This briefing document provides a comprehensive synthesis of the third edition of the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs Accounting Standard), issued by the International Accounting Standards Board (IASB) in February 2025. The standard is designed for entities without public accountability and is based on full IFRS Accounting Standards, modified to address the specific needs of SMEs and cost-benefit considerations.
The third edition introduces significant updates, aligning key areas with full IFRS standards to enhance relevance and comparability. The most critical revisions include:
• Alignment with IFRS 15 (Revenue): Section 23, Revenue from Contracts with Customers, has been completely revised to align with the five-step revenue recognition model of IFRS 15, fundamentally changing how SMEs account for revenue.
• Alignment with IFRS 3 (Business Combinations): Section 19, Business Combinations and Goodwill, is revised to align with IFRS 3, updating the definition of a business and the accounting for acquisitions.
• New Section on Fair Value Measurement: A new standalone section, Section 12, Fair Value Measurement, centralizes guidance for measuring fair value and related disclosures, relocating requirements from various other sections.
• Updated Definition of Control: Section 9, Consolidated and Separate Financial Statements, amends the definition of ‘control’ to align with full IFRS, potentially changing which entities a parent must consolidate.
• Refined Concepts and Principles: Section 2, Concepts and Pervasive Principles, has been updated to reflect the IASB’s latest conceptual framework, providing a more robust foundation for accounting policies and estimates.
Transition to the third edition is generally applied retrospectively. However, the standard provides extensive mandatory exceptions and optional exemptions to ease the burden of adoption, particularly for complex areas such as business combinations, revenue recognition, and financial instruments.
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1. Scope and Objective of the IFRS for SMEs Standard
The IFRS for SMEs Accounting Standard is intended for use by small and medium-sized entities (SMEs) that publish general purpose financial statements for external users.
1.1 Definition of a Small and Medium-sized Entity (SME)
An entity qualifies as an SME if it meets two primary criteria:
1. It does not have public accountability. An entity has public accountability if its debt or equity instruments are traded in a public market, or it holds assets in a fiduciary capacity for a broad group of outsiders as a primary business (e.g., banks, insurance companies, mutual funds).
2. It publishes general purpose financial statements for external users. These users include investors, lenders, creditors, and credit rating agencies.
A subsidiary whose parent applies full IFRS Accounting Standards is not prohibited from using the IFRS for SMEs Standard in its own separate financial statements if the subsidiary itself does not have public accountability.
1.2 Objective of Financial Statements
The core objective of general purpose financial statements for an SME is to provide financial information about the entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. This information pertains to:
• The economic resources of the entity, claims against it, and changes in those resources and claims.
• How efficiently and effectively management has used the entity’s economic resources (stewardship).
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2. Fundamental Concepts and Pervasive Principles
Section 2 of the standard establishes the conceptual foundation for financial reporting, outlining the qualitative characteristics of useful information and defining the core elements of financial statements.
2.1 Qualitative Characteristics of Financial Information
| Characteristic Type | Characteristic | Description |
| Fundamental | Relevance | Information is capable of influencing users’ decisions. It has predictive value, confirmatory value, or both. Materiality is an entity-specific aspect of relevance. |
| Faithful Representation | Information represents the substance of the economic phenomena it purports to represent. It must be complete, neutral (supported by prudence), and free from error to the extent possible. | |
| Enhancing | Comparability | Enables users to identify and understand similarities and differences among items, both across entities and over time for the same entity. |
| Verifiability | Assures users that information faithfully represents the economic phenomena, meaning knowledgeable and independent observers could reach a consensus on its depiction. | |
| Timeliness | Information is available to decision-makers in time to be capable of influencing their decisions. | |
| Understandability | Information is classified, characterized, and presented clearly and concisely. |
2.2 The Elements of Financial Statements
The standard defines the five core elements that form the basis of financial statements:
• Asset: A present economic resource controlled by the entity as a result of past events.
• Liability: A present obligation of the entity to transfer an economic resource as a result of past events.
• Equity: The residual interest in the assets of the entity after deducting all its liabilities.
• Income: Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.
• Expenses: Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.
2.3 Measurement Bases
The standard outlines two principal measurement bases:
1. Historical Cost: Provides information derived from the price of the transaction or event that gave rise to the item. This includes amortised cost for certain financial instruments.
2. Current Value: Provides information updated to reflect conditions at the measurement date. Current value bases include:
◦ Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
◦ Value in Use (for assets) and Fulfilment Value (for liabilities): The present value of future cash flows expected to be derived from an asset or required to fulfill a liability.
◦ Current Cost: The cost of an equivalent asset or liability at the measurement date.
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3. Major Revisions and Amendments in the Third Edition
The third edition introduces numerous amendments across nearly all sections of the standard. The most transformative changes are highlighted below.
3.1 Major Section Revisions
| Section | Title | Summary of Revision |
| Section 23 | Revenue from Contracts with Customers | Fully revised to align with the five-step revenue recognition model of IFRS 15. This requires entities to identify contracts, identify distinct performance obligations (promises), determine the transaction price, allocate the price to promises, and recognize revenue as promises are fulfilled. |
| Section 19 | Business Combinations and Goodwill | Revised to align with IFRS 3, including the updated definition of a ‘business’. This impacts how an entity determines whether an acquisition is a business combination or an asset acquisition and affects the recognition of assets, liabilities, and goodwill. |
3.2 New and Significantly Amended Sections
| Section | Title / Subject | Key Changes |
| Section 12 | Fair Value Measurement | A new, dedicated section that consolidates requirements for measuring fair value and related disclosures. It introduces a three-level fair value hierarchy (Level 1, 2, 3) to categorize inputs used in valuation techniques. |
| Section 9 | Consolidated and Separate Financial Statements | The definition of ‘control’ is amended to be based on an investor having power over an investee, exposure to variable returns, and the ability to use its power to affect those returns. This aligns with full IFRS and could alter consolidation conclusions. |
| Section 11 | Financial Instruments | The option to apply the recognition and measurement requirements of IAS 39 has been removed. Requirements for estimating fair value have been relocated to the new Section 12. |
| Section 15 | Joint Arrangements | The term ‘joint venture’ is replaced by ‘joint arrangement’. The definition of ‘joint control’ is amended to align with the new definition of ‘control’ in Section 9. |
| Section 26 | Share-based Payment | Numerous clarifications have been added, including the definitions of ‘vesting condition’, ‘performance condition’, and ‘service condition’. New requirements address the classification of share-based payments with a net settlement feature for withholding tax. |
| Section 30 | Foreign Currency Translation | New requirements have been added for assessing whether a currency is exchangeable and how to determine the exchange rate to use when it is not. |
3.3 Other Notable Amendments
• Section 2 (Concepts and Pervasive Principles): Updated to reflect the IASB’s most recent conceptual framework, providing clearer definitions and principles.
• Section 3 (Financial Statement Presentation): An entity must now disclose ‘material accounting policy information’ instead of ‘significant accounting policies’.
• Section 4 (Statement of Financial Position): Line items must be disaggregated when relevant to an understanding of the entity’s financial position.
• Section 10 (Accounting Policies, Estimates and Errors): A formal definition of ‘accounting estimate’ has been introduced to help distinguish changes in estimates from changes in policies.
• Section 17 (Property, Plant and Equipment): Clarifies that depreciation methods based on revenue are not appropriate.
• Section 34 (Specialised Activities): Bearer plants are now required to be accounted for under Section 17 (Property, Plant and Equipment) if they can be measured separately without undue cost or effort. Exploration and evaluation assets must be treated as a separate class of assets.
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4. Financial Statements: Presentation and Structure
The standard mandates a complete set of financial statements to ensure a fair presentation of an entity’s financial position, performance, and cash flows.
4.1 Components of a Complete Set of Financial Statements
A complete set includes:
1. Statement of Financial Position: Presents assets, liabilities, and equity at the reporting date.
2. Statement of Comprehensive Income: Presents all items of income and expense. This can be a single statement or two separate statements (an Income Statement and a Statement of Comprehensive Income).
3. Statement of Changes in Equity: Shows a reconciliation of the carrying amount of each component of equity from the beginning to the end of the period.
4. Statement of Cash Flows: Reports cash flows from operating, investing, and financing activities.
5. Notes: Comprise material accounting policy information and other explanatory details.
An entity must present comparative information for the previous period for all amounts in the financial statements.
4.2 Key Presentation Principles
• Compliance: An entity whose financial statements comply with the standard must make an explicit and unreserved statement of such compliance in the notes.
• Going Concern: Management must assess the entity’s ability to continue as a going concern. If there are material uncertainties, they must be disclosed.
• Accrual Basis: Financial statements (except for cash flow information) must be prepared using the accrual basis of accounting.
• Materiality and Aggregation: Each material class of similar items must be presented separately. Immaterial items can be aggregated.
• Consistency: The presentation and classification of items shall be retained from one period to the next unless a change is required by the standard or a different presentation is more appropriate.
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5. Transition to the Third Edition
Section 35 and Appendix A provide detailed guidance on the transition to the new edition.
5.1 General Principle: Retrospective Application
Entities are required to retrospectively apply the amended and revised sections in accordance with Section 10 (Accounting Policies, Estimates and Errors). This means applying the new policies as if they had always been in effect, which involves restating comparative information.
5.2 Mandatory Exceptions to Retrospective Application
On first-time adoption, an entity shall not retrospectively change the accounting it followed under its previous framework for certain transactions, including:
• Derecognition of financial assets and liabilities: If derecognized before the transition date, they remain derecognized.
• Hedge accounting: No changes are made to hedge accounting for relationships that no longer exist at the transition date.
• Accounting estimates: Estimates from prior periods are not revised.
• Completed contracts with customers: Contracts completed before the date of transition are not restated.
5.3 Optional Exemptions from Retrospective Application
To simplify the transition, entities may elect to use one or more of the following exemptions:
• Business Combinations: A first-time adopter may elect not to apply the revised Section 19 to business combinations that were effected before the date of transition.
• Share-based Payment Transactions: Section 26 is not required to be applied to equity instruments granted before the transition date.
• Fair Value or Revaluation as Deemed Cost: An entity may elect to measure an item of property, plant and equipment, investment property, or an intangible asset at its fair value on the transition date and use that fair value as its deemed cost.
• Cumulative Translation Differences: A first-time adopter can elect to deem the cumulative translation differences for all foreign operations to be zero at the transition date.
• Revenue: An entity is permitted to apply the revised Section 23 either retrospectively or prospectively to contracts that are in progress at the date of initial application.
• Deferred Income Tax: A first-time adopter may apply Section 29 prospectively from the date of transition.
Entities must provide reconciliations of equity and profit or loss from their previous financial reporting framework to the amounts determined under the new IFRS for SMEs Standard.