IFRS for SMEs explained

Most companies in the world are small and privately owned, and full IFRS, written for listed groups, asks more of them than their lenders and owners need. The IFRS for SMEs Accounting Standard is the IASB's answer, and its third edition applies from 2027. This guide explains who can use it, what the third edition changes, how it differs from full IFRS with a worked example, and how it relates to IFRS 19 and to the frameworks for private companies in the US.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. Updated . 8 minute read.

Short answer

The IFRS for SMEs Accounting Standard is a stand-alone, simplified version of IFRS Accounting Standards for entities without public accountability that publish general purpose financial statements, such as private companies whose shares and debt are not traded and that do not hold assets for a broad group of outsiders as a main business. Whether it may be used is decided by each jurisdiction. It is shorter than full IFRS, removes some options, simplifies recognition and measurement and requires far fewer disclosures: all research and development and all borrowing costs are expensed, goodwill is amortised, over no more than ten years if its life cannot be estimated reliably, and leases are still split into finance and operating leases. The third edition, issued by the IASB in February 2025 and effective for annual periods beginning on or after 1 January 2027, aligns revenue with a simplified IFRS 15 model, adds a fair value section based on IFRS 13, merges the two financial instruments sections, and updates control and business combinations to IFRS 10 and IFRS 3, but keeps the incurred loss model and the old lease model. In this guide's example, the same company reports profit of CU 1,430 thousand under IFRS for SMEs and CU 1,869 thousand under full IFRS.

At a glance

Issued
Third edition, 2025
Applies from
1 January 2027
For
No public accountability
Revenue
Based on IFRS 15
Leases
Still off balance sheet
Goodwill
Amortised, max 10 years
IFRS for SMEs explainedIssued: Third edition, 2025; Applies from: 1 January 2027; For: No public accountability; Revenue: Based on IFRS 15; Leases: Still off balance sheet; Goodwill: Amortised, max 10 years.KEY FACTS AT A GLANCEIFRS for SMEs explainedIssuedThird edition, 2025Applies from1 January 2027ForNo public accountabilityRevenueBased on IFRS 15LeasesStill off balance sheetGoodwillAmortised, max 10 yearsTax BakersIFRS for SMEs explainedIssued: Third edition, 2025; Applies from: 1 January 2027; For: No public accountability; Revenue: Based on IFRS 15; Leases: Still off balance sheet; Goodwill: Amortised, max 10 years.KEY FACTS AT A GLANCEIFRS for SMEs explainedIssuedThird edition, 2025Applies from1 January 2027ForNo public accountabilityRevenueBased on IFRS 15LeasesStill off balance sheetGoodwillAmortised, max 10 yearsTax Bakers
Key facts at a glance, as set out in this guide.

Who can use IFRS for SMEs?

An entity can use it if it does not have public accountability and publishes general purpose financial statements for external users, such as owners not involved in management, lenders and credit agencies. An entity has public accountability if its debt or equity instruments are traded in a public market, or are being issued for trading, or if it holds assets in a fiduciary capacity for a broad group of outsiders as one of its main businesses, as banks, insurers, securities brokers, pension funds and investment funds do. Each jurisdiction decides whether to permit or require the standard, and some set size limits too. A subsidiary of a group reporting under IFRS can use it in its own statements. See who uses IFRS and US GAAP.

How does IFRS for SMEs differ from full IFRS?

Full IFRS vs IFRS for SMEs at a glanceFull IFRS vs IFRS for SMEs at a glanceTOPICFull IFRSIFRS for SMEsCapitalise development costsRequiredNot allowedCapitalise borrowing costsRequiredNot allowedAmortise goodwillNot allowedRequiredLease liability for operating leasesRequiredNot requiredExpected credit loss modelRequiredNot required
Same foundations, fewer choices and far fewer disclosures.
AreaFull IFRSIFRS for SMEs
Development costsCapitalised when the IAS 38 criteria are metAll research and development expensed
Borrowing costsCapitalised on qualifying assetsExpensed
Goodwill and other intangible assetsGoodwill and indefinite-lived intangibles tested for impairment, not amortisedAll amortised; if the useful life cannot be estimated reliably, over no more than ten years
Leases, as lesseeRight-of-use asset and lease liability for nearly all leases under IFRS 16Finance leases on the balance sheet, operating leases expensed
Credit lossesExpected credit loss model under IFRS 9Incurred loss model, with an ageing analysis of past-due assets
Investment propertyFair value or cost modelFair value through profit or loss if it can be measured without undue cost or effort, otherwise treated as property, plant and equipment
Earnings per share, segments, interim reports, held for saleRequired where IAS 33, IFRS 8, IAS 34 and IFRS 5 applyNot covered
DisclosuresExtensiveFar fewer, focused on lenders and owners

Many full IFRS options are kept, such as revaluation of property, plant and equipment, and the deferred tax model follows IAS 12. The standard is updated in periodic comprehensive reviews rather than every time full IFRS changes, so it lags behind on purpose.

IFRS for SMEs in practice: one company, two profits

A company's profit before four items is CU 2,000 thousand. In the year it spends CU 300 thousand on developing a product that meets the IAS 38 criteria, carries goodwill of CU 1,000 thousand from an acquisition at the start of the year, pays CU 50 thousand of interest on a loan financing a new warehouse under construction, and signs a 5-year office lease at CU 120 thousand a year, paid at each year end, with a 6% discount rate. All figures are in CU thousand.

Year 1Full IFRSIFRS for SMEs
Profit before the four items2,0002,000
Development spendCapitalised(300)
GoodwillTested for impairment, no charge(100) amortised over 10 years
Interest on the construction loanCapitalised(50)
Office lease(131): depreciation 101 and interest 30 on a lease liability of 505(120) rent expense
Profit1,8691,430

The SME figure is lower in year 1 because costs that full IFRS capitalises are expensed straight away, but its balance sheet is simpler too: no development asset to test, no lease liability, and goodwill that runs off over ten years. Over the life of the assets, the differences reverse. See IAS 38 intangible assets and IFRS 16 leases.

What does the third edition change?

  • Revenue: Section 23 is rewritten on the principles of IFRS 15, as a simplified five-step model, with relief for contracts in progress at transition.
  • Fair value: a new Section 12 sets out fair value measurement and disclosures based on IFRS 13.
  • Financial instruments: the two sections are merged into Section 11, aligned in part with IFRS 9, with a principle for classifying debt instruments by their contractual cash flows; the option to apply IAS 39 is removed. The expected credit loss model was not adopted.
  • Control and business combinations: Section 9 uses the IFRS 10 definition of control, and Section 19 is updated to IFRS 3, including contingent consideration at fair value and step acquisitions.
  • Concepts: Section 2 is aligned with the 2018 Conceptual Framework.
  • Leases: unchanged. The IASB decided aligning with IFRS 16 would be too great a burden for SMEs for now and will reconsider it in the next review.

The third edition applies to annual periods beginning on or after 1 January 2027, with earlier application permitted. In May 2026 the IASB proposed a narrow amendment letting an intermediate parent skip consolidated statements where its own parent is an investment entity that does not consolidate, with the same effective date.

How does it compare with IFRS 19?

IFRS 19, also effective from 2027, lets an eligible subsidiary of a group that reports under IFRS apply full IFRS recognition and measurement with reduced disclosures, so its figures match the group's reporting package. IFRS for SMEs changes the numbers as well as the notes. A subsidiary choosing between them weighs simpler accounting against the cost of converting its figures for the group every year. See IFRS 19 reduced disclosures.

Is there a US equivalent?

US private companies use US GAAP, with the simplifications developed by the Private Company Council, such as amortising goodwill, or a special purpose framework such as the AICPA's FRF for SMEs, which is not GAAP. See private company alternatives in US GAAP and what is IFRS.

Keep going

Our free Excel models work through the examples in these guides, and the comparisons show where IFRS and US GAAP part ways. Every guide names the Chartered Accountant who wrote it and the one who reviewed it.

All accounting standards guides Free Excel models

Questions people ask

What is IFRS for SMEs?

A simplified, stand-alone version of IFRS Accounting Standards issued by the IASB for entities without public accountability, with simpler recognition and measurement and far fewer disclosures.

When does the third edition of IFRS for SMEs apply?

For annual periods beginning on or after 1 January 2027, with earlier application permitted. It was issued in February 2025.

Who can use IFRS for SMEs?

Entities without public accountability that publish general purpose financial statements, where the jurisdiction permits it; listed companies, banks, insurers and investment funds cannot.

Does IFRS for SMEs require leases on the balance sheet?

Only finance leases. The third edition did not adopt IFRS 16, so operating leases are still expensed, usually on a straight-line basis.

Sources

The standards, updates and other documents this guide draws on.

  1. IFRS Foundation: IFRS for SMEs Accounting Standard, third edition, more details
  2. KPMG: IFRS for SMEs, third edition, updated 27 February 2025
  3. IFRS Foundation: IASB proposes extending the consolidation exception to eligible SMEs, May 2026
  4. IFRS Foundation: list of IFRS Accounting Standards and Interpretations

Rules and fees change. If you are reading this long after October 26, 2026, confirm the figures with the source before you rely on them.

IFRS 19IFRS 19: reduced disclosures for subsidiariesPrivate company alternativesAccounting alternatives for private companies under US GAAPAccounting standardsWhat is IFRS? A plain-English introduction

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This guide is general information. It is not tax or legal advice for your situation.