The IFRS for SMEs (International Financial Reporting Standard for Small and Medium-sized Entities) provides a simplified, principles-based framework for preparing financial statements. It is designed to reduce the reporting burden on smaller entities while ensuring that the financial statements remain transparent, comparable, and useful to users such as owners, lenders, and regulators.
1. Who Qualifies to Apply IFRS for SMEs?
The IFRS for SMEs is intended for entities that do not have public accountability and publish general-purpose financial statements.
An entity has public accountability if it:
- Has debt or equity instruments traded in a public market; or
- Holds assets in a fiduciary capacity for a broad group of outsiders, such as banks, insurance companies, securities brokers, and investment funds.
Entities such as family-owned businesses, owner-managed companies, and medium-sized enterprises without listed shares generally qualify.
However, each jurisdiction decides which entities are required or permitted to use IFRS for SMEs.
2. Recent Changes to IFRS for SMEs (Third Edition, 2025)
In February 2025, the IASB issued the third edition of the IFRS for SMEs, effective for annual reporting periods beginning on or after 1 January 2027, with early adoption permitted.
Key updates include:
- Section 2 – Concepts and Pervasive Principles updated to align with the 2018 Conceptual Framework.
- Section 9 – Consolidated and Separate Financial Statements revised to adopt a single control model.
- Section 11 – Financial Instruments, now streamlined into a single section with updated classification and disclosure guidance.
- Section 12 – New section on Fair Value Measurement based on IFRS 13, centralising fair value requirements.
- Section 19 – Business Combinations now requires use of the acquisition method (aligned with IFRS 3).
- Section 23 – Revenue has been overhauled to reflect a simplified five-step model consistent with IFRS 15.
Notably, the IASB decided not to incorporate lease accounting aligned with IFRS 16 in this update, although it may be revisited in the future.
3. Required Components of Financial Statements
According to Section 3 of IFRS for SMEs, a complete set of financial statements includes:
- A statement of financial position (balance sheet) at the reporting date.
- A statement of comprehensive income for the reporting period (either a single statement or separate income statement and statement of comprehensive income).
- A statement of changes in equity for the reporting period.
- A statement of cash flows for the reporting period.
- Notes to the financial statements, including a summary of significant accounting policies and other explanatory information.
4. Statement of Financial Position (Balance Sheet)
The statement of financial position presents an entity’s assets, liabilities, and equity at a specific point in time.
It should distinguish between current and non-current classifications unless a liquidity presentation is more relevant.
Illustrative Example
Statement of Financial Position at 31 December 20X2
Assets
Current assets
Cash and cash equivalents ………………… R120,000
Trade receivables ……………………….. R85,000
Inventories ……………………………. R150,000
Total current assets ………………………. R355,000
Non-current assets
Property, plant and equipment …………….. R600,000
Intangible assets ……………………….. R40,000
Total non-current assets …………………… R640,000
Total assets ……………………………….. R995,000
Liabilities
Current liabilities
Trade payables ………………………….. R95,000
Current tax payable ……………………… R25,000
Total current liabilities ………………….. R120,000
Non-current liabilities
Bank loan ………………………………. R300,000
Total non-current liabilities ………………. R300,000
Total liabilities ……………………………. R420,000
Equity
Share capital …………………………….. R250,000
Retained earnings …………………………. R325,000
Total equity ………………………………… R575,000
Total liabilities and equity ………………….. R995,000
5. Statement of Comprehensive Income
This statement shows the entity’s financial performance during the reporting period. Entities may present a single statement of comprehensive income or separate income and comprehensive income statements.
Illustrative Example
Statement of Comprehensive Income for the year ended 31 December 20X2
Revenue ……………………………………. R1,200,000
Cost of sales ………………………………. (R750,000)
Gross profit ……………………………….. R450,000
Other income ……………………………….. R25,000
Operating expenses ………………………….. (R300,000)
Finance costs ………………………………. (R20,000)
Profit before tax …………………………… R155,000
Income tax expense ………………………….. (R45,000)
Profit for the year …………………………. R110,000
Other comprehensive income: None
Total comprehensive income for the year ……….. R110,000
6. Statement of Changes in Equity
This statement reconciles opening and closing balances of equity accounts such as share capital and retained earnings.
Illustrative Example
Statement of Changes in Equity for the year ended 31 December 20X2
Share Capital Retained Earnings Total
Balance at 1 January 20X2 …….. R250,000 R215,000 R465,000
Profit for the year ………….. R110,000 R110,000
Dividends declared …………… (R50,000) (R50,000)
Balance at 31 December 20X2 …… R250,000 R325,000 R575,000
7. Statement of Cash Flows
This statement provides information on cash inflows and outflows during the reporting period, classified into operating, investing, and financing activities.
Illustrative Example:
Statement of Cash Flows for the year ended 31 December 20X2
Cash flows from operating activities:
Cash receipts from customers ……………….. R1,160,000
Cash paid to suppliers and employees ………… (R880,000)
Interest paid …………………………….. (R20,000)
Income taxes paid …………………………. (R40,000)
Net cash from operating activities ……………. R220,000
Cash flows from investing activities:
Purchase of equipment ……………………… (R150,000)
Net cash used in investing activities …………. (R150,000)
Cash flows from financing activities:
Proceeds from bank loan ……………………. R100,000
Dividends paid ……………………………. (R50,000)
Net cash from financing activities ……………. R50,000
Net increase in cash and cash equivalents ……… R120,000
Cash and cash equivalents at beginning of year …. R0
Cash and cash equivalents at end of year ………. R120,000
8. Notes to the Financial Statements
Notes are critical for explaining policies, judgments, and providing detail behind the numbers. They enhance the transparency and understandability of financial statements.
Things Often Forgotten
- Disclosure of accounting policies (e.g., revenue recognition, depreciation methods).
- Related party transactions, even small loans or advances between the entity and directors should be disclosed.
- Contingent liabilities and commitments, such as pending litigation or lease obligations.
- Events after the reporting date that could affect users’ understanding.
- Breakdown of key balances, such as trade receivables ageing or PPE categories.
- Adoption of new standards and early adoption of the 2025 third edition where applicable.
9. Best Practices for Presentation
- Keep formatting clear: headings, subtotals, and comparatives aid readability.
- Provide prior-year comparatives for all line items.
- Use plain language in notes to make accounts accessible to non-accountants.
- Highlight key performance metrics in management commentary, even though not required by IFRS for SMEs.
- Provide a dedicated note explaining recent IFRS for SMEs updates and how they affect the entity.
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