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Corporate regulator eases financial reporting rules for small businesses

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Teresita J. Herbosa
‘The changes in effect made easier and (simpler) the reporting of small enterprises.’ -- Securities and Exchange Commission Chairperson Teresita J. Herbosa

THE SECURITIES and Exchange Commission (SEC) has eased financial reporting requirements for small businesses as part of a continuing government effort to facilitate entrepreneurship.

“The Commission, in its meeting held on 22 March 2018, approved the adoption of the Philippine Financial Reporting Standards (PFRS) for Small Entities as part of SEC’s rules and regulations on financial reporting,” according to SEC Memorandum Circular No. 5, series of 2018, dated March 26, that was published in a newspaper on Thursday last week and posted on the regulator’s website.

Adoption of the PFRS for Small Entities, in turn, prompted revision of Section 2 of Securities Regulation Code (SRC) Rule 68, or the general guide to financial statement preparation.

Prior to the release of the new guidelines, the SEC had required small and medium enterprises (SMEs) to observe uniform financial reporting standards that simplified the principles in the full PFRS for recognizing assets, liabilities, income and expenses.

“The changes in effect made easier and (simpler) the reporting of small enterprises,” SEC Chairperson Teresita J. Herbosa said in a mobile phone message when sought for explanation, citing SEC General Accountant Emmanuel Y. Artiza.

“The Financial Reporting Standards Council came out with said framework as one of ease-of-doing-business initiative as recommended by the Association of (Certified Public Accountants) in Public Practice.”

The new framework this time distinguished medium-sized entities as those with total assets of more than P100 million to P350 million or total liabilities of more than P100 million to P250 million.

The PFRS for Small Entities will now apply to businesses with total assets or liabilities of P3 million to P100 million, that are required to file financial statements under Part 2 of SRC Rule 68, are not in the process of filing their financial statements for the purpose of issuing any class of instruments to the public and are not holders of secondary licenses.

The new rules will not apply to small businesses which have operations or investments that are based or conducted in another country. These should instead use the full PFRS or PFRS for SMEs.

The circular also exempted from mandatory adoption of the PFRS for Small Entities those small businesses that are subsidiaries of a parent company reporting under the full PFRS or PFRs for SMEs, are subsidiaries of a foreign parent moving towards International Financial Reporting Standards (IFRS) or IFRS for SMEs, and joint ventures of associates that form part of a group reporting under the full PFRS or PFRS for SMEs, among others.

Should a small business breach the prescribed threshold in terms of total assets or total liabilities and thus fall under a different classification, its annual financial statement should be prepared based on the higher framework, the circular read.

The SEC may consider other cases as valid exceptions from the mandatory adoption of PFRS for Small Entities.

“If a small entity that uses the PFRS for Small Entities in a current year breaches the floor or ceiling of the size criteria at the end of that current year, and the event that caused the change is considered ‘significant and continuing,’ the entity shall transition to the applicable financial reporting framework in the next accounting period,” according to the circular.

If such event is not considered “significant and continuing,” the entity can continue to use the same financial reporting framework it currently uses, according to the circular.

Management will determine what is “significant and continuing” based on the relevant qualitative and quantitative factors; but in general, a fourth or more of the consolidated total assets is considered significant.

The SEC requires entities meeting the prescribed criteria to apply the PFRS for Small Entities for the annual period beginning on or after Jan. 1, 2019, although the regulator will allow early application of the new reporting rules. — Krista Angela M. Montealegre