the course of the
ordinary activities of the entity.

a. Expenses that arise in the course of the ordinary activities of the entity include, for
example, cost of sales, wages and depreciation. They usually take the form of an
outflow or depletion of assets such as cash and cash equivalents, inventory, or
property, plant and equipment.
b. Losses are other items that meet the definition of expenses and may arise in the
course of the ordinary activities of the entity. When losses are recognised in the
statement of comprehensive income, they are usually presented separately because
knowledge of them is useful for making economic decisions.
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However, a single statement of income and retained earnings can be presented by an SME instead of a
statement of comprehensive income and statement of changes in equity if the only changes to the equity
are the result of the following:
1. Profit or loss
2. Payment of dividends
3. Prior period errors
4. Changes in accounting policy

3. Statement of changes in equity

4. Statement of cash flows
5. Notes, comprising a summary of significant accounting policies and other explanatory
information.

26. PFRS for SMEs does not require the presentation of (a) Total of assets classified as held for sale and (b)
Total of liabilities included in disposal group classified as held for sale.

ANSWER: TRUE

Full PFRS and PFRS for SMEs requires practically the same line items to be presented
on the face of the statement of financial position.

HOWEVER,

“Under PFRS 5, presentation of Non-current assets held for sale and discontinued
operations, an entity shall classify a non-current asset (or disposal group) as held for sale if its
carrying amount will be recovered principally through a sale transaction rather than through
continuing use.”

And,

Total of liabilities included in disposal group classified as held for sale.

IS REQUIRED. BUT NOT UNDER PFRS FOR SMEs.

27. Presentation of investment in joint ventures is required under PFRS for SMEs but not under full PFRS.

ANSWER: TRUE

Full PFRS requires presentation of Investment in Associate but not Investment in Joint Ventures
while PFRS for SMEs requires the presentation of both line item/accounts.

28. All of the following are considered line items in the statement of financial position of an SME, except
a. Provisions
b. Noncontrolling interest
c. Equity attributable to the owners of parent
d. Revaluation surplus

For the following 3 items:

An SME provided the following on December 31, 2016:
Cash 50,000
Accounts receivable 1,060,000
Prepayments 120,000
Inventories 120,000
Investment in associate 220,000
Property, plant and equipment 6,500,000
Accumulated depreciation and
1,400,000
impairment
Software- net of amortization and
20,000
impairment
Deferred tax asset 10,000
Bank overdraft 160,000
Bank loan, fully payable in 2018 and
100,000
repayable without penalty
Trade payables 860,000
Interest payable 4,000
Current tax liability 540,000
Provision for warranty 8,000
Employee benefit obligation, current
20,000
portion P8,000
Finance lease liability, current portion,
88,000
P40,000
Share capital 60,000
Retained earnings 4,860,000
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29. What is the total amount of current assets?

Cash 50,000
Accounts receivable 1,060,000
Prepayments 120,000
Inventories 120,000
Total 1,350,000

30. What is the total amount of current liabilities?

Bank overdraft 160,000

Trade payables 860,000
Interest payable 4,000
Current tax liability 540,000
Provision for warranty 8,000
Employee benefit obligation, current
8,000
portion P8,000 = 20,000
Finance lease liability, current portion,
40,000
P40,000 = 88,000
Total 1,620,000

31. What is the total shareholders’ equity?

Share capital 60,000

Retained earnings 4,860,000
Total 4,920,000

STATEMENT OF COMPREHENSIVE INCOME/CHANGES IN EQUITY/CASH FLOWS

32. PFRS for SMEs considers actuarial gain or loss on projected benefit obligation as a component of other
comprehensive income (OCI) and the company may elect to present it either as component of OCI or as
component of profit or loss.

ANSWER: TRUE

COMPONENTS OF OTHER COMPREHENSIVE INCOME (OCI)

PAS 1 PFRS for SMEs
a. Changes in Revaluation Surplus a. Changes in Revaluation Surplus
b. Unrealized gain and losses on changes in b. Some actuarial gains and losses
fair values of c. Some gains and losses arising from
-investment in equity instruments translating the financial statements of
designated as FVTOCI (irrevocable election) a foreign operation
-Investment in debt instruments measured d. Some changes in fair values of
at fair value through OCI hedging instruments
c. Remeasurement of the net defined benefit
liability (asset) The first three (3) items cannot be reclassified
d. Gains and losses arising from translating to profit or loss
the financial statement of a foreign
operation
e. Effective portion of gains and losses in
hedging instruments in a cash flow hedge
f. Changes in fair value of a financial liability
designated as FVTPL that are attributable to
changes in credit risk
g. Changes in the time value of option when
the option’s intrinsic value and time value
are separated and only the changes in the
intrinsic value is designated as hedging
instrument
h. Changes in the fair value of the forward
elements of forward contracts when
separating the forward element …..

33. Which of the following gain and loss should be recognized in OCI of an SME?
a. Gain and loss from discontinued operations
b. Gain and loss arising on translating the financial statements of a foreign operation
c. Gain on remeasuring equity investments at FVOCI
d. Extraordinary gain and loss
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34. Which is not considered as Other Comprehensive Income for SMEs?

a. Some actuarial gains and losses
b. Some gains and losses on available-for-sale securities
c. Some foreign exchange translation gains and losses
d. Some changes in fair values of hedging instruments

35. Which gain and loss can an SME elect to recognize in OCI or in profit or loss?
a. Revaluation surplus of PPE
b. Gain and loss arising on translating the financial statements of a foreign operation
c. Actuarial gain and loss of defined benefit plan
d. Gain and loss on hedging instrument

NOTES TO FINANCIAL STATEMENTS/RELATED PARTIES/EVENTS AFTER THE REPORTING PERIODS

36. An SME is required to present the following in the notes:

a. Segment information;
b. Earnings per share; and
c. Interim financial reports.

ANSWER: FALSE

Under PFRS for SMEs, an SME is not required to present the following in the notes:
a. Segment information;
b. Earnings per share; and
c. Interim financial reports.

Such disclosures are normally for entities with public accountability

ACCOUNTING CHANGES

37. Which of the following statements is correct?

a. Changes in accounting policy are always handled in the current or prospective period.
b. Prior years’ statements should be restated for changes in accounting estimate.
c. A change from expensing certain costs to capitalizing these costs due to a change in the period
benefited should be handled as a change in accounting estimate.
d. Correction of a prior period error should be an adjustment to current year net income.

INVENTORIES AND REVENUE

38. Under PFRS for SMEs, if the selling price less cost to complete and sell is lower than cost of inventory, the
writedown is recognized
a. As an impairment loss
b. An component of cost of goods sold
c. As an impairment loss or component of cost of goods sold
d. Directly in retained earnings

Full PFRS and PFRS for SMEs practically have the same provisions related to Inventory’s
definition, measurement, costs of purchase, costs of conversions, other costs and cost formulas
for inventory.

An SME shall measure inventories at the lower of cost and estimated selling price less cost to complete
and dispose.

If the estimated selling price less cost to complete and dispose is lower than cost, the inventory is deemed
impaired. Impairment loss shall be recognized accordingly.

39. Revenue from sale of goods shall be recognized when all of the following conditions have been satisfied,
except
a. The entity has transferred to the buyer the significant risks and rewards of ownership of the goods.
b. The entity retains either continuing managerial involvement or effective control over the goods sold.
c. The amount of revenue can be measured reliably.
d. It is probable that economic benefits will flow to the entity.

BASIC FINANCIAL INSTRUMENTS

40. To be classified as basic financial instrument, the investment in ordinary shares must be nonputtable.

ANSWER: TRUE

A financial instrument is a contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity
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Section 11 applies to all financial instruments meeting the conditions of paragraph 11.8 except for
the following:

(a) investments in subsidiaries, associates and joint ventures that are accounted for in accordance with
Section 9 Consolidated and Separate Financial Statements, Section 14 Investments in Associates or
Section 15 Investments in Joint Ventures.

(b) financial instruments that meet the definition of an entity’s own equity (see Section 22 Liabilities and
Equity and Section 26 Share-based Payment).

(c) leases, to which Section 20 Leases applies. However, the derecognition requirements in paragraphs
11.33–11.38 apply to derecognition of lease receivables recognised by a lessor and lease payables
recognised by a lessee. Also, Section 12 may apply to leases with characteristics specified in paragraph
12.3(f).

(d) employers’ rights and obligations under employee benefit plans, to which Section 28 Employee Benefits
applies.

An entity shall account for the following financial instruments as basic financial instruments
a. cash.
b. a debt instrument (such as an account, note, or loan receivable or payable) that meets the
conditions in paragraph 11.9.
c. a commitment to receive a loan that:
(i) cannot be settled net in cash, and
(ii) when the commitment is executed, is expected to meet the conditions in paragraph
11.9.
d. an investment in non-convertible preference shares and non-puttable ordinary shares or
preference shares.

A debt instrument that satisfies all of the conditions in (a)–(d) below shall be accounted for in
accordance with Section 11:
a. Returns to the holder are
(i) a fixed amount;
(ii) a fixed rate of return over the life of the instrument;
(iii) a variable return that, throughout the life of the instrument, is equal to a single
referenced quoted or observable interest rate (such as LIBOR); or
(iv) some combination of such fixed rate and variable rates (such as LIBOR plus 200
basis points), provided that both the fixed and variable rates are positive (eg an
interest rate swap with a positive fixed rate and negative variable rate would not meet
this criterion). For fixed and variable rate interest returns, interest is calculated by
multiplying the rate for the applicable period by the principal amount outstanding
during the period.
b. There is no contractual provision that could, by its terms, result in the holder losing
the principal amount or any interest attributable to the current period or prior periods.
The fact that a debt instrument is subordinated to other debt instruments is not an
example of such a contractual provision.
c. (Contractual provisions that permit the issuer (the debtor) to prepay a debt instrument
or permit the holder (the creditor) to put it back to the issuer before maturity are not
contingent on future events.
d. There are no conditional returns or repayment provisions except for the variable rate
return described in (a) and prepayment provisions described in (c).

Examples of financial instruments that would normally satisfy the conditions in paragraph 11.9
are:
a. trade accounts and notes receivable and payable, and loans from banks or other third
parties.
b. accounts payable in a foreign currency. However, any change in the account payable
because of a change in in the exchange rate is recognised in profit or loss.
c. loans to or from subsidiaries or associates that are due on demand.
d. a debt instrument that would become immediately receivable if the issuer defaults on an
interest or principal payment (such a provision does not violate the conditions in
paragraph 11.9).

41. To be classified as basic financial instrument, the investment in preference shares must be non-
convertible and nonputtable.

ANSWER: TRUE

To be classified as basic financial instrument, the investment in ordinary shares must be nonputtable
To be classified as basic financial instrument, the investment in preference share must be non-convertible
and non-puttable.

A puttable financial instrument - a financial instrument that gives the holder the right to sell the
instrument back to the issuer for cash;
 Page 12 of 17

A financial instrument that is automatically redeemed or purchased by the issuer on the occurrence
of an uncertain future event or upon the death of the holder.

42. To be classified as basic financial instrument, the investment in debt instrument must assure the holder or
creditor of a payment of the fixed amount of principal and fixed amount of interest without any conditions.

ANSWER: TRUE

43. Derivative contracts are not basic financial instrument.

ANSWER: TRUE

PFRS for SMEs specifically mentions that the following financial instruments do not normally qualify as
basic financial instrument:

1. Asset backed securities, such collateralized mortgage obligations, repurchase agreement

and securitized packages of receivable.
2. Derivative contracts – interest rate swap, forward contract, futures contract, options
3. Hedging instruments
4. Commitment to make loan to another entity
5. Commitment to receive a loan if the commitment can be net settled in cash

44. All of the following are considered basic financial instruments, except
a. Demand and fixed-term deposit
b. Option and forward contract
c. Loan from subsidiary due on demand
d. A debt instrument that becomes payable on demand if the issuer defaults on interest or principal
payment.

45. It is a financial instrument that gives the holder the right to sell the instrument back to the issuer or is
automatically redeemed or purchased by the issuer on the occurrence of a future uncertain
event.______________.

ANSWER: Puttable instruments

46. All of the following financial assets are basic financial instruments, except
a. Cash
b. Accounts receivable
c. A passive interest in the nonputtable ordinary shares of another entity
d. An interest in the nonputtable ordinary shares where the investee is classified as an associate of the
entity.

47. All of the following are basic financial instruments, except

a. Investment in non-convertible and nonputtable preference shares
b. Financial instruments that meets the definition of an entity’s own equity.
c. A fixed-interest fixed-term loan from a bank.
d. Investment in nonputtable ordinary shares.

48. All of the following are considered basic financial instruments, except
a. Accounts payable in foreign currency
b. Loan from associate due on demand
c. Investment in convertible debt
d. A debt instrument with a fixed rate of return.

49. Which of the following statements reflects the accounting for financial instruments under IFRS for SMEs?
a. All financial instruments must be measured at fair value.
b. Reversal of an impairment loss is not allowed.
c. All amortized cost instruments must be tested for impairment.
d. All financial instruments must be measured at amortized cost.

PFRS for SMEs provides that basic financial instruments are initially measured at the transaction price
including transaction costs.

However, if the instrument is measured at fair value through profit or loss, the transaction costs are
expensed immediately.

INVESTMENT IN ASSOCIATE

50. An SME exercising significant influence over another entity shall account its interest using equity method.

ANSWER: FALSE
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An associate is an entity, including an unincorporated entity such as a partnership, over

which the investor has significant influence and that is neither a subsidiary nor an interest
in a joint venture.

Significant influence is the power to participate in the financial and operating policy
decisions of the associate but is not control or joint control over those policies.

(a) If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or more
of the voting power of the associate, it is presumed that the investor has significant
influence, unless it can be clearly demonstrated that this is not the case.
(b) Conversely, if the investor holds, directly or indirectly (eg through subsidiaries), less
than 20 per cent of the voting power of the associate, it is presumed that the investor
does not have significant influence, unless such influence can be clearly demonstrated.
(c) A substantial or majority ownership by another investor does not preclude an investor
from having
significant influence.

The significant difference between full PFRS and PFRS for SMEs lies in the Measurement
of Investment in associate.

Under full PFRS, the investor has no accounting policy choice, the investment in associates shall
be accounted for using the equity method only.

Under PFRS for SMEs, all of its investments in associates using one of the cost model, the equity
method and the fair value model.

An investor shall account for all of its investments in associates using one of the following:

(a) the cost model.

 Initially measured at transaction price including transaction costs
 Subsequently measure the investment in associate at cost less any
accumulated impairment loss.
However, cost model is not permitted if the investment in
associate has a public price quotation, otherwise, FAIR VALUE
MODEL shall be used.

Under the FAIR VALUE MODEL, an investment in an associate

is recognised initially, an investor shall measure it at the
transaction price. Transaction price excludes transaction costs

At each reporting date, the investment is measured at fair value

with changes in fair value recognized in profit or loss. (gain or
loss from increase/decrease in fair value)

Take note that the cost of disposal when fair value model is used
in measuring the cost of investment.

 All dividends and other distributions received are recognized as income in

without regard.

(b) the equity method.

Under the equity method of accounting, an equity investment is initially

recognised at the transaction price (including transaction costs) and is
subsequently adjusted to reflect the investor’s share of the profit or loss and other
comprehensive income of the associate.

Dividends and other distributions received from the associate are recognized as
reduction in of the carrying amount of the investment.

Subsequently tested for impairment.

For the following 3 items:

On January 1, 2016, SME acquired 25% of the equity of each of entities B, C, and D for P1,000,000, P1,500,000
and P2,800,000, respectively.

Transaction costs of 1% of the purchase price were incurred by SME.

On January 2, 2016 Entity B declared and paid dividend of P100,000.

On December 31, 2016, Entity C declared and paid dividend of P800,000.

 Page 14 of 17

For the year ended December 31, 2016, entities B and C recognized profit respectively of P500,000 and
P1,800,000.

However, entity D recognized a loss of P2,000,000.

Published price quotations do not exist for the shares of entities B, C, and D.

Using appropriate valuation techniques SME determined the fair value of the investments in Entities B, C, and
D on December 31, 2016 at P1,300,000, P2,900,000 and P1,500,000, respectively.

Costs of disposal are estimated at 5% of the fair value of the investments.

51. What is the balance of SME’s investment in associate at the end of the current year using cost model?

Iniatially measured at cost plus transaction costs:

Particulars Entity B Entity C Entity D

Initial Measurement 1,000,000 1,500,000 2,800,000
Transaction Cost 10,000 15,000 28,000
Total 1,010,000 1,515,000 2,828,000

Total investment in associate: P5,353,000

All dividends and other distributions received are recognized as income in without regard.

Particulars Entity B Entity C Entity D

Initial Measurement 1,300,000 2,900,000 1,500,000
Transaction Cost 65,000 145,000 75,000
Total 1,235,000 2,755,000 1,425,000

Total fair value: P5,130,000

Therefore, the investment is impaired.

Impairment loss 223, 000

Accumulated impairment loss 223,000

52. What is the balance of SME’s investment in associate at the end of the current year using equity method?

Particulars Entity B Entity C Entity D

Initial Measurement 1,000,000 1,500,000 2,800,000
Total 1,000,000 1,500,000 2,800,000

Particulars Entity B Entity C Entity D

Initial Measurement 1,000,000 1,500,000 2,800,000
Payment of dividend (25,000) (200,000)
Profit 125,000 450,000 (500,000)
Total 1,100,000 1,750,000 2,300,000

TOTAL: P5,150,000

53. What is the balance of SME’s investment in associate at the end of the current year using fair value model?
Fair Value Model is not applicable for this type of investment.

INVESTMENT PROPERTY

54. If an SME can measure the fair value of a property interest held under an operating lease that meets the
definition of investment property, the entity may elect to classify its leasehold interest as investment
property.

ANSWER: TRUE

55. Borrowing costs directly attributable to the construction of an investment property shall be recognized as
expense when incurred.

ANSWER: TRUE

56. As a rule, PFRS for SMEs requires measurement of investment property at fair value without undue cost
or effort on an on-going basis at reporting periods.

ANSWER: TRUE
 Page 15 of 17

57. When an entity elects the cost model of measuring investment property, it is required to present it in the
statement of financial position as a separate line item.

ANSWER: TRUE

58. On January 1, 2016, an SME acquired property consisting of ten identical freehold detached houses each
with separate legal title including the land on which it is built for P200,000,000, 20% of which is attributable
to the land. The units have a useful life of 50 years. The following costs are also incurred on such date:

Nonrefundable transfer taxes

not included in the purchase 20,000,000
price
Legal cost directly attributable
1,000,000
to the acquisition
Reimbursement to the previous
owner for prepaying
nonrefundable property taxes 10,000
for the six-month period ending
June 30, 2016
Advertising campaign 500,000
Opening function to celebrate
200,000
new rental business

On June 30, 2016, SME paid local property taxes of P20,000 for the year ending June 30, 2017.

Throughout 2016, SME incurred repairs and maintenance of P120,000.

SME used one of the ten units to accommodate the administration and maintenance staff.

The other nine units were rented out to independent parties under operating leases.

Refundable deposits held by SME on December 31, 2016 totaled P270,000. Rent received in the year
ended December 31, 2016 totaled P1,550,000 of which P50,000 related to January 2017.

On December 31, 2016, the fair value of each unit was reliably estimated at P25,000,000.

The fair value of the units can be measured reliably estimated at P25,000,000.

The fair value of the units can be measured reliably on an ongoing basis without undue cost or effort.

59. What is the initial cost of the investment property?

60. What is the carrying amount of the investment property on December 31, 2016?
61. What is the gain or (loss) on fair value changes in 2016?
62. What is the carrying amount of PPE?
63. What is the depreciation expense in 2016?

PROPERTY, PLANT & EQUIPMENT

64. PFRS for SMEs allows the use of revaluation model in measuring PPE.

ANSWER: TRUE

65. PFRS for SMEs allows separate presentation of PPE held for sale in the statement of financial position.

ANSWER: FALSE

GOVERNMENT GRANT/ BORROWING COST

66. Under PFRS for SMEs, a government grant is recognized when the conditions are actually satisfied.

ANSWER: TRUE

67. PFRS for SMEs does not allow an entity to match grant with the expense for which it is intended to
compensate or the cost of the asset that it is used to finance.

ANSWER: TRUE

68. Under PFRS for SMEs, a grant related to asset may be treated either as deferred income or as a reduction
in the carrying amount of the asset.
 Page 16 of 17

ANSWER: FALSE

69. At SME’s option, borrowing costs may be capitalized so long as it related to a qualifying asset and such
fact is disclosed in the notes.

ANSWER: FALSE

70. An SME shall capitalize all of the following as cost of PPE, except
a. Transport cost
b. Loan raising cost
c. Installation cost
d. Nonrefundable purchase tax

71. Which of the following is a disclosure requirement in relation to borrowing cost under IFRS for SMEs?
a. Borrowing cost capitalized during the period
b. Segregation of qualifying asset from other assets
c. Capitalization rate for borrowing cost capitalization
d. Total finance cost recognized as expense

INTANGIBLE ASSETS

72. Under PFRS for SMEs, an expenditure item under development stage may qualify for recognition as
intangible asset when the strict criteria for capitalization are met.

ANSWER: FALSE

73. An SME is only allowed to apply revaluation model in accounting for intangible assets.

ANSWER: FALSE

74. Under PFRS for SMEs, an intangible’s useful life (including goodwill) shall in no case exceed 10 years.

ANSWER: FALSE

IMPAIRMENT OF ASSETS

75. Goodwill, under PFRS for SMEs, requires impairment testing only when there is an indication that the
asset is impaired.

ANSWER: TRUE

76. Intangibles assets, under PFRS for SMEs, require impairment testing only when there is an indication that
the asset is impaired.

ANSWER: TRUE

PROVISIONS AND CONTINGENCIES

No questions here!

LEASES

No questions here!

EMPLOYEE BENEFITS

77. Under PFRS for SMEs, past service costs are recognized as expense over the vesting period.

ANSWER: FALSE

78. Under PFRS for SMEs, actuarial gains and losses may be recognized either as a component of profit or
loss; or as a component of OCI and is not subsequently recycled to profit or loss but transferred directly to
retained earnings.

ANSWER: TRUE
 Page 17 of 17

79. Under PFRS for SMEs, projected unit credit method shall be used in measuring defined benefit liability
so long as information that is needed to make such calculation is already available or can be obtained
without undue cost or effort.

ANSWER: TRUE

80. Under PFRS for SMEs, changes in fair value of plan assets are recognized in profit or loss.

ANSWER: TRUE

INCOME TAX

No questions here!

EQUITY

No questions here!

NOTHING FOLLOWS