IFRS for SMEs: Third Edition Released with Significant Updates

In 2024, the International Accounting Standards Board (IASB) released the long-anticipated third edition of the IFRS for SMEs Accounting Standard, marking the first major update to the framework since 2015. This edition brings the standard in closer alignment with full IFRS while preserving its simplified structure and suitability for small and medium-sized entities.

The IFRS for SMEs is used in over 80 jurisdictions worldwide and is designed specifically for unlisted companies that do not have public accountability. While it is not mandatory in the UK—where most SMEs follow FRS 102 or FRS 105 under UK GAAP—the standard is a key reference point for international best practice and is especially relevant to UK businesses with overseas operations, subsidiaries, or aspirations to expand into global markets.

This latest edition introduces meaningful revisions across areas such as consolidation, fair value measurement, financial instruments, and revenue recognition, all aimed at improving the relevance, clarity, and comparability of financial statements prepared by SMEs.

 

Key Changes in the Third Edition of IFRS for SMEs

 

The IASB has refined and modernised the standard in five key areas, aligning selected aspects with recent updates to full IFRS standards, including IFRS 9, IFRS 13, and IFRS 15.

 

1. Conceptual Framework – Revised Section 2

 

Section 2 of the IFRS for SMEs now reflects the updated IASB Conceptual Framework. This revision enhances the ability of SMEs to develop accounting policies where specific guidance is absent. The new framework provides clearer definitions of assets, liabilities, income, and expenses, and introduces updated principles for recognition and measurement.

Implications: This change helps SMEs make more consistent and principled accounting judgments, particularly in emerging or complex areas where the standard does not prescribe detailed rules.

 

2. Consolidation – Unified Basis of Control (Section 9)

 

Section 9 has been revised to adopt a single, consistent basis for assessing control when determining whether a subsidiary should be consolidated. The definition of control now mirrors that of full IFRS, considering power over the investee, exposure to variable returns, and the ability to affect those returns.

Implications: This enhances comparability and simplifies consolidation assessments, particularly for SMEs with joint ventures, special purpose vehicles, or partially owned subsidiaries.

 

3. Financial Instruments – Expanded Disclosure Requirements (Section 11)

 

Section 11 has been updated to require more comprehensive disclosures about credit risk and liquidity risk. These align more closely with IFRS 7-style disclosures, helping financial statement users better understand an entity’s exposure to financial risk.

Implications: SMEs will need to improve internal tracking of financial risks, such as aging of receivables and loan maturity profiles, and prepare narrative and quantitative disclosures accordingly.

 

4. Fair Value Measurement – New Section 12 Introduced

 

A brand-new Section 12 has been added to provide a clear and consistent framework for measuring and disclosing fair value. Previously, fair value concepts were scattered throughout the standard. The new section consolidates guidance in one place, aligning with the three-level fair value hierarchy introduced by IFRS 13.

Implications: This helps SMEs apply fair value techniques more consistently, especially for investments, derivative instruments, or asset revaluations. However, it may require valuation expertise or updated accounting software.

 

5. Revenue Recognition – Comprehensive New Approach (Section 23)

 

Section 23 now incorporates a five-step revenue recognition model, adapted from IFRS 15 but simplified for SMEs. These steps are:

 

• Identify the contract with the customer
• Identify the separate performance obligations
• Determine the transaction price
• Allocate the price to the performance obligations
• Recognise revenue when the obligation is satisfied

 

Implications: This change enhances transparency in revenue reporting, particularly for service-based businesses or those offering bundled goods and services. SMEs with multi-element contracts will need to reassess how and when revenue is recognised.

 

What Does This Mean for Me? – Impact on UK SMEs and Businesses

 

Although UK SMEs predominantly report under FRS 102 or FRS 105, many will find the IFRS for SMEs relevant for benchmarking, international comparability, or preparing consolidated accounts for overseas parent companies. The updates carry practical and strategic implications:

 

1. Anticipating Future Changes to UK GAAP

The FRC regularly reviews FRS 102 and has historically aligned its updates with those made to IFRS for SMEs. The reforms introduced in this third edition are likely to influence future changes to UK standards. Businesses would be wise to stay ahead of the curve by familiarising themselves with the new principles—particularly in revenue recognition and fair value measurement.

 

2. Better Financial Clarity for Stakeholders

The enhanced disclosures around financial instruments and risk, along with the revised revenue framework, will enable SMEs to present more informative and transparent financial statements. This can improve stakeholder confidence, particularly for lenders, investors, and grant providers.

 

3. More Robust Internal Systems Needed

The changes will place increased pressure on SMEs to maintain robust systems for tracking performance obligations, managing risk disclosures, and calculating fair value. This may require:

 

• Enhanced financial software capabilities
• Staff training on revised accounting treatments
• Potential external valuation or advisory support

 

4. International Expansion and Cross-Border Consistency

UK SMEs with overseas interests—either as part of a group or through foreign subsidiaries—will benefit from aligning with IFRS for SMEs, as it can simplify cross-border consolidation, due diligence, and investor reporting. Adopting or understanding the standard may also help attract global investment.

 

Conclusion

 

The third edition of the IFRS for SMEs represents a thoughtful evolution of the standard, balancing the need for global alignment with the simplicity required by smaller entities. While it does not automatically apply to UK SMEs under current regulation, the updates offer valuable guidance and insight into best practice for financial reporting.

UK businesses should see this as a preview of what’s to come under future UK GAAP reforms and an opportunity to modernise their financial reporting frameworks. Proactively reviewing accounting policies, internal processes, and staff readiness will help SMEs stay ahead of changes, whether reporting under IFRS for SMEs, FRS 102, or preparing for eventual adoption of more advanced reporting requirements.