THE International Accounting Standards Board (IASB) recently released the third edition of the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs).
The updated version aims to align small business financial reporting with existing full Philippine Financial Reporting Standards (PFRS) while maintaining practicality.
According to Brian O'Donovan, global IFRS and corporate reporting leader at KPMG International, "The IASB's goal in updating the SMEs Accounting Standard is to minimize the differences from IFRS Accounting Standards while keeping it simple."
These changes reflect key improvements made to the IFRS over the past decade. In the Philippines, where IFRS for SMEs is adopted as the PFRS, it is crucial to assess how these updates could impact financial reporting once the Financial and Sustainability Reporting Standards Council (FSRSC) decides on implementation.
The new IFRS for SMEs introduces key changes affecting financial reporting.
One major update is in revenue recognition, requiring SMEs to follow a five-step model (as adopted from IFRS 15) to record income when control of goods or services is transferred to a customer. This shift may alter how some businesses track sales and contracts.
Another significant revision is in financial instrument classification, which aims to streamline asset and liability categorization based on cash flow characteristics (as adopted from IFRS 9).
Additionally, the framework now includes clearer fair value measurement guidelines.
These updates aim to keep up SMEs with accounting standards applicable to larger entities, ensuring financial statements remain relevant and comparable for stakeholders, especially primary users like shareholders and lenders.
What remains unchanged
However, some aspects remain unchanged. Lease accounting is still not fully aligned with IFRS 16, meaning SMEs may continue using a simplified approach.
Likewise, the expected credit loss model from IFRS 9 has not been adopted, as the IASB determined implementation costs would place undue burden for smaller businesses.
The FSRSC has yet to announce an adoption timeline for the revised standard. While the benefits of these updates are clear, it remains uncertain whether they will outweigh the costs for SMEs.
A significant consideration is that most SMEs are non-publicly traded, with financial statements primarily used by internal stakeholders like management.
If compliance costs outweigh benefits, a more tailored approach may be necessary. To address this, the FSRSC must engage the SME sector in discussions to ensure the transition is both practical and manageable.
A structured transition is also essential, allowing businesses to refine accounting processes while minimizing disruption. Many SMEs operate with limited resources and need sufficient time to adapt without incurring undue financial strain.
A rushed implementation could overwhelm businesses lacking the infrastructure to handle significant changes, making it critical to balance regulatory improvements with the realities SMEs face.
Although adoption in the Philippines is still pending, SMEs should prepare for it. A well-planned adoption, implementation and transition, one that prioritizes collaboration, phased implementation, and comprehensive training, will help businesses and professionals not only comply but also easily adjust to the changes.
Financial transparency and adaptability are not just regulatory ideals but business necessities. It is also fundamental that standards must evolve alongside the economic landscape to remain useful.
Likewise, SMEs and accounting professionals must embrace these changes, understanding that flexibility in compliance is inevitable.
Conversely, regulators must ensure the transition is economically viable and practical. With a balanced approach, these changes can drive growth, strengthen credibility, and equip SMEs to navigate an increasingly complex financial environment with confidence.
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Manuel Guilius A. Pamorca is a member of the Acpapp Media Affairs and a technical accounting senior supervisor at Scrubbed.net Global Services..
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