1.5 IFRS for small and medium-sized entities (SMEs)

IFRS for SMEs simplifies financial reporting for smaller businesses. It offers a streamlined alternative to full IFRS, with reduced disclosure requirements and simplified accounting treatments tailored to SME needs.

The standard aims to improve SME access to capital and enhance financial statement comparability. Key differences from full IFRS include simplified recognition and measurement, fewer disclosures, and omitted topics not relevant to typical SMEs.

IFRS for SMEs overview

Scope and applicability

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• IFRS for SMEs is a self-contained set of accounting principles tailored for the needs and capabilities of smaller businesses
• Applicable for entities that do not have public accountability and publish general purpose financial statements for external users
• Designed to meet the financial reporting needs of SMEs, which represent over 95% of all companies worldwide

Simplified reporting requirements

• IFRS for SMEs is based on full IFRS with modifications to reflect the needs of users of SMEs' financial statements and cost-benefit considerations
• Simplifications include omitted topics not relevant to SMEs, simplified recognition and measurement requirements, and reduced disclosure obligations
• Aims to provide a more cost-effective and proportionate financial reporting framework for SMEs compared to full IFRS

Key differences from full IFRS

Recognition and measurement simplifications

• Goodwill and other indefinite-life intangibles are amortized over their useful lives, rather than being subject to annual impairment tests
• Investment property is measured using the cost-depreciation-impairment model, with the fair value model as an option
• Financial instruments are classified into just two categories: amortized cost and fair value through profit or loss

Reduced disclosure obligations

• Significantly fewer disclosures are required under IFRS for SMEs compared to full IFRS
  • Approximately 300 disclosures in IFRS for SMEs vs over 3,000 in full IFRS
• Disclosure reductions include:
  • No requirement to present a statement of financial position at the beginning of the earliest comparative period
  • Simplified disclosures for pensions, share-based payment, and financial instruments

Omitted topics

• Certain topics in full IFRS are omitted from IFRS for SMEs as they are not relevant to typical SMEs:
  • Earnings per share
  • Interim financial reporting
  • Segment reporting
  • Insurance (insurers cannot use IFRS for SMEs)
• Assets held for sale are not presented separately in the statement of financial position

Benefits of IFRS for SMEs

Improved access to capital

• IFRS for SMEs enhances financial reporting quality and transparency for SMEs, making their financial statements more reliable and comparable for lenders and investors
• Enables SMEs to more easily access finance from banks, venture capital firms, and other capital providers across different countries
• Facilitates cross-border fundraising by providing a common accounting language

Enhanced comparability

• IFRS for SMEs provides a standardized financial reporting framework for SMEs globally
• Allows for easier benchmarking and comparison of financial performance between SMEs in different countries and industries
• Enables SMEs to more effectively communicate their financial position and results to stakeholders

Cost savings vs full IFRS

• Applying full IFRS can be complex and costly for SMEs, often requiring extensive resources and external consulting support
• IFRS for SMEs offers a more streamlined and cost-effective alternative that still delivers decision-useful information
• Cost savings arise from simplified recognition, measurement and disclosure requirements as well as less frequent updates compared to full IFRS

Adoption considerations

Eligibility criteria

• An entity is eligible to use IFRS for SMEs if it does not have public accountability
  • No debt or equity instruments traded in a public market
  • Not a financial institution or insurance company
  • Not holding assets in a fiduciary capacity as a primary business
• Subsidiaries of entities applying full IFRS can still use IFRS for SMEs if they meet the eligibility criteria themselves

Transition process and timeline

• SMEs adopting IFRS for SMEs for the first time apply the standard retrospectively, with limited mandatory and optional exemptions
• Date of transition is the beginning of the earliest period for which full comparative information under IFRS for SMEs is presented
  • For example, an SME adopting IFRS for SMEs effective 1 January 2024 with one year of comparatives would have a date of transition of 1 January 2023
• Typical timeline for transition includes:
  • Preparation and planning (3-6 months)
  • Assessment of accounting policy differences and impacts (2-4 months)
  • System and process changes and training (3-6 months)
  • Transition adjustments and comparatives (2-4 months)

Stakeholder impact and communication

• Transition to IFRS for SMEs impacts various stakeholders including investors, lenders, customers, suppliers, and employees
• Key stakeholder considerations and communications include:
  • Explaining the reasons for and benefits of adopting IFRS for SMEs
  • Providing training and education on the new financial reporting framework
  • Discussing impact on key financial metrics, debt covenants, compensation arrangements etc.
  • Engaging early and regularly to address questions and concerns

Financial statement presentation

Components of financial statements

• A complete set of financial statements under IFRS for SMEs includes:
  • A statement of financial position
  • A single statement of comprehensive income or a separate income statement and statement of comprehensive income
  • A statement of changes in equity
  • A statement of cash flows
  • Notes to the financial statements
• Comparative information is required for all amounts presented in the current period financial statements

Comparative information requirements

• SMEs are required to present comparative information for all amounts reported in the current period financial statements
  • Includes comparative notes disclosures, not just financial statement line items
• At minimum, comparative information includes the preceding period
  • Additional earlier periods can be included on a voluntary basis
• If accounting policies are applied retrospectively, a restated statement of financial position is presented as at the beginning of the preceding period

Materiality and aggregation principles

• Financial statements should present each material class of similar items separately
  • Items of a dissimilar nature or function are presented separately unless immaterial
• Materiality is an entity-specific judgment based on size and nature of an item
  • An item can be material by size, nature, or a combination of both
  • Assessment is made in the context of the financial statements as a whole
• Immaterial items can be aggregated with amounts of a similar nature or function and need not be presented separately

Accounting policies, estimates and errors

Selection and application of accounting policies

• SMEs select accounting policies to ensure financial statements provide relevant and reliable information
• If IFRS for SMEs does not specifically address a transaction, event or condition, judgment is used to develop an appropriate accounting policy
  • Hierarchy to follow: requirements for similar issues in IFRS for SMEs, definitions and concepts in the Conceptual Framework, full IFRS requirements for similar issues
• Accounting policies are applied consistently to similar transactions and events

Changes in accounting estimates

• Accounting estimates are monetary amounts in financial statements that are subject to measurement uncertainty
  • Examples: uncollectible receivables, inventory obsolescence, useful lives and residual values of assets
• Changes in accounting estimates result from new information or developments and are accounted for prospectively
  • Recognized in profit or loss in the period of change and future periods affected
• Distinguished from corrections of errors and changes in accounting policies

Corrections of prior period errors

• Prior period errors are omissions or misstatements arising from a failure to use/misuse of reliable information that was available or could have been reasonably obtained
• Material prior period errors are corrected retrospectively by restating comparative prior period amounts or the opening balances of assets, liabilities and equity
  • Restatement as far back as is practicable
• If impracticable to determine period-specific effects or cumulative effect of an error, restate opening balances of assets, liabilities and equity for the earliest period possible

Financial instruments

Classification of financial assets and liabilities

• Financial instruments are classified into two categories under IFRS for SMEs:
  • Basic financial instruments measured at amortized cost
    • Examples: cash, demand and fixed-term deposits, commercial paper, accounts and notes receivable, accounts and notes payable, loans
  • Other financial instruments measured at fair value through profit or loss (FVTPL)
    • Includes all complex financial instruments like derivatives, investments in convertible and non-convertible preference shares and debt, investments in non-subsidiary equity instruments
• Classification is based on the business model for managing the instruments and their contractual cash flow characteristics

Initial and subsequent measurement

• Basic financial instruments are initially measured at transaction price, including transaction costs
  • Subsequently measured at amortized cost using the effective interest method
• FVTPL financial instruments are initially measured at fair value, excluding transaction costs which are expensed
  • Subsequently measured at fair value with changes recognized in profit or loss
• Specific measurement guidance applies to certain instruments:
  • Investments in non-convertible and non-puttable preference shares and non-derivative equity - measured at FVTPL if fair value can be measured reliably, otherwise at cost less impairment
  • Commitments to receive or make a loan - measured at cost less impairment

Impairment of financial assets

• At each reporting date, assess whether there is objective evidence of impairment for any financial assets not measured at FVTPL
• Objective evidence includes:
  • Significant financial difficulty of the issuer
  • Breach of contract like a default or delinquency in interest or principal payments
  • Granting of a concession to the borrower that would not otherwise be considered
  • Probable bankruptcy or financial reorganization of the borrower
• If objective evidence exists:
  • For instruments measured at amortized cost, impairment loss is the difference between the asset's carrying amount and the present value of estimated cash flows discounted at the original effective interest rate
  • For instruments measured at cost less impairment, impairment loss is the difference between the asset's carrying amount and the best estimate of what the asset could be sold for currently
• Impairment losses are reversed if the amount decreases in a subsequent period and the decrease can be objectively linked to an event after initial recognition

Inventories

Measurement of cost

• Inventories are measured at the lower of cost and estimated selling price less costs to complete and sell
• Cost of inventories includes:
  • All costs of purchase (e.g. purchase price, transport, handling, import duties and non-recoverable taxes)
  • Costs of conversion (e.g. direct labor, production overheads)
  • Other costs incurred in bringing the inventories to their present location and condition
• Techniques to measure cost:
  • Standard cost method - takes into account normal levels of materials, labor, efficiency and capacity utilization; regularly reviewed and revised
  • Retail method - cost determined by reducing sales value by the appropriate percentage gross margin; useful when large number of rapidly changing items with similar margins

Cost formulas

• Cost of inventories is assigned by using specific identification or FIFO/weighted average cost formulas
  • Specific identification of costs for inventories not ordinarily interchangeable or goods/services produced and segregated for specific projects
  • FIFO (first-in, first-out) assumes items purchased or produced first are sold first, so ending inventory consists of most recently purchased or produced items
  • Weighted average cost is based on the average of all items available for sale during the period
• Same cost formula is used for all inventories with similar nature and use to the entity

Recognition as an expense

• When inventories are sold, the carrying amount is recognized as an expense (cost of sales) in the period of the related revenue recognition
• Any write-down to estimated selling price less costs to complete and sell is also recognized as an expense when it occurs
• Some inventories may be allocated to other asset accounts (e.g. inventory used as a component of self-constructed property, plant or equipment)
  • Recognized as an expense over the useful life of that asset

Property, plant and equipment

Initial and subsequent measurement

• Items of PP&E are initially measured at cost
  • Cost includes purchase price, directly attributable costs of bringing the asset to the location and condition for its intended use, and initial estimate of dismantling/removing the item and restoring the site
• Subsequent to initial recognition, PP&E is measured at cost less accumulated depreciation and impairment losses
  • Cost model is the only option under IFRS for SMEs (no revaluation model)
• If payment is deferred beyond normal credit terms, cost is the present value of all future payments
  • Difference between this amount and total payments is recognized as interest expense over the period of credit

Depreciation and impairment

• Depreciation is the systematic allocation of the depreciable amount (cost less residual value) over an asset's useful life
  • Depreciation method reflects the pattern of economic benefit consumption (e.g. straight-line, diminishing balance, units of production)
  • Depreciation begins when the asset is available for use and ends when derecognized or classified as held for sale
• Useful life is reviewed at each financial year-end; residual value is reviewed at each reporting date
  • Changes are accounted for prospectively as changes in estimates
• At each reporting date, assess whether there are any indications an asset may be impaired (events or changes in circumstances)
  • If impairment indicated, compare carrying amount to recoverable amount (higher of fair value less costs to sell and value in use)
  • Impairment loss recognized in profit or loss if carrying amount exceeds recoverable amount

Derecognition and disposal

• PP&E is derecognized on disposal or when no future economic benefits are expected from its use or disposal
• Gain or loss on derecognition is the difference between net disposal proceeds (if any) and carrying amount
  • Recognized in profit or loss when the item is derecognized
  • Not classified as revenue
• Compensation from third parties for impaired, lost or given up items of PP&E is recognized in profit or loss when it becomes receivable

Provisions and contingencies

Recognition criteria for provisions

• A provision is a liability of uncertain timing or amount
• Recognize a provision only when:
  • The entity has a present obligation (legal or constructive) as a result of a past event,
  • It is probable (more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and
  • A reliable estimate can be made of the amount of the obligation
• A constructive obligation arises when an entity's actions create valid expectations that it will fulfill certain responsibilities (e.g. published policies, past practices)

Measurement of provisions

• Provisions are measured at the best estimate of the amount required to settle the present obligation at the reporting date
  • Reflects a current market-based discount rate (risks specific to the liability)
  • Risks and uncertainties are taken into account in reaching the best estimate
• Where the effect of the time value of money is material, the provision is measured at the present value of the expected future cash flows
• Best estimate for a large population of items (e.g. warranties) is the expected value (probability-weighted average)
• Future events that may affect the amount required to settle an obligation are reflected in the amount of a provision where there is sufficient objective evidence that they will occur

Contingent liabilities and assets

• A contingent liability is a possible obligation from past events whose existence will only be confirmed by uncertain future events not wholly within the entity's control, or a present obligation not recognized because an outflow of economic benefits is not probable or cannot be reliably measured
  • Not recognized but disclosed unless the possibility of an outflow of resources is remote
• A contingent asset is a possible asset from past events whose existence will only be confirmed by uncertain future events not wholly within the entity's control
  • Not recognized but disclosed where an inflow of economic benefits is probable
  • When realization of income is virtually certain, the related asset is not a contingent asset and recognition is appropriate

Income taxes

Current tax recognition and measurement

• Current tax is the amount of income taxes payable (recoverable) in respect of taxable profit (tax loss) for a period
• Recognize a current tax liability for tax payable on taxable profit for current and past periods, measured at the amount expected to be paid
  • Recognize an asset for the benefit of tax losses that can be carried back to recover tax paid in a previous period
• Current tax liabilities (assets) are measured at the amounts expected to be paid (recovered) using the tax rates/laws that have been enacted or substantively enacted by the reporting date

Deferred tax recognition and measurement

• Deferred tax liabilities (assets) are the amounts of income taxes payable (recoverable) in future periods in respect of taxable (deductible) temporary differences and the carryforward of unused tax losses and credits
• Temporary differences are differences between the carrying amount of an asset or liability and its tax base
  • Taxable temporary differences will result in taxable amounts in future periods when the asset/liability is recovered/settled
  • Deductible temporary differences will result in deductible amounts in future periods when the asset/liability is recovered/settled
• Recognize deferred tax liabilities for all taxable temporary differences
  • Except for those arising from: initial recognition of goodwill; initial recognition of an asset/liability in a transaction other than a business combination that affects neither accounting nor taxable profit
• Recognize deferred tax assets for deductible temporary differences, unused tax losses and credits
  • Only to the extent it is probable that future taxable profits will be available against which they can be utilized
• Deferred tax assets and liabilities are measured at the tax rates expected to apply when the asset is realized or the liability settled, based on rates/laws enacted or substantively enacted by the reporting date
  • Reflect the tax consequences of how the entity expects to recover or settle the carrying amounts of assets and liabilities

Presentation and disclosure requirements

• Allocate current and deferred tax to the related components of profit or loss, other comprehensive income and equity
  • Do not discount