The International Accounting Standards Board (IASB) has issued an exposure draft (ED) outlining proposed changes to the IFRS for Small and Medium-sized Entities (IFRS for SMEs) as part of its second comprehensive review of the accounting standard, which was first issued in 2009 and last amended in 2015. The ED is accompanied by helpful documents that provide a snapshot of what is a lengthy set of proposals and that address a series of questions and answers. The ED is open for comment until 7 March 2023.

The IFRS for SMEs – although not available for use in the UK – is widely used in other jurisdictions. The standard is intended for use by entities that do not have ‘public accountability’ and that publish ‘general purpose’ financial statements. It is based on full IFRS Accounting Standards with modifications to reflect the needs of users of the financial statements of such entities and cost-benefit considerations. Despite the title of the standard, many entities that do not consider themselves to be small or medium-sized could be within its intended scope.

A number of substantial changes have been made to IFRS Accounting Standards in recent years, many of which are not reflected in the current version of the IFRS for SMEs. The ED recommends incorporating simplified versions of the requirements of recently issued or amended IFRS Accounting Standards into the third edition of the IFRS for SMEs. The proposals consequently set out major changes to the sections of the IFRS for SMEs dealing with concepts and pervasive principles, consolidated and separate financial statements, business combinations and goodwill, and revenue (outlined further below). They would also add a new section on fair-value measurement, as well as making minor changes to other sections of the standard.

The ED proposes to revise Section 23 Revenue by introducing a single framework for recognising revenue for goods and services. Based on the five-step model in IFRS 15 Revenue from Contracts with Customers, it would require revenue to be recognised when the customer obtains control of the good or service.

Limited changes to Sections 11 and 12 on financial instruments are also proposed to align with IFRS 9 Financial Instruments, introducing a principle for classification and measurement of financial instruments based on their contractual cash flow characteristics. While the incurred loss model will be retained for trade receivables and contract assets, an expected credit loss model would be introduced for some financial assets measured at amortised cost. All the financial instruments requirements will be combined into a new Section 11 with the new Section 12 focusing on fair-value measurement.

Some recent changes to IFRS Accounting Standards are, however, not reflected in the proposals. Most significantly, the IASB has decided not to update the IFRS for SMEs to align it with IFRS 16 Leases at this time; they felt that doing so would impose a workload on SMEs disproportionate to the benefit for users of their financial statements. These requirements may, however, be incorporated at a later stage.

The IASB has also decided to defer consideration of alignment of the IFRS for SMEs with IFRS 14 Regulatory Deferral Accounts, as this standard may be replaced when its ongoing project on rate-regulated activities is completed.

With UK companies unable to apply the IFRS for SMEs, it is easy to dismiss the standard as being irrelevant. It does, however, influence the UK’s financial reporting regime as much of UK GAAP is based upon it. The proposals are likely to have an impact therefore on the Financial Reporting Council’s ongoing periodic review of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and the related exposure draft expected soon. ICAEW is looking closely at the IASB’s proposals and will be responding to them in due course.