6.2 PFRS for SMEs, PFRS for Small Entities, and Micro Entities
Key Takeaways
Under Revised SRC Rule 68, entities with total assets above PHP 350 million or liabilities above PHP 250 million, or with public accountability, apply full PFRS.
Medium-sized entities (assets of PHP 100-350 million or liabilities of PHP 100-250 million) apply PFRS for SMEs, which amortizes goodwill (10 years if unreliable) and expenses all borrowing and development costs.
Small entities with assets or liabilities above PHP 3 million up to PHP 100 million apply PFRS for Small Entities, effective for annual periods beginning on or after January 1, 2019.
PFRS for Small Entities has no finance lease concept, allows cost or fair value for investment property, uses an RA 7641 accrual approach for retirement benefits, and permits not recognizing deferred taxes.
Micro entities (assets or liabilities at or below PHP 3 million) may use the income tax basis or PFRS for Small Entities.
PFRS for SMEs, PFRS for Small Entities, and Micro Entities
The last FAR topic (five items) asks when each Philippine reporting framework applies and how its salient rules differ from full PFRS. This section sets out the Revised SRC Rule 68 size tiers, the main PFRS for SMEs differences examiners test, the simplifications in PFRS for Small Entities, and the income tax basis available to micro entities.
1. Which Framework Applies: The SRC Rule 68 Tiers
The Securities and Exchange Commission (SEC) prescribes which financial reporting framework a corporation uses through Revised SRC Rule 68, as amended (including SEC Memorandum Circular No. 5, s. 2018 and SEC Memorandum Circular No. 4, s. 2026, which raised the audit threshold).
The Philippine Financial Reporting Tiers
| Category | Size Criteria | Framework |
|---|---|---|
| Large and/or publicly accountable entities | Total assets above PHP 350 million or total liabilities above PHP 250 million; or entities required to file under Part II of the Rule (such as issuers of registered securities and public companies), entities in the process of issuing instruments in a public market, and holders of secondary licenses | Full PFRS |
| Medium-sized entities | Total assets of PHP 100 million to PHP 350 million or total liabilities of PHP 100 million to PHP 250 million, with none of the public-accountability features | PFRS for SMEs (full PFRS is permitted only in the cases the Rule lists, for example a subsidiary of a parent that reports under full PFRS) |
| Small entities | Total assets or total liabilities above PHP 3 million but not above PHP 100 million | PFRS for Small Entities |
| Micro entities | Total assets or total liabilities at or below PHP 3 million | Choice of the income tax basis or PFRS for Small Entities |
For fiscal years ending on or after December 31, 2025, SEC Memorandum Circular No. 4, s. 2026 raised the threshold for requiring audited financial statements of stock and nonstock corporations (including one person corporations) to total assets or total liabilities above PHP 3 million. The exemption does not cover Group A, B, and C corporations under Revised SRC Rule 68 or other entities vested with public interest. Micro entities still submit financial statements that include at least a Statement of Management's Responsibility, a statement of financial position, an income statement, and notes.
Pivotal Divergences: PFRS for SMEs vs. Full PFRS
For CPALE candidates, the following distinctions between PFRS for SMEs and Full PFRS are frequently examined:
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Goodwill:
- Full PFRS (PFRS 3 / PAS 36): Goodwill is never amortized. It must be tested for impairment annually at the cash-generating unit level.
- PFRS for SMEs (Section 19): Goodwill is amortized over its estimated useful life. If the entity is unable to make a reliable estimate of useful life, the life is presumed to be 10 years.
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Borrowing Costs (PAS 23 vs. Section 25):
- Full PFRS: Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset must be capitalized as part of asset cost.
- PFRS for SMEs: All borrowing costs are expensed immediately in profit or loss when incurred. Capitalization is strictly prohibited.
-
Research and Development Costs (PAS 38 vs. Section 18):
- Full PFRS: Research is expensed; development costs must be capitalized as intangible assets once technical and commercial feasibility criteria are satisfied.
- PFRS for SMEs: All research and development costs are expensed immediately in profit or loss as incurred. Capitalization of internally generated intangibles is prohibited.
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Leases (PFRS 16 vs. Section 20):
- Full PFRS: Single on-balance sheet model for lessees (ROU asset and lease liability recognized for all non-exempt leases).
- PFRS for SMEs: Retains the older distinction between finance leases and operating leases. Operating leases remain off-balance sheet, with rental payments expensed straight-line.
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Investment Property (PAS 40 vs. Section 16):
- Full PFRS: Accounting policy choice between cost model and fair value model for all investment property.
- PFRS for SMEs: Investment property whose fair value can be measured reliably without undue cost or effort must be measured at fair value through profit or loss. If fair value cannot be measured reliably without undue cost or effort, the cost-depreciation-impairment model must be applied.
2. PFRS for Small Entities and Reporting by Micro Entities
The FRSC approved PFRS for Small Entities (PFRS for SEs) on December 13, 2017, effective for annual periods beginning on or after January 1, 2019, because small entities found PFRS for SMEs too complex. Its preface lists the key simplifications:
| Area | PFRS for Small Entities Treatment |
|---|---|
| Inventories | Subsequently measured at the lower of cost and market value (the probable selling price to willing buyers at the reporting date) |
| Investment property | Policy choice of cost or fair value |
| Leases | No "finance lease" concept: all lease payments or receipts are recognized as expense or income as incurred or earned |
| Onerous contracts | No accounting for onerous contracts |
| Equity-settled share-based payment | Measured by reference to the net asset value of the equity instruments granted (total assets less liabilities divided by shares outstanding) |
| Defined benefit plans | Accrual approach under RA 7641 (the Retirement Pay Law) or company policy, using current salaries and years of service without projecting future salary increases |
| Deferred taxes | Policy choice not to recognize deferred taxes |
| Biological assets | Policy choice of cost or current market price |
| Prior period adjustments | Captured in the opening balance of the current year, with disclosure |
Micro entities may instead use the income tax basis, in which financial statements follow the recognition rules used for filing income tax returns (for example, expenses recognized when deductible), with the minimum statements required by the SEC.
Note
The FSRSC adopted the third edition of PFRS for SMEs on May 16, 2025, effective for annual periods beginning on or after January 1, 2027 (early application permitted). Candidates sitting in 2026 study the 2015 edition described above, but should know the new edition is coming (it adds, among others, a PFRS 15-style revenue model and fair value measurement guidance).
Mindoro Agro-Industrial Corporation has total assets of PHP 180,000,000 and total liabilities of PHP 90,000,000. It is a non-publicly accountable private entity. Under Philippine SEC Revised SRC Rule 68 and PFRS for SMEs, which of the following statements correctly identifies Mindoro's prescribed reporting framework and its required accounting treatments for goodwill and borrowing costs?
Mindoro is a Small Entity; it must capitalize qualifying borrowing costs and test goodwill annually for impairment without amortization
Mindoro is an SME; it must apply Full PFRS, amortize goodwill over 10 years, and expense all borrowing costs
Mindoro is a Large Entity; it must apply Full PFRS, capitalize borrowing costs on qualifying assets, and never amortize goodwill
Mindoro is a Medium-Sized Entity (SME); it may apply PFRS for SMEs, under which goodwill is amortized over its useful life (presumed 10 years if unestimable) and all borrowing costs are expensed immediately
A small entity applying PFRS for Small Entities leases a delivery van under a three-year non-cancellable lease. How does it account for the lease?
It recognizes a right-of-use asset and a lease liability, as under PFRS 16.
It must apply the finance lease model of PFRS for SMEs Section 20.
It capitalizes the van only if the lease term exceeds 75% of the van's useful life.
It recognizes the lease payments as expense as incurred, because PFRS for Small Entities has no finance lease concept.
Sections you finish are checked off in the contents.