IFRS for SMEs Just Got an Update – Here’s What You Need to Know

What is IFRS for SMEs?

IFRS for SMEs is a simplified accounting framework designed for smaller businesses. Unlike full IFRS, which can be complex and burdensome for small enterprises, IFRS for SMEs provides a streamlined approach to financial reporting. This allows SMEs to prepare general-purpose financial statements without requiring extensive resources or specialized accounting knowledge.

  • Purpose: IFRS for SMEs is designed to offer a simplified reporting framework tailored to the unique needs of small and medium-sized entities. This framework ensures that financial statements remain credible and reliable, providing valuable information for lenders, investors, and other stakeholders. By reducing the complexity of financial reporting, IFRS for SMEs helps businesses focus on growth and operations while maintaining transparency and accountability.

  • Eligibility: To be eligible to use the IFRS for SMEs, a business must be classified as an entity without public accountability. This means the business is not publicly traded and does not hold assets in a fiduciary capacity for a broad group of outsiders, such as banks or insurance companies. The standard aims to address the specific challenges faced by these businesses while simplifying compliance requirements. 

In the Philippines, entities within the scope of this standard (PFRS for SMEs) are those with total assets over Php100 million but below Php350 million or total liabilities over Php100 million but below Php250 million.

IFRS for SMEs plays a crucial role in the financial ecosystem by providing a consistent and straightforward reporting standard. The simplified framework helps build confidence and trust among stakeholders, ensuring that SMEs can access the financial support they need to grow and thrive.

Why Was the Standard Updated?

IFRS for SMEs standard is not static; it undergoes periodic revisions to ensure it remains relevant and effective for its intended users. These updates serve several key purposes:

  • Reflect Updates in Full IFRS: The revisions incorporate changes from the full IFRS deemed relevant and applicable to SMEs. These periodic revisions help ensure that SMEs benefit from improvements in financial reporting practices and methodologies used by larger entities. The goal is to maintain alignment with global accounting standards while keeping the requirements manageable for smaller businesses. 

  • Clarify Ambiguous Requirements: Feedback from SMEs and stakeholders often highlights areas where the standard's requirements are unclear or ambiguous. These revisions aim to provide clearer guidance, making it easier for SMEs to comply with the standard and for stakeholders to understand their financial reports.

  • Improve Comparability and Consistency: Consistency and comparability in financial reporting are essential for stakeholders, including investors, lenders, and regulators. By periodically revising the IFRS for SMEs, the International Accounting Standards Board (IASB) aims to enhance the comparability of financial statements across different jurisdictions and industries. This helps build trust and confidence in the financial information provided by SMEs.

The 2025 update, which represents the third edition of the IFRS for SMEs, follows previous revisions in 2015 and the 2023 update to incorporate the Pillar Two Model Rules. 

These periodic updates underscore the IASB's commitment to maintaining a robust and practical accounting standard for small and medium-sized enterprises and their stakeholders (IASB, 2025).

Key Changes in the 2025 IFRS for SMEs Update

The 2025 update brings important changes to how SMEs present their financial statements, focusing on making them more useful and easier to understand. Here is a breakdown of the key changes:

A. Financial Statement Presentation

Material Accounting Policy Information 

Previously, companies had to disclose their "significant accounting policies," which meant explaining any accounting rules they used that were important. 

Now, the focus is on "material accounting policy information." "Material" means information that, if left out or changed, could influence the decisions of someone reading the financial statements.

Essentially, this change allows SMEs to limit their disclosures to accounting policies that truly matter to users of the financial statements, avoiding unnecessary clutter.

New Guidelines on Materiality, Order of Notes, and Subtotals:

Materiality 

The update introduces new guidelines on materiality, helping SMEs determine what information is important enough to be included in the financial statements. Materiality is assessed based on the size and nature of an item, as well as its potential impact on the financial statements. 

These guidelines aim to improve the quality of disclosures by ensuring that only relevant and significant information is presented.

Order of Notes 

The 2025 update provides clearer guidance on the presentation order of notes in financial statements. This helps create a more logical and user-friendly structure, making it easier for stakeholders to navigate and understand the information. The order of notes is typically based on the relative importance of each item and its relevance to the financial statements as a whole.

Subtotals 

New guidelines on subtotals have been introduced to enhance the presentation of financial information. Subtotals are intermediate totals that provide a clearer picture of key financial metrics, such as gross profit or operating income. 

By including subtotals, SMEs can improve the readability and comparability of their financial statements, making it easier for users to analyze and interpret the data.

These changes aim to improve the clarity and usefulness of financial statements, helping stakeholders make better-informed decisions.

B. Statements of Financial Position & Cash Flows

The update revises the Statement of Financial Position and the Statement of Cash Flows to provide more detailed and transparent information.

Disaggregation of Line Items for Clarity 

In the 2025 update, SMEs must disaggregate line items on their financial statements when it improves clarity. This means breaking down larger categories into more specific items to provide a clearer and more detailed view of the company's financial position. 

For example, instead of showing a single line item for "current assets," an SME might disaggregate this into more specific items like "cash and cash equivalents," "accounts receivable," and "inventory." 

This enhances transparency and helps users better understand the components of the financial statements.

New Supplier Finance Arrangement Disclosures 

Sometimes, companies use special agreements with banks or other financial institutions to pay their suppliers earlier. The update requires companies to disclose more information about these supplier finance arrangements (also referred to as reverse factoring) to help stakeholders better understand how the company manages its payments to suppliers and its cash flow. 

The new disclosure requirements aim to provide greater transparency around these arrangements, including the terms and conditions, the amount of financing obtained, and the impact on the SME's financial position.

Reconciliation of Changes in Liabilities from Financing Activities 

SMEs must now include a reconciliation of changes in liabilities arising from financing activities in their cash flow statements. This requirement provides a detailed explanation of how and why the liability amounts from financing activities changed over the reporting period. 

The reconciliation typically includes information on changes due to cash flows (e.g., repayments of loans), non-cash changes (e.g., the impact of foreign exchange rates), and other changes (e.g., the acquisition of new financing). 

By including this reconciliation, SMEs can enhance the transparency and completeness of their financial reporting, making it easier for users to understand the sources and uses of financing.

These changes are intended to provide more detailed and transparent information about a company's financial position and cash flow.

C. Revenue Recognition & Financial Instruments

The 2025 update significantly changes how SMEs recognize revenue and handle financial instruments. 

Alignment of Revenue Recognition Model with IFRS 15 

The 2025 update revises the revenue recognition model for SMEs to align with IFRS 15: Revenue from Contracts with Customers. This model introduces a more structured approach, guiding SMEs through a five-step process to recognize revenue. 

The process involves identifying the contract, determining performance obligations, establishing the transaction price, allocating it to those obligations, and recognizing revenue as obligations are fulfilled. 

This ensures a consistent and transparent method for reporting revenue across all SMEs, making it easier for stakeholders to compare financial information.

Removal of IAS 39 Financial Instruments Option

Previously, SMEs could follow the older IAS 39 Financial Instruments rules. This option has been removed. The update now requires SMEs to apply new classification rules for financial instruments, which are simpler and more relevant to their needs. These rules focus on classifying financial instruments (loans, investments, bonds, etc.) based on the business model of the entity and the cash flow characteristics of the instrument. 

The goal is to streamline reporting, reduce complexity, and ensure alignment with global standards.

Clarification on Financial Guarantee Contracts and Debt Instruments 

The update clarifies guidance on how SMEs should account for financial guarantee contracts and classify debt instruments. For financial guarantee contracts, SMEs must now disclose their nature, terms, and the potential impact on financial statements. 

Regarding debt instruments, the criteria for classification have been refined to help SMEs determine whether an instrument should be categorized as a liability or equity. This clarification reduces ambiguity and enhances the consistency of reporting across different SMEs.

Overall, these changes aim to enhance the consistency and accuracy of financial reporting by aligning SME practices with broader IFRS principles and clarifying the treatment of complex financial items. 

The goal is to provide more reliable and comparable financial information for stakeholders.

D. Leases & Business Combinations

Revised Guidance on Business Combinations 

The 2025 update introduces revised guidance on how SMEs should account for business combinations, aligning with the 2008 version of IFRS 3: Business Combinations. 

A business combination occurs when one entity acquires control of another, such as in a merger or acquisition. The updated guidance clarifies how SMEs should measure and recognize the assets, liabilities, and goodwill that result from such transactions.

For instance:

  • Goodwill, which represents the purchase price excess over the fair value of the net assets acquired, must be recognized as an intangible asset and systematically amortized. This makes the accounting treatment more straightforward for SMEs compared to full IFRS.

  • The guidance also emphasizes a consistent approach to identifying and measuring assets and liabilities, ensuring transparency and reliability in financial reporting.

By simplifying and tailoring the requirements for SMEs, these updates provide clearer direction for entities involved in business combinations, making the process easier to apply and understand.

Lease Accounting Revisions:

The 2025 update revises lease accounting to make it clearer and more consistent for SMEs. Leases are agreements where one party (the lessee) obtains the right to use an asset owned by another party (the lessor) in exchange for payment.

The revisions clarify how SMEs should:

  • Distinguish between finance leases (where the lessee effectively assumes ownership of the asset) and operating leases (where the lessee only uses the asset temporarily).

  • Measure and disclose lease-related assets and liabilities on the balance sheet for finance leases, including the lease term and payment details.

The revisions aim to make the lease accounting rules easier to understand and apply, effectively helping SMEs account for their lease agreements and more accurately report their financial obligations.

E. Fair Value Measurement & Related Disclosures

A New Section Centralizing Guidance on Fair Value Measurement

The 2025 update introduces a new section specifically dedicated to fair value measurement, consolidating guidance in one place to make it easier for SMEs to find and use. Fair value refers to the price at which an asset could be sold, or a liability transferred, in a transaction between willing, knowledgeable parties.

By centralizing the guidance, the new section simplifies the process for SMEs, helping them understand when and how to measure assets and liabilities at fair value. 

This change enhances consistency in applying fair value principles, reducing confusion caused by scattered or overlapping requirements in the previous standard.

More Detailed Instructions on Estimating Fair Value

Sometimes, it's not easy to find an exact market price for an asset or liability. The update gives SMEs more detailed instructions, tools, and techniques for making fair value estimates. 

This includes considerations like:

  • Market-Based Measurement: The update encourages SMEs to prioritize market data (such as recent sales of similar assets) when determining fair value.

  • Valuation Techniques: The update offers guidance on commonly used techniques, such as the market approach (comparing with similar items), the income approach (discounting future cash flows), and the cost approach (considering replacement costs).

  • Hierarchy of Inputs: The update clarifies the use of observable inputs (e.g., market prices) over unobservable inputs (e.g., internal estimates) to enhance the reliability of fair value measurements.

This means that when a price isn't readily available, there are now clearer rules for determining what that price would likely be. These changes are designed to improve the accuracy and consistency of fair value measurements, ensuring that financial statements reflect the true value of a company's assets and liabilities.

F. Foreign Currency Translation & Hyperinflation

The 2025 update also provides more clarity and consistency in how SMEs handle foreign currency transactions and hyperinflation-related situations. 

More Clarity for Determining Exchange Rate for Advance Payments

The 2025 update clarifies guidance on how SMEs should determine the exchange rate for advance payments made or received in foreign currencies. An advance payment occurs when a business pays or receives cash before the related goods or services are delivered. 

The updated standard clarifies that the exchange rate at the transaction date should be used to recognize the advance payment.

If the exchange rate changes before the transaction is settled, the difference is generally reflected in the financial statements as a foreign exchange gain or loss. This clearer approach helps SMEs consistently handle such transactions, ensuring stakeholders have a reliable view of the impact of foreign currency movements on the business.

Consistent Approach for Assessing Currency Exchangeability 

The update also introduces a standardized method for assessing whether a currency is exchangeable—meaning whether it can be converted into another currency at a reasonable rate within a reasonable timeframe. This is particularly important for SMEs operating in countries where currency restrictions or economic conditions might limit exchangeability.

Under the new approach, SMEs must consider factors such as government regulations, market conditions, and the availability of foreign currency when determining whether a currency is exchangeable. If a currency is deemed non-exchangeable, the SME may need to apply alternative methods, such as using an estimated exchange rate. 

These changes aim to improve the accuracy and reliability of financial reporting in situations involving foreign currencies, helping ensure financial statements reflect the true economic impact of these transactions.

G. Employee Benefits & Income Tax

The 2025 update changes how SMEs account for employee benefits and income taxes, focusing on providing more detailed and accurate information. Here’s what you need to know:

More Detailed Disclosures for Employee Benefits

"Defined benefit plans" are retirement plans, where employees are promised a specific amount upon retirement. Meanwhile, "termination benefits" are payments made to employees when their employment ends. 

The update requires SMEs to provide more detailed information about these benefits in their financial statements, clarifying how benefit obligations are calculated and the assumptions underpinning those calculations.

Additionally, SMEs must outline not only what termination benefits they provide, but also when they expect these liabilities to arise. This change is designed to help stakeholders better understand the company’s financial commitments.

New Guidance on Recognizing Deferred Tax Assets and Handling Tax Uncertainties

The update provides new guidance on when and how to recognize deferred tax assets—essentially potential future tax savings—when there’s uncertainty around a company’s ability to use those savings. These new guidelines provide a more structured approach to reporting and estimating these assets.

Handling tax uncertainties also gets a major upgrade. SMEs will now need to consider situations with ambiguity—like disputes with tax authorities or unclear tax laws. The IFRS update provides a framework for assessing these uncertainties and reflecting them appropriately in financial statements. While this adds an extra step for SMEs, it helps reduce the risk of unforeseen liabilities later.

H. Transition Provisions

When a new accounting standard comes into effect, companies must switch from the old rules to the new ones. The 2025 update includes transition provisions to help SMEs make this switch smoothly. 

Relief Measures for First-Time Adopters

For companies using the IFRS for SMEs for the first time, the update provides some "relief measures" to make the transition easier. 

For example, companies may be allowed to use shortcuts or approximations when restating certain financial information during the transition. These measures are akin to training wheels for those new to the standard, helping them adopt the guidelines without getting bogged down by the burden of getting everything right from the start.

Applying the Revised Revenue Recognition Model

Another crucial aspect relates to the updated revenue recognition model. Entities now have two options for applying this model:

  • Prospectively: This means applying the new standard only to transactions and events occurring after the adoption date, leaving past financial records unchanged. This option is often considered less burdensome since it avoids reworking historical data.

  • Retrospectively: Under this approach, the company applies the new standard to both current and past financial records. While this option requires more effort, it provides a clearer picture of how the changes impact the business over time.

By giving organizations the flexibility to choose their preferred approach, the IFRS aims to accommodate the diverse needs of SMEs, recognizing that no two businesses are exactly alike in how they manage their financial reporting.

When Will the 2025 IFRS for SMEs Update Take Effect?

The third edition of the IFRS for SMEs was officially issued in February 2025, marking a significant milestone for small and medium-sized enterprises worldwide. However, the changes won’t take effect immediately, giving businesses time to prepare for the transition.

Globally, the updated standards are set to become effective for annual reporting periods beginning on or after January 1, 2027. Early adoption is permitted for entities that wish to align sooner. That said, each jurisdiction has the authority to determine its own adoption timeline. 

As such, SMEs should consult their respective national accounting bodies to confirm when the new standards will apply in their region.

Specific implementation dates have not yet been announced for SMEs in the Philippines. Keep an eye on updates from the Philippine Financial Reporting Standards Council (PFRSC) and other relevant authorities to stay informed about the timelines.

How These Changes Impact SMEs

While the updates to the IFRS for SMEs are designed to bring meaningful benefits, they also come with a set of challenges. Here’s a closer look at what these changes mean for SMEs:

Enhanced Transparency and Comparability

One of the update's primary goals is to make financial statements more transparent and easier to compare across different businesses. By standardizing disclosures and providing clearer, more useful information, lenders, investors, and other stakeholders can have a better understanding of an SME's financial health. For SMEs, this could enhance opportunities for securing funding or building trust with key partners.

Simplified Financial Reporting

The updates streamline financial reporting by removing outdated options like IAS 39 (the older standard for financial instruments), which was widely considered overly complex, with rigid rules that often led to confusion and reporting inconsistencies. 

By doing so, they reduce complexity and make it easier for SMEs to align their reporting practices with global standards. This simplification is a welcome relief for small businesses that often lack the resources to handle intricate accounting requirements.

Compliance Challenges

SMEs will need to invest time and resources in updating their accounting policies, systems, and financial reporting processes to align with the new requirements. For smaller organizations, this may require external support or staff training to ensure a smooth transition.

What SMEs Should Do Next

With the 2025 IFRS for SMEs update on the horizon, taking proactive steps can help ease the transition to revised guidelines. Here’s how SMEs can prepare effectively:

Review Internal Financial Reporting Policies 

Start by examining your current accounting rules and procedures and ensure they align with the new standards, adjusting any practices that deviate from the updated requirements. 

Update Accounting Systems and Disclosures 

SMEs may need to assess their current chart of accounts and reporting templates to ensure they align with the revised standards. 

For example, if the updated standards require more detailed disclosure of lease obligations, SMEs might need to create new sub-accounts to separately track lease payments, interest expenses, and other related costs. 

They may also need to review their existing contracts, such as supplier agreements or lease contracts, to identify financial details that must now be separately recorded.

This may also involve upgrading processes and using digital tools. Many modern accounting software have features specifically designed to support IFRS compliance.

Seek Professional Advice

The new IFRS for SMEs standards may affect each business differently. As such, consulting with a reputable accounting firm can be incredibly beneficial for navigating these changes effectively. Professional accountants and auditors specializing in IFRS can help SMEs understand how the updates apply to their unique circumstances. 

For instance, an SME in retail may need guidance on recognizing revenue from customer loyalty programs. Meanwhile, a manufacturing business might face questions about accounting for supplier financing. 

Train Finance Teams

Your finance team will play a critical role in implementing the updates. Provide them with the necessary training to understand the revised standards, ensuring they are equipped to handle new reporting requirements effectively. 

Training can take many forms, from in-house workshops led by external IFRS experts to online courses tailored for SMEs. The key is to ensure your team understands not only the "what" but also the "how" of applying the revised standards in the context of your business. 

Investing in their knowledge pays off by reducing compliance risks, improving reporting quality, and building a stronger, more capable finance team.

  • Monitor Jurisdictional Timelines

Since adoption timelines can vary by jurisdiction, keep an eye on announcements from the Philippine Securities and Exchange Commission (SEC). This will give you time to prepare before the deadline and reduce the risk of last-minute compliance hurdles.

This proactive approach to the IFRS for SMEs update will not only help ensure compliance but also position your business to benefit from the enhanced transparency and credibility that come with aligning to global standards.

References: