Three is not a crowd



Among the top priorities of the Philippines’ current administration is to improve the ‘ease of doing business’ in the Philippines. We expect the national government and its local units to work together to improve and expedite business registration processes. With this objective in mind, some government units have started working to reduce the average time spent on processing business permits. Soon enough, we also expect the enhancement of fiscal and non-fiscal incentives.

We have noticed some enhancements lately. In the near future, we also need somebody to attend to growing concerns by micro and small-to-medium enterprises (MSMEs). One of their major concerns is the requirement by both the Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue for companies—big or small—to file their financial statements every year. Regardless of whether they are publicly listed, non-listed, or are foundations, all business entities in the country are required to file independently audited financial statements. Relaxing this requirement now may be a challenge because (1) it may involve amending our current laws, which would take time, and (2) our country may not be ready yet for it – it may still be for the good of our people to just have someone look into the dealings of operating entities, given recent accounts of unlawful operations of certain foundations, and some fraudulent transactions.

If we cannot immediately change our existing laws, we can at least look into introducing some changes on how companies are required to report. What MSMEs find difficult to do is to comply fully with the existing financial reporting standards in the Philippines. We currently have the Philippine Financial Reporting Standards (PFRS) for large companies and the Philippine Financial Reporting Standards for Small and Medium-sized Entities (PFRS for SMEs), which are both significantly similar to international reporting standards due to our country’s direct adoption of the equivalent international standards. While we currently have PFRS for SMEs, which could be useful for MSMEs, compliance with its accounting and disclosure requirements still appears to be cumbersome for most MSMEs.

External auditors, or those in public practice, are fully aware of this difficulty the MSMEs face as we deal with this problem on an annual basis. Recognizing the situation, the Association of Certified Public Accountants in Public Practice (ACPAPP) has initiated the drafting of a Proposed Third Financial Reporting Framework in the Philippines (Proposed Framework), which should simplify financial accounting and disclosure requirements for the MSMEs. The simplification is focused on providing options for MSMEs, limiting the need to use fair values and avoiding the application of estimates and judgments. ACPAPP’s past president and my colleague in the firm, Che Javier, noted some new provisions of the Proposed Framework in her article (also for this column) last month. And I have included additional interesting changes introduced by the Proposed Framework here:
Leases – All contracts will be treated as operating lease, and rental expense/income will be recognized when incurred/earned. There is no requirement to do straight-lining of total rent expense/income.

Pension – The recognition of pension liability will follow the accrual method, which calculates the liability based on the current salary of the entitled employee, service period, and the minimum entitlements required by the Philippine retirement law. The concept of projected unit cost method was removed.

Taxes – Provided option not to recognize deferred taxes and follow taxes payable method approach, which is a mere calculation of current tax payable with all accounting and tax variances considered as permanent differences.

Estimates and judgments – The requirement to provide disclosures about management estimates and judgment, including information on sensitivity analysis, becomes unnecessary.

Consolidation – Provided an option not to consolidate and just equity account investment in subsidiaries.
Restatements and reclassifications – Removed the requirement to restate comparative year of the financial statements in cases of restatements and reclassifications. Impact of restatements or reclassifications will be charged to beginning retained earnings of the current year financials.

For the simplified accounting treatments introduced, certain disclosure requirements apply but are considered very minimal compared with the existing requirements of PFRS and PFRS for SMEs. The proposed effective date of this new standard is January 1, 2018, with the option to adopt earlier.

We are not the only country looking at the possibility of having a third financial reporting framework. A number of other countries are now considering developing a third simplified framework for MSMEs, while some have already adopted their own. Having a new framework would necessitate practitioners to study once again, while still struggling to be up-to-date with the ever-changing provisions of the existing PFRS and PFRS for SMEs. Nevertheless, a third simplified framework is surely a welcome challenge for MSMEs and the whole accounting practice.

The Proposed Framework was presented to the public for the first time during the ACPAPP day of the Accountancy Week Celebration, and was well accepted by the practitioners. ACPAPP formally presented the Proposed Framework to the Financial Reporting Standards Council (FRSC) this week and we are all hoping to receive a positive response from the FRSC and other regulators soon after. If we want to improve the ease of doing business in the country, our focus should not only be on making business registration and processes faster. It is more important to establish ways and means on how we can help businesses better comply with established rules, and one way is by making the rules more business-friendly.

Ma. Lois G. Abad is a partner from Assurance and Human Capital of Isla Lipana & Co./PwC Philippines. Email your comments and questions to This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.


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