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.
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
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 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 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.
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.
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.
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 1,060,00
0
Prepayments 120,000
Inventories 120,000
Investment in associate 220,000 Property, plant and equipment 6,500,00 0 Accumulated depreciation and
impairment 1,400,00
0 Software- net of amortization
and impairment 20,000
Deferred tax asset 10,000
Bank overdraft 160,000
Bank loan, fully payable in 2018
and repayable without penalty 100,000
Trade payables 860,000
Interest payable 4,000
Current tax liability 540,000
Provision for warranty 8,000
Employee benefit obligation,
current portion P8,000 20,000 Finance lease liability, current
portion, P40,000 88,000
Share capital 60,000
Retained earnings 4,860,00
0 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
portion P8,000 = 20,000 8,000
Finance lease liability, current portion,
P40,000 = 88,000 40,000
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 b. Unrealized gain and losses on
changes in fair values of
-investment in equity instruments designated as FVTOCI (irrevocable election)
-Investment in debt instruments measured at fair value through OCI c. Remeasurement of the net defined
benefit liability (asset)
d. Gains and losses arising from translating 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 …..
a. Changes in Revaluation Surplus b. Some actuarial gains and losses c. Some gains and losses arising
from translating the financial statements of a foreign operation
d. Some changes in fair values of hedging instruments
The first three (3) items cannot be reclassified to profit or loss
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
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
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;
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
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.
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
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 price
20,000,0 00 Legal cost directly
attributable to the acquisition
1,000,00 0 Reimbursement to the
previous owner for prepaying nonrefundable property taxes for the six- month period ending June 30, 2016
10,000
Advertising campaign 500,000 Opening function to
celebrate new rental business
200,000
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.
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
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
