IASB Publishes Third Edition of IFRS for SMEs
The IFRS for SMEs Accounting Standard (“the Standard”) is an independent and comprehensive accounting framework specifically tailored for the general-purpose financial statements of entities commonly referred to as small and medium-sized entities (SMEs). The IASB (International Accounting Standards Board) developed the Standard based on the full IFRS Accounting Standards, with simplifications that take into account the informational needs of users of SMEs’ financial statements and the resources available to SMEs in preparing those statements.
On February 27, 2025, the IASB (“the Board”) issued the third edition of the IFRS for SMEs Accounting Standard. The updates to the Standard reflect amendments made to the full IFRS Accounting Standards while maintaining the original objective of simplicity. The key concepts introduced in this update include:
• Updating the requirements for the statement of cash flows, consolidated financial statements, financial instruments, and business combinations;
• Consolidating the fair value measurement requirements into a single section;
• Revising the revenue recognition model.
What is the issue?
Below is a summary of the significant updates made to the Standard:
• Section 7: Statement of Cash Flows
New requirements have been added to disclose a reconciliation of changes in liabilities arising from financing activities, including those changes resulting from both cash flows and non-cash flows, as well as disclosures of supplier finance arrangements.
• Section 9: Consolidated and Separate Financial Statements
The main updates to this section include aligning the definition of control with IFRS 10 Consolidated Financial Statements. The rebuttable presumption that an entity is controlled when an investor owns the majority of voting rights in an investee has been clarified and retained.
• Section 11: Financial Instruments
The former Section 11 “Basic Financial Instruments” and Section 12 “Other Financial Instruments” have been merged into a single section. This section now aligns with certain principles from IFRS 9 Financial Instruments, although differences remain. Notably, the Standard no longer allows SMEs to apply the recognition and measurement requirements of IAS 39 Financial Instruments: Recognition and Measurement. The incurred loss model for the impairment of financial assets at amortized cost has been retained. The revised Standard includes simplifications for financial guarantee contracts issued for nil consideration, including them within the scope of Section 21 Provisions and Contingencies. Requirements to disclose both an analysis of the age of financial assets and a maturity analysis of financial liabilities have been added.
• Section 12: Fair Value Measurement
Section 12 is a newly introduced section. It consolidates the requirements for measuring and disclosing information about fair value measurements into one place based on the requirements of IFRS 13 Fair Value Measurement. Consequently, any fair value measurement and disclosure requirements previously included in other sections have been relocated to Section 12.
• Section 19: Business Combinations and Goodwill
Section 19 “Business Combinations and Goodwill” has been revised to align with IFRS 3 Business Combinations, particularly including elements such as the definition of a business. New requirements explain that an entity newly formed to effect a business combination may not be the acquirer in the business combination. The revised section now requires contingent consideration to be measured at fair value, provided it can be done reliably without undue cost or effort at the acquisition date. Additionally, the treatment of acquisition costs has been aligned with IFRS 3, meaning these costs are now recognized in profit or loss at the time of acquisition. The IASB, however, retained the requirement in the Standard to amortize goodwill. Furthermore, new requirements for step acquisitions have been added.
• Section 23: Revenue from Contracts with Customers
The revenue section of the Standard has been revised to align with IFRS 15 Revenue from Contracts with Customers. The framework for recognizing revenue is based on the five-step model in IFRS 15, but simplifications have been included to make it easier for SMEs to apply. Transition relief is also provided.
Topics Not Updated or Amended in This Edition
The IASB decided not to amend the Standard in this review for IFRS 14 Regulatory Deferral Accounts, IFRS 16 Leases, and cryptocurrency. These topics will be revisited as part of the Board’s next comprehensive review of the Standard. To reduce the burden on SMEs of having to adjust for changes and ensure stability, revisions are expected to be limited to approximately once every three years.
Who is impacted?
All entities reporting under the current IFRS for SMEs Accounting Standard will be impacted. SMEs are encouraged to begin reviewing the new requirements of the Standard and the associated transition requirements. This may result in entities needing to gather additional information and explore whether revisions to accounting systems, processes, and controls are required to comply with some of the amendments.
When does it apply?
The third edition of the Standard is effective for annual periods beginning on or after January 1, 2027. An entity shall retrospectively apply the amended sections in accordance with Section 10 – Accounting Policies, Estimates, and Errors. However, transition relief is available from retrospective application.
