Accounting Alert

This Accounting Alert is issued to circulate Securities and Exchange Commission (SEC/Commission) Memorandum Circulars (MC) No. 35-2020 dated December 28, 2020 on the financial reporting relief provided to Financing Companies (FC), Lending Companies (LC), and Microfinance-NGOs (MF-NGOs) in light of COVID-19 pandemic.

Overview

The Commission En Banc, in its meeting held on December 22, 2020, decided to provide relief to the subject companies by allowing staggered booking of provision for credit losses calculated in accordance with the requirements of Philippine Financial Reporting Standards (PFRS), PFRS for Small and Medium-Sized Entities (SMEs), or PFRS for Small Entities (SEs), as applicable, for annual period ending on or after December 31, 2020 (to consider those with fiscal year-end) for a maximum period of 5 years using straight-line amortization method to be recognized in profit or loss. 

Industry-specific Framework

The financial reporting relief is considered a deviation from the requirements of PFRS, PFRS for SMEs and PFRS for SEs. FCs, LCs and MF-NGOs that opt to avail of the relief should prepare their Audited Financial Statements (AFS) in accordance with an industry-specific framework, to be referred to as the PFRS/PFRS for SMEs/PFRS for SEs, as modified by the application of the financial reporting reliefs issued and approved by the SEC.

Disclosure Requirements in the Financial Statements

FCs, LCs, and MF-NGOs which opt to adopt the industry-specific framework, should specify in the "Basis of Preparation of the Financial Statements" section of the financial statements the relief availed of and indicate that the availment thereof covers only the current-year transactions. For consistency of presentation, the subject companies should comply with the following prescribed wordings:

"The accompanying financial statements have been prepared in accordance with (state the applicable financial reporting framework), as modified by the application of the following financial reporting reliefs issued and approved by the Securities and Exchange Commission in response to the COVID-19 pandemic: (enumerate reliefs availed of). The reliefs cover only current-year transactions/events and do not impact the comparative period/s."

To ensure transparency in financial reporting, a qualitative disclosure of the impact of the reliefs availed of should be disclosed. The following information should likewise be provided in tabular format in the Note to Financial Statements that contains the "Basis of Preparation of the Financial Statements":

• Impact on the affected financial statement line items if the provision for credit losses was measured and recorded in accordance with the PFRS, PFRS for SMEs, or PFRS for SEs, as applicable (loans and receivables, allowance for credit losses, provision for credit losses, retained earnings, deferred tax asset and expense, earnings per share [for listed companies], etc.).
• Amount of allowance recognized/amortized for the period; and,
• Balance of unrecognized (unamortized) allowance

The industry-specific accounting framework shall form part of the applicable financial reporting framework for the purpose of preparing and filing general-purpose financial statements with the SEC pursuant to the Revised Securities Regulations Code (SRC) Rule 68.

Entities must comply with the requirements of the relevant financial reporting standards in doing the above adjustments when it reverts to PFRS, PFRS for SMEs, or PFRS for SEs, as applicable, after the period of relief.

Effects on the Independent Auditor's Opinion

Where the external auditor has been engaged to perform an audit engagement in accordance with Philippine Standards on Auditing (PSA) on the companies' AFS, which have been prepared using PFRS/PFRS for SMEs/PFRS for SEs, as modified by the application of the financial reporting reliefs issued and approved by the SEC, the external auditor shall reflect in the opinion paragraph that the financial statements are prepared in accordance with the compliance framework described in the notes to the financial statements. In addition, the external auditor shall include an Emphasis of Matter paragraph in the auditor's report to draw attention to the basis of accounting that has been used in the preparation of the financial statements.

See attached Accounting Alert for further details.