Overview of the IFRS for SMEs Accounting Standard 2025 Update
On 27 February 2025, the International Accounting Standards Board (IASB) issued the third edition of the IFRS for SMEs® Accounting Standard. This edition aligns SME accounting more closely with full IFRS — updating or introducing sections on foundational concepts, revenue, financial instruments, fair value, business combinations, and control — while intentionally deferring the amendment of sections on leases, due to complexity concerns.
Key changes
1. Section 2: Concepts and Pervasive Principles
Fully revised to align with the 2018 Conceptual Framework, this section now provides clearer guidance on developing accounting policies where the standard is silent. SMEs benefit from improved consistency and a more robust conceptual basis.
2. Section 9: Consolidated and Separate Financial Statements
A single control model aligned with IFRS 10 replaces the prior dual-model approach. Control now hinges on power over the investee, exposure to variable returns, and the ability to use power to influence returns. The special-purpose entity guidance was removed. A rebuttable presumption remains when voting power exceeds 50%.
3. Sections 11 & 12: Financial Instruments; Fair-value Measurement
• Financial Instruments (Section 11): Sections on basic and other financial instruments were merged. The IAS 39 option was removed, although SMEs may still recognise impairment, using the retained-loss model. New disclosures include aging of financial assets, maturity analyses, and disclosures for financial guarantee contracts.
• Fair-value Measurement (Section 12): A new standalone section aligned with IFRS 13 was introduced, covering fair-value hierarchies and three measurement approaches (market, cost and income).
4. Section 19: Business Combinations and Goodwill
Aligned with IFRS 3, this revised section now requires the acquisition method, fair-value recognition of contingent consideration, and updates to the definition of a business. It also includes guidance for step acquisitions.
5. Section 23: Revenue from Contracts with Customers
Previously based on IAS 11/18, this section has been comprehensively redrafted to reflect IFRS 15’s five-step revenue model while simplifying language and judgment requirements to suit SMEs. Key elements include contract modifications, principal/agent considerations, return rights, contract balances, and disclosure of significant judgments.
6. Other changes
• Definitions and scope: The definition of ‘public accountability’ was clarified to include entities such as banks, insurers and investment firms.
• Statement of cash flows (Section 7): Now requires disclosure of supplier finance arrangements and a reconciliation of liabilities arising from financing activities.
• Employee benefits (Section 28): Enhancements include more detailed reconciliations of defined benefit obligations, plan assets and reimbursement rights.
The IASB deliberately chose not to adopt IFRS 16 lease requirements, or the IFRS 9 expected credit loss model for SMEs – deferring lease accounting for a future review and retaining the less complex impairment model.
Implementation & effective date
• Effective date: The standard becomes effective for annual periods starting on or after 1 January 2027, with early adoption permitted.
• Transition provisions: SMEs adopting early must include a ‘new standards issued’ disclosure in their Section 10 disclosures. Relief includes exemption from certain transition disclosures in the first year.
• Supporting resources: The IASB released full standard documentation, Basis for Conclusions, illustrative financials, and educational materials – including marked-up comparisons and modules for key sections, e.g. financial instruments – with ongoing updates via podcasts and webcasts.
Strategic implications
| Area | Impact for SMEs |
| Revenue | More robust and transparent calling for model updates and disclosures |
| Consolidation | Consistent control assessments reducing inconsistencies in financial statements |
| Financial instruments & fair value | Enhanced clarity which may increase disclosure costs, but improve decision‑usefulness |
| Business combinations | Greater alignment which ensures acquisitions are recorded consistently with full IFRS |
| Cash flow & employee benefits | Incremental disclosure adding transparency – but with added reporting complexity. |
Despite increased complexity in some areas, the IASB ensured that SMEs continue to benefit from a simplified, cost-effective framework. The IFRS for SMEs Accounting Standard remains self-contained, in plain language, and excludes topics deemed irrelevant, e.g. leases, segment reporting and earnings per share.
Conclusion
The 2025 third edition of IFRS for SMEs Accounting Standard marks a significant step toward global convergence, enhancing consistency and comparability with full IFRS while retaining SME-tailored simplifications. SMEs must prepare to update accounting systems, revise transition disclosures and provide enhanced disclosures – particularly in revenue, financial instruments, fair value and business combinations. Auditors are advised to prompt their clients to start with preparations for implementation. Early adoption, combined with the IASB’s extensive support resources, can ease the transition ahead of the 2027 effective date.
LEAF can assist with identifying deficiencies and areas for improvement on your audit files.
References
- 1. IFRS for SMEs Accounting Standard, Third edition, February 2025.
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