Adoption of IFRS for SMEs Accounting Standard for First Time Startups – A Guide for Small and Medium-Sized Entities

Small and Medium-Sized Entities (SMEs) often face challenges in financial reporting due to complex accounting standards. They often follow local standards, GAAP accounting principles, and internal bookkeeping practices, which limit global growth, reduce transparency, and put your business at risk of non-compliance.

That’s where the International Financial Reporting Standard for SMEs (IFRS for SMEs) steps in. It provides a simplified yet structured accounting framework tailored for these businesses. Compliance with this standard reduces complexity, enhances transparency, and helps SMEs working across borders maintain consistency.

Here’s what it is and why it matters.

What is IFRS for SMEs?

IFRS for SME refers to the International Financial Reporting Standard set in July 2009 by the International Accounting Standards Board (IASB®) for SMEs that do not have public accountability. It is a set of self-contained standards based on full IFRSs. However, they have been simplified for SMEs to reduce the complexity of financial reporting while maintaining high-quality accounting principles.

Think of it as a streamlined, “lighter” version of the full IFRS rules, designed specifically for small and medium-sized businesses. It keeps the core accounting principles of the full standards but trims down the parts that aren’t as critical for smaller companies.

Its key features include:

• Simplified Recognition & Measurement: It sets easier rules for revenue, leases, and financial instruments.
• Reduced Disclosures: IFRS for SMEs only requires critical information. This reduces complexity and cuts down administrative burden.
• Global Consistency: The standard aligns with international practices and eases cross-border transactions.

Designed for entities without public accountability in multiple languages and fewer strict rules, the standard has been adopted by over 80 countries. Today, it has become a gold standard for SMEs aiming to attract investors or expand globally. It’s a practical toolkit that allows you to keep what matters, ditching what doesn’t, so you can focus on growth, not accounting headaches.

The Need for Compliance

Adopting the IFRS for SMEs Standard is critical for SMEs wanting to increase their business potential. Non-compliance leads to missed opportunities, legal issues, and reputational damage. Businesses must align with the standard if they want to:

1. Be a part of a globally recognized framework and access global markets, attract investors, partners, and clients worldwide.
2. Build trust and credibility with lenders, regulators, and stakeholders through transparent, standardized financials.
3. Meet legal requirements and avoid penalties in jurisdictions where compliance is mandated.
4. Secure funding from global investors who favor IFRS-compliant businesses for clear risk assessment.
5. Simplify reporting by adhering to globally standardized rules.
6. Prepares their business for scaling, mergers, or transitioning to full IFRS.
7. Bring transparency and boost economic efficiency by enhancing the quality of financial information gained by investors
8. Enhance the comparability of financial statements.

Adopting the Global Financial Reporting

Module 35 of the IFRS for SMEs Standard provides a structured approach for entities that want to transition to this international accounting standard for the first time. It helps businesses understand specific rules, exceptions as well and exemptions, facilitating a smoother transition without imposing an excessive burden on businesses.

Entities must apply new accounting policies retrospectively to all presented financial periods, with certain mandatory exceptions and optional exemptions:

• Mandatory Exceptions:

  • Derecognition of Financial Assets and Liabilities: Items derecognized under prior GAAP before transition cannot be reinstated.
  • Hedge Accounting: Existing hedges must meet IFRS for SMEs criteria from the transition date onward.
  • Estimates: Prior estimates cannot be revised unless errors are identified.
  • Discontinued Operations: Pre-transition classifications remain unchanged.
  • Non-Controlling Interests: Changes apply prospectively unless business combinations are restated.
  • Government Loans: Loans are recognized at their previous GAAP carrying amount, with no retrospective recognition of grants.

• Optional Exemptions:

  • Business Combinations: Entities can choose to restate none, some, or all past combinations.
  • Share-Based Payments: Exemption applies to pre-transition equity instruments.
  • Fair Value/Revaluation as Deemed Cost: Fair value or previous GAAP revaluations can be used for property, plant, equipment (PPE), and intangible assets.
  • Cumulative Translation Differences: Reset to zero at transition for foreign currency translation.
  • Severe Hyperinflation: Assets and liabilities can be measured at fair value after normalization.
  • Deferred Tax: Section 29 applies prospectively.

How to Prepare Financial Statements When Transitioning to IFRS for SMEs

For a smooth and hassle-free transition to the standard, the business needs to follow a few key steps on the transition date (usually the start of the earliest period shown in the financial statements):

• Recognize what’s required: Make sure all assets and liabilities that must be recorded under IFRS for SMEs are included.
• Drop what’s not allowed: Remove any items that were previously reported but aren’t recognized under the new standard.
• Reclassify where needed: Check if something was listed as a certain type of asset or liability under your old reporting system, but is categorized differently under the new standard, and update it accordingly.
• Use IFRS measurements: Recalculate the values of all recognized assets and liabilities using methods outlined in the new standard.

This process ensures that your financials are fully aligned with the new standards from the start.

Disclosure Requirements

Entities transitioning to IFRS for SMEs must provide detailed reconciliations and explanations of financial statement adjustments, including:

• Reconciliations of equity at the transition date and the end of the last GAAP period.
• Reconciliation of profit/loss for the latest period reported under the previous GAAP.
• Explanation of Changes, outlining the impact on financial position, performance, and cash flows.
• Distinction Between Errors and Policy Changes, clarifying whether changes resulted from IFRS adoption or correction of prior GAAP errors.

Significant Estimates & Judgments

Entities must disclose the impact of using exemptions, such as fair value as deemed cost or restatements of business combinations. If retrospective application is impracticable, they must disclose the unadjusted amounts and apply adjustments prospectively.

Eligibility Criteria for SMEs under IFRS

To qualify, businesses must make sure they have no public accountability. This means

• It does not have its debt or equity instruments traded in a public market.
• It does not hold assets in a fiduciary capacity for a broad group of outsiders (e.g., banks, insurance companies, pension funds).

Also, the company must publish its general-purpose financial statements – financial statements intended for external users (e.g., owners not involved in managing the business, lenders, and creditors who aren’t directly involved in day-to-day operations).

It must be noted that a subsidiary of a listed company can use IFRS for SMEs for its own standalone financial reports if it meets the no-public-accountability rule. However, for consolidation with its parent company (which uses full IFRS), it would need to adjust its financials to comply with full IFRS, since there are notable differences between the two standards.

Exclusions from IFRS for SMEs

The simplified standards do not apply to:

• Publicly listed companies (they are required to use full IFRS or local GAAP).
• Financial institutions (again, subjected to full IFRS, US GAAP, or sector-specific rules).

Final Words

As global markets get interconnected, it has become important for businesses to use IFRS for SMEs as a strategic tool and not just a regulatory checkbox. By adopting this globally recognized framework, they can not only align their accounting practices with international norms, but also strengthen their credibility and trust with investors, lenders, and partners across borders.

So, instead of viewing IFRS as a compliance burden, consider it as an investment that you are making in your business’s future. It can help you fortify your stakeholders’ trust in your business, helping you compete on a global stage.

Need support navigating IFRS? Let’s turn this challenge into your competitive advantage. Our team of IFRS specialists brings hands-on expertise in global standards to help you implement the framework efficiently, minimize disruptions, and unlock new opportunities.

Reach out today, and we’ll guide you through every step to ensure compliance becomes a catalyst for growth.