The International Accounting Standards Board (IASB) regularly publishes new International Financial Reporting Standards (IFRS), Interpretations of Standards (IFRIC) or amendments to existing IFRS Standards.
The global IFRS team publishes IFRS Alerts on these changes (and other issues relevant to IFRS) as they are announced so that you can keep up to date.
Grant Thornton International Ltd is pleased to share our Alerts with you below:
Executive summary
The International Accounting Standards Board (IASB) has recently released the third edition of its IFRS for SMEs Accounting Standard (IFRS for SMEs or the Standard). This edition represents a major update to the Standard and follows a comprehensive review conducted by the IASB over the past few years. The updates to the Standard cover all sections of the current IFRS for SMEs. Some of the most significant updates are on the topics of revenue recognition, fair value measurement and business combinations.
Background
IFRS for SMEs is designed for small and medium sized entities (SMEs) without public accountability that are still required to prepare general purpose financial statements. Entities with public accountability are defined in the Standard as entities who have debt or equity instruments traded in a public market, or entities which hold assets in a fiduciary capacity for a broad group of outsiders (eg banks, insurance companies, securities brokers etc.). The Standard is explicitly not available to entities with public accountability, and if such an entity does apply the Standard, it cannot describe its financial statements as conforming to the IFRS for SMEs Accounting Standard, even if this is allowed by legislation in their local jurisdiction.
The key changes in the new Standard
The changes to the Standard cover a broad range of topics, and for the full list you can refer to the IFRS Foundation’s press release and the published Standard (IFRS - IASB issues a major update to the IFRS for SMEs Accounting Standard). Here we have summarised some of the key changes which may have the most significant impact.
Revenue recognition
Section 23 ‘Revenue from Contracts with Customers’ has been revised to align with the requirements of IFRS 15 ‘Revenue from Contracts with Customers’. This is a significant change from previous practice and will require the application of the five-step model (set out in IFRS 15 ‘Revenue from Contracts with Customers’) to identify revenue contracts, identify performance obligations or promises, determine the transaction price, allocate this price to each promise, and finally recognise revenue as promises are fulfilled.
These new requirements may require more work and new processes to be put in place by the reporting entity. As we saw with the adoption of this model in the full version of IFRS 15, this can be very challenging, so we would encourage preparers to start planning for this transition sooner rather than later.
Fair value measurement
Section 12 ‘Fair Value measurement’ has been added to IFRS for SMEs for the first time in this edition. Previously, information about fair value measurement and disclosure was spread throughout the other sections where it was relevant, but in the third edition this is now grouped into a new separate section.
The reformatting that has taken place should make finding and referring to the guidance much easier, and will also ensure consistent application of fair value principles throughout the financial statements.
Business combinations
Section 19 ‘Business Combinations and Goodwill’ has been updated in the third edition to align it more closely with the detailed requirements set out in IFRS 3 ‘Business Combinations’. This edition now replaces the purchase method of accounting, as it was referred to in the previous edition of IFRS for SMEs, with the acquisition method of accounting. Although the methods are similar in many respects, there are more areas of complexity that need to be addressed in the acquisition method.
Although IFRS 3 has been in effect for some time, it is often not properly understood, and as a result is not appropriately applied. For SMEs that regularly engage in business combinations or acquisitions this may cause significant difficulty when applying the updated Standard. We would recommend that preparers engage with this early. Although it applies to full IFRS requirements, Grant Thornton International Ltd.'s series ‘Insights into IFRS 3’ may help to provide more information and supporting material on the requirements and application of the acquisition method.
Effective date
The third edition of IFRS for SMEs is effective for reporting periods beginning on or after 1 January 2027. Early application is permitted, however this may be dependent on jurisdictional approvals.
The changes introduced in the third edition must be applied retrospectively as set out in Section 10 of the Standard.
Our thoughts
We support the release of this new edition of the Standard, which should improve the quality of financial information being reported by SMEs.
While the effective date is still some time away, we encourage entities that currently apply IFRS for SMEs to start considering the impact of the changes sooner rather than later. In particular, the changes to the revenue recognition model may be challenging to apply, as we saw with the adoption of IFRS 15. If you will be impacted by these amendments, or would like to discuss them further, contact us.