The International Accounting Standards Board (IASB) has published the third edition of the IFRS for SMEs Accounting Standard, marking the completion of its second comprehensive review of the standard.

The revised standard reflects key improvements made to full IFRS Accounting Standards in recent years while ensuring that financial reporting remains relevant and proportionate for smaller businesses.

Scope of the Standard

The IFRS for SMEs Accounting Standard (SMEs Accounting Standard) is a self-contained standard designed for use by entities that do not have public accountability and that publish general purpose financial statements. Despite the title of the Standard, many entities that do not consider themselves to be small or medium-sized (SMEs) could be within its intended scope. 

While UK companies cannot adopt the SMEs Accounting Standard, much of UK GAAP is broadly based on it. This means these amendments may still influence the UK’s financial reporting framework.

Alignment with IFRS Accounting Standards

Recent years have seen substantial changes to IFRS Accounting Standards, including the introduction of several significant new standards. In response, the revised SMEs Accounting Standard enhances alignment with IFRS Accounting Standards while incorporating targeted modifications to ensure it remains relevant, simplified and with the appropriate cost-benefit considerations for SMEs.

One of the more significant updates is the revision of Section 23 Revenue from Contracts with Customers, which now aligns with IFRS 15 Revenue from Contracts with Customers, with appropriate simplifications. The section introduces more comprehensive requirements, including a five-step model for revenue recognition and new requirements on how to account for features found in more complex contracts with customers.

Beyond revenue recognition, the third edition introduces several significant updates aimed at improving alignment with IFRS Accounting Standards:

• Section 2 Concepts and Pervasive Principles has been revised to align with the IASB’s Conceptual Framework for Financial Reporting, issued in 2018.
• Section 9 Consolidated and Separate Financial Statements now applies a single model for assessing control, replacing the two previous models. This single model is intended to improve comparability between consolidated financial statements prepared applying the Standard. 
• Sections of the 2015 Standard on Basic Financial Instruments and Other Financial Instrument Issues have been combined into Section 11 Financial Instruments. This section introduces principles to make the classification of financial instruments easier. The update also introduces new requirements for financial guarantee contracts and expands disclosure requirements.
• Section 12 Fair Value Measurement has been added to the Standard. This new section sets out the requirements for measuring fair value and disclosing information about fair value measurements, improving the Standard’s alignment with IFRS 13 Fair Value Measurement.
• Section 19 Business Combinations has been revised to align with IFRS 3 Business Combinations. The definition of a business has been updated and new measurement requirements introduced. 

Notably, the IASB has chosen not to align the SMEs Accounting Standard with IFRS 16 Leases in this edition, citing concerns over the complexity and implementation costs of the Standard. However, it has indicated that lease accounting will be reconsidered in a future review.

The third edition is effective for annual reporting periods beginning on or after 1 January 2027. However, earlier application is permitted. 

Georgina Chalk, Technical Manager in ICAEW’s Corporate Reporting Faculty, comments: “We welcome this latest edition of the IFRS for SMEs Accounting Standard. The updates will bring greater consistency and better financial information for users. However, we encourage the IASB to prioritise lease accounting in future updates to further enhance alignment with IFRS Accounting Standards.”

For further resources on the SMEs Accounting Standard and IFRS Accounting Standards visit icaew.com/crresources.