Key Points
- Full IFRS applies to publicly accountable entities; IFRS for SMEs applies to entities that do not issue debt or equity in a public market.
- The IFRS for SMEs standard runs fewer than 330 pages versus several thousand pages for full IFRS.
- Apply IFRS for SMEs when local law permits it and the entity has no public accountability; apply full IFRS when the entity is listed or regulated to use it.
- Goodwill is amortised under IFRS for SMEs but tested annually for impairment (not amortised) under full IFRS.
Side-by-side comparison
| Dimension | IFRS for SMEs (Third Edition) | Full IFRS |
|---|---|---|
| Scope | Entities without public accountability that publish general purpose financial statements | Entities with public accountability (listed companies, financial institutions) or where jurisdictions require it |
| Volume | Single self-contained standard, fewer than 330 pages | Over 40 individual standards plus interpretations, several thousand pages |
| Goodwill | Amortised over its useful life (maximum ten years if life cannot be reliably estimated) per Section 19.23 | Not amortised; tested annually for impairment under IAS 36 |
| Leases | Retains the IAS 17 finance/operating distinction for lessees; IFRS 16 right-of-use model not adopted in the Third Edition | Lessees recognise a right-of-use asset and lease liability for virtually all leases under IFRS 16 |
| Revenue | Simplified five-step model aligned with IFRS 15 principles but with reduced judgement requirements (Section 23 revised) | Full IFRS 15 five-step model with detailed guidance on variable consideration, contract modifications, principal-vs-agent assessments, and licence revenue allocation |
| Financial instruments | Merged Sections 11/12 aligned with IFRS 9 classification principles but retaining an incurred loss impairment model | IFRS 9 expected credit loss model with three-stage staging framework |
| Disclosures | Significantly reduced; approximately 300 disclosure requirements | Over 3,000 individual disclosure requirements across all standards |
Decision rule: Apply IFRS for SMEs when the entity has no public accountability and local jurisdiction permits the framework. Apply full IFRS when the entity is publicly listed or holds assets in a fiduciary capacity for a broad group of outsiders.
What is IFRS for SMEs vs Full IFRS?
The framework choice determines every audit procedure the team designs. An entity reporting under IFRS for SMEs does not recognise right-of-use assets under IFRS 16. If the auditor tests leases against IFRS 16 on an IFRS-for-SMEs engagement, every lease procedure is misdirected. The reverse is equally damaging: accepting an incurred loss model on a full IFRS engagement violates IFRS 9.5.5.1, which requires expected credit losses from initial recognition.
Section 1.5 defines eligibility: an entity has public accountability if it has issued debt or equity in a public market or holds assets in a fiduciary capacity as a primary business. ISA 210.6(a) requires the auditor to determine whether the financial reporting framework is acceptable. Accepting IFRS for SMEs for a publicly accountable entity creates a qualification risk before substantive testing begins.
Worked example: Costa & Filhos Lda.
Client: Portuguese textiles company, FY2025, revenue EUR 11M. Costa & Filhos has no listed debt or equity and does not hold assets in a fiduciary capacity. Portuguese law permits IFRS for SMEs for entities below certain size thresholds.
Step 1 — Goodwill under IFRS for SMEs (Section 19.23)
Costa & Filhos acquired a small dyeing workshop in March 2025 for EUR 1.4M. The fair value of identifiable net assets was EUR 1.05M, producing goodwill of EUR 350,000. Costa & Filhos amortises the goodwill over seven years (the period management estimates it will benefit from acquired customer relationships). Annual charge: EUR 50,000. Carrying amount at 31 December 2025: EUR 312,500 (nine months of amortisation at EUR 37,500).
Documentation note: record the acquisition date fair values, the goodwill calculation (EUR 1.4M less EUR 1.05M), the useful life estimate (seven years), and the stub-period amortisation charge. Cite Section 19.23(a).
Step 2 — Contrast with full IFRS (IAS 36 / IFRS 3)
Under full IFRS, the same EUR 350,000 of goodwill would not be amortised. The entity would allocate it to a cash-generating unit and test for impairment annually under IAS 36.10. Carrying amount at 31 December 2025 would remain EUR 350,000 (assuming no impairment).
Documentation note: under full IFRS the file would contain the CGU allocation, the discount rate, the projected cash flows, and the recoverable-amount conclusion. Under IFRS for SMEs, these are replaced by the amortisation schedule and an indicator-based impairment assessment per Section 27.
Step 3 — Equipment lease under IFRS for SMEs (Section 20)
Costa & Filhos leases a weaving machine (fair value EUR 180,000, useful life ten years) for six years at EUR 2,800 per month. The lease term covers 60% of useful life. The present value of payments (at 5%) is approximately EUR 144,600, or 80% of fair value. Both indicators point to a finance lease under the IAS 17 criteria retained in Section 20. Costa & Filhos recognises an asset and liability of EUR 144,600.
Documentation note: record the two classification indicators, the discount rate source, and the present value calculation. Cite Section 20.9.
Step 4 — Contrast with full IFRS (IFRS 16)
Classification is irrelevant for the lessee under IFRS 16. Costa & Filhos would recognise a right-of-use asset and lease liability of EUR 144,600 regardless of whether the arrangement looks like a "finance" or "operating" lease.
Documentation note: under full IFRS the file would cite IFRS 16.22 for initial measurement. No classification test exists. The team verifies the lease term (IFRS 16.18-21) and the discount rate (IFRS 16.26).
If the team applied IFRS 16 on this IFRS-for-SMEs engagement, the classification test would be skipped, and any lease that qualifies as operating under Section 20 would be incorrectly capitalised.
Why it matters in practice
- Teams apply full IFRS disclosure checklists to IFRS-for-SMEs engagements, requesting disclosures the framework does not require. The reverse also occurs: using an IFRS-for-SMEs checklist on a full IFRS engagement leaves hundreds of mandatory disclosures untested. ISA 210.6(a) requires agreement on the applicable framework before the engagement letter is signed.
- The eligibility assessment is often performed once at acceptance and never revisited. An entity that issues a bond or begins holding client funds in a fiduciary capacity crosses the public accountability threshold and must transition to full IFRS. ISA 315.13 requires the auditor to understand the entity's nature, which includes monitoring changes that affect framework eligibility.
Related terms
Frequently asked questions
Can an entity switch from IFRS for SMEs to full IFRS voluntarily?
Yes, but the transition is a change in financial reporting framework, not an accounting policy change under IAS 8. The entity applies IFRS 1 as a first-time adopter because its previous financial statements did not contain an unreserved statement of compliance with full IFRS (IFRS 1.3). The auditor verifies IFRS 1 transition adjustments in the opening balance sheet.
Does IFRS for SMEs require expected credit loss impairment like IFRS 9?
No. The Third Edition (effective 1 January 2027) retains an incurred loss model for financial assets at amortised cost (Section 11). The entity recognises impairment only when objective evidence of a loss event exists. Full IFRS requires a forward-looking expected credit loss model from day one under IFRS 9.5.5.1, with losses recognised across three stages.
When does the Third Edition of IFRS for SMEs become mandatory?
The Third Edition is effective for annual reporting periods beginning on or after 1 January 2027, with early application permitted. Local jurisdictions may set different adoption dates, so the engagement team checks the national endorsement timeline during planning. ISA 210.6(a) applies: the auditor confirms the applicable version of the framework before signing the engagement letter.