IFRS Foundation Releases Third Edition of IFRS for SMEs Standard

The International Accounting Standards Board (IASB) has published the Third Edition of the IFRS for SMEs Standard, bringing important updates that will change how small and medium-sized businesses report their financial information.

These changes are designed to improve transparency, simplify reporting where possible, and bring SME accounting closer to full IFRS without overcomplicating the process. The updated standard will be effective from 1 January 2027, but businesses can choose to apply it earlier if they are ready.

In this article, we’ll break down what’s changing, why it matters, and what SMEs need to do to prepare—using plain English and simple explanations.

1. Revenue Recognition: A More Structured Approach

What’s changing?

• The new rules introduce a five-step model for recognising revenue, based on IFRS 15 – Revenue from Contracts with Customers.

• Revenue will no longer be recognised just when money is received, but when control of goods or services is transferred to the customer.

• This new approach ensures that businesses report income more consistently and fairly.

What does this mean in practice?
✅ If you sell products, revenue is recognised when the customer takes ownership and can use the product.
✅ If you provide services over time (e.g., consulting, subscriptions, construction projects), revenue is recognised gradually, rather than all at once.
✅ If a contract includes multiple elements (e.g., selling equipment with maintenance services), revenue must be split and recognised at the right times.

Why does this matter?

• Businesses must review contracts carefully to ensure they record revenue correctly.

• Some companies may need to adjust their financial statements, particularly if they offer long-term contracts, milestone payments, or warranties.

• Investors and lenders will get a clearer picture of how a business earns money over time.

2. Financial Instruments: A Forward-Looking Approach to Credit Losses

What’s changing?

• The old method of recognising bad debts (the "incurred loss model") is being replaced with an expected credit loss model (ECL), like IFRS 9 – Financial Instruments.

• Instead of waiting until a customer fails to pay, businesses must estimate potential losses in advance.

What does this mean in practice?
✅ If you offer credit to customers (e.g., selling goods or services on account), you must predict possible non-payments and set aside an allowance in your financial statements.
✅ The amount of expected losses depends on factors such as:

• The customer’s payment history

• The economic environment

• Whether the customer has a high risk of default

✅ Banks and financial institutions will expect more detailed reporting on credit risks when assessing loans.

Why does this matter?

• This prepares businesses for potential bad debts, reducing the risk of unexpected financial losses.

• It ensures financial statements show a more realistic view of a company’s cash flow and risks.

• SMEs will need to adjust their credit management processes to monitor and predict potential losses more effectively.

3. Lease Accounting: Greater Transparency in Reporting

What’s changing?

• The new rules bring lease accounting closer to IFRS 16, meaning SMEs must recognise most leases as liabilities on the balance sheet.

• However, simplifications remain, so SMEs won’t have to apply all the complex requirements of full IFRS.

What does this mean in practice?
✅ If you rent office space, equipment, or vehicles, you might need to record the lease as both an asset and a liability.
✅ Short-term leases and low-value leases may still be treated as simple rental expenses.
✅ You will need to disclose more information about your lease agreements in your financial statements.

Why does this matter?

• This change gives a clearer picture of a company’s financial obligations, helping investors and lenders understand long-term commitments.

• Businesses will need to review their lease contracts and update their accounting records accordingly.

• It prevents businesses from hiding large financial obligations off the balance sheet.

4. Simplified and Streamlined Disclosure Requirements

What’s changing?

• Some disclosure requirements have been removed or simplified, making financial reporting easier and less time-consuming for SMEs.

• The focus is now on providing essential information without overwhelming businesses with excessive details.

What does this mean in practice?
✅ Fewer unnecessary footnotes in financial statements.
✅ Clearer guidance on what information must be disclosed, so businesses only report what is relevant.
✅ Financial statements will be more focused and easier to read.

Why does this matter?

• SMEs will spend less time on compliance while still meeting financial reporting standards.

• Investors and lenders will receive clearer and more useful information.

• Businesses can focus on what truly matters in their financial statements.

5. Other Refinements to Improve Accuracy and Consistency

Business Combinations (IFRS 3 Influence)

• The updated Section 19 clarifies the definition of a business and introduces new measurement rules for business acquisitions.

• This makes it easier to differentiate between acquiring a business versus acquiring just assets.

Fair Value Measurement (IFRS 13 Influence)

• A new Section 12 consolidates fair value measurement requirements, improving consistency in how businesses determine fair value.

General Refinements Across Various Sections

• Minor improvements ensure alignment with full IFRS while keeping the standard practical and relevant for SMEs.

When Do These Changes Take Effect?

✔ The new IFRS for SMEs Standard becomes effective from 1 January 2027.
✔ Early adoption is allowed, so businesses can choose to apply the changes sooner if they are ready.
✔ CIBA will provide training, CPD sessions, and technical guidance to help businesses transition smoothly.

How Should SMEs Prepare?

To ensure a smooth transition, SMEs should take the following steps:

✅ Review Contracts for Revenue Recognition Changes – Ensure your business is recognising revenue at the right time.
✅ Update Credit Risk Management – Begin tracking expected credit losses and adjust how you estimate bad debts.
✅ Check Your Lease Agreements – Determine which leases need to be recorded as assets and liabilities.
✅ Simplify Financial Disclosures – Focus on essential reporting requirements to streamline your financial statements.

Final Thoughts: What This Means for SMEs

These updates to IFRS for SMEs will improve financial reporting, enhance transparency, and provide more reliable financial information. While some changes increase complexity, others make financial statements clearer and more useful.

By preparing early, SMEs can ensure compliance, improve their financial management, and provide more accurate financial reports to investors and stakeholders.