3. Accounting for Non-financial Assets under IFRS for SMEs (Sections 13–20, 27, 34)

1. IFRS for SMEs: Foundation and Entry Rules (Sections 1, 2, 35).
2. IFRS for SMEs: Presentation of Financial Statements (Sections 3–10, 31–33).
3. IFRS for SMEs: Accounting for Non-financial Assets (Sections 13–20, 27, 34).
4. IFRS for SMEs: Financial Instruments and Equity (Sections 11–12, 22).
5. IFRS for SMEs: Income, Liabilities, and Taxes (Sections 21, 23–26, 28–30).

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Introduction: Managing the Company’s Resource Base

This is the third part of my systematic overview of the IFRS for SMEs Standard. In previous publications, I covered the Foundation and Entry Rules (Sections 1, 2, 35) and Financial Statement Presentation (Sections 3–10, 31–33).

In this overview, we move to the analysis of non-financial assets – property, plant and equipment, inventories, intangible assets, and investment property. These items form the asset base of the business and serve as an indicator of its productive capacity.

We will conduct a detailed analysis of Sections 13–20, 27, and 34, comparing the current version of the Standard (2015) with Full IFRS Standards and assessing the changes that the new 2025 Edition will bring.

Practical Value for the CFO

Understanding the specifics of accounting for these assets is a tool for making weighted investment and management decisions:

1. Optimizing Administration Costs: Where is the line between measurement precision (e.g., fair value of real estate) and the cost of obtaining it?
2. Investment Planning (CapEx): How will the prohibition on capitalizing borrowing costs affect the financial result of investment projects?
3. Preparing for Scaling: What discrepancies in accounting for goodwill or biological assets might become an obstacle during consolidation with a parent company reporting under Full IFRS?

Architecture of Simplifications: Efficiency over Variability

The IFRS for SMEs Standard focuses on the needs of lenders (and owners), who are primarily interested in asset liquidity rather than their hypothetical market value. Therefore, the Standard offers three levels of simplification:

• Unification of Methods: Elimination of alternatives available in Full Standards (e.g., the mandatory expensing model for borrowing costs).
• Pragmatic Measurement: Replacing complex impairment tests with simpler amortization methods for goodwill and intangible assets.
• “Undue Cost or Effort” Concept: An important tool allowing entities to opt out of the costly fair value model (e.g., for investment property) if the cost of obtaining it exceeds the benefit to users of financial statements.

Below is a detailed analysis of accounting for each class of assets.

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Section 13: Inventories

Accounting for inventories is a fundamental element for trading and manufacturing entities. Section 13 “Inventories” of the IFRS for SMEs Standard is based on the principles of IAS 2, yet it contains fundamental differences regarding cost formation.

Definition and Scope

According to Paragraph 13.1, inventories are assets:

• held for sale in the ordinary course of business;
• in the process of production for such sale; or
• in the form of materials or supplies to be consumed in the production process or in the rendering of services.

This definition is fully harmonized with IAS 2. Both standards exclude from their scope:

• Work in progress arising under construction contracts (regulated by Section 23). (In Full IFRS, the corresponding exception in Para 2(a) of IAS 2 was technically withdrawn because IFRS 15 replaced IAS 11 “Construction Contracts”.)
• Financial instruments (Sections 11, 12 / IFRS 9).
• Biological assets related to agricultural activity and agricultural produce at the point of harvest (Section 34 / IAS 41).

Measurement of Inventories and Cost

The basic measurement principle is identical: inventories are measured at the lower of cost and estimated selling price less costs to complete and sell (net realizable value in IAS 2 terminology).

Cost Structure

Cost includes all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition (Para 13.5).

• Costs of purchase: Include purchase price, import duties, non-refundable taxes, and transport costs. Trade discounts are deducted.
• Costs of conversion: Include direct costs (labor) and systematically allocated variable and fixed production overheads.

Important Aspect of Allocation (Para 13.9):

IFRS for SMEs (Para 13.9) requires allocating fixed production overheads based on the normal capacity of the production facilities. This prevents the capitalization of costs arising from idle capacity into the cost of units produced. Unallocated overheads are recognized as an expense in the period in which they are incurred. This approach corresponds to IAS 2, ensuring comparability of gross margin.

Cost Formulas

Paragraph 13.18 permits the use of FIFO (First-in, First-out) or Weighted Average Cost methods. The LIFO (Last-in, First-out) method is explicitly prohibited under both IFRS for SMEs and Full IFRS Standards.

For inventories that are not ordinarily interchangeable, the specific identification of individual costs is required (Para 13.17).

Key Discrepancy: Borrowing Costs

The most significant difference affecting financial results and the carrying amount of assets relates to the capitalization of borrowing costs.

• IFRS for SMEs (Section 25): Requires recognizing all borrowing costs as an expense in the period in which they are incurred. Capitalization of interest into the cost of assets (including inventories with a long production cycle, e.g., maturing whisky, cheese, or construction of real estate for sale) is prohibited.
• Full IFRS Standards (IAS 23): Require mandatory capitalization of borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset (an asset that takes a substantial period of time to get ready for its intended use or sale).

Implications for Professionals:

An entity reporting under IFRS for SMEs will reflect lower inventory cost and higher finance costs in the production period compared to a similar entity under Full IFRS. This can significantly affect profitability ratios (Gross Margin vs. Net Margin) and EBITDA – preventing artificial profit inflation through the capitalization of inefficiencies.

At the same time, this is a significant simplification that eliminates the need for complex interest capitalization calculations for long production cycles.

Impairment of Inventories

According to Para 13.19 and Section 27, an entity shall assess at each reporting date whether any inventories are impaired. If the carrying amount exceeds the selling price less costs to complete and sell, the difference is written off to profit or loss.

An important requirement of IFRS for SMEs is the reversal of impairment losses in subsequent periods if circumstances have changed (Para 27.4). This coincides with the requirements of IAS 2 (Para 33).

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Sections 14, 15. Investments in Associates and Joint Ventures (vs. IAS 28, IFRS 11)

This block demonstrates the flexibility of the IFRS for SMEs Standard, providing entities with choices not available in Full Standards.

Investments in Associates (Section 14)

An Associate is defined as an entity over which the investor has significant influence (usually 20% or more of the voting power), but not control.

Measurement Models (Policy Choice):

Unlike IAS 28, which strictly requires the use of the Equity Method for consolidated financial statements, Section 14 (Para 14.4) allows SMEs to choose one of three models to account for all their investments in associates:

1. Cost Model: The investment is measured at cost less any accumulated impairment losses. Dividends are recognized as income in profit or loss. This model is the simplest and most common among SMEs. However, it is not permitted if there is a published price quotation (in which case the Fair Value Model is mandatory).
2. Equity Method: The investment is initially recognized at cost (transaction price plus transaction costs) and subsequently adjusted for the investor’s share of the profit or loss and other comprehensive income of the investee. Dividends received from the associate reduce the carrying amount of the investment. This method best reflects the economic substance of the investor’s influence on the associate’s assets.
3. Fair Value Model: The investment is recognized at the transaction price (excluding transaction costs, unlike other methods). At each reporting date, the investment is remeasured to fair value, with changes recognized in profit or loss. This model provides the most relevant information for investors but requires regular valuation, which can be costly in the absence of an active market.

Key Differences for Professionals:

• Simplicity: The Cost Model is significantly simpler as it does not require tracking the associate’s net assets or eliminating unrealized profits from intragroup transactions.
• Goodwill: Under the Equity Method in IFRS for SMEs, goodwill included in the carrying amount of the investment is amortized (see Section 19). In IAS 28, it is not amortized but forms part of the carrying amount tested for impairment.

Investments in Joint Ventures (Section 15)

This section regulates accounting for activities where two or more parties have joint control. Joint control is the contractually agreed sharing of control, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control (Para 15.2).

Section 15 retains a classification similar to the old IAS 31, distinguishing three types of joint arrangements:

1. Jointly Controlled Operations: Use of assets and resources of the venturers without establishing a separate entity. Each venturer recognizes in its financial statements: its own assets, its own liabilities, its own expenses, and its share of income.
2. Jointly Controlled Assets: Joint ownership of an asset (e.g., an oil pipeline). Each venturer recognizes its share of the asset and liabilities, and income from the sale or use of its share of the output, along with its share of expenses.
3. Jointly Controlled Entities (JCE): Establishment of a separate legal entity (corporation, partnership) in which each venturer has an interest. For JCEs, Paragraph 15.9 provides the same triad of accounting policy choices as for associates: Cost Model, Equity Method, or Fair Value Model.

Comparison with IFRS 11 “Joint Arrangements”:

The Full Standard IFRS 11 changed the approach, classifying arrangements into only two categories: Joint Operations and Joint Ventures, based on rights and obligations rather than legal form.

Accounting Methods for JCEs:

• IFRS for SMEs (Para 15.9): Allows the same three models as for associates (Cost, Equity, Fair Value).
• Full IFRS Standards (IFRS 11): Require the use of the Equity Method exclusively for Joint Ventures (the option to use proportionate consolidation was removed).

Table 1: Comparison of Investment Accounting Methods

Investment Type	IFRS for SMEs (Sec 14–15)	Full IFRS Standards (IAS 28, IFRS 11)
Associates	Choice: Cost Model, Equity Method, Fair Value Model	Equity Method only
Joint Ventures (JCE)	Choice: Cost Model, Equity Method, Fair Value Model	Equity Method only

Cost Impact: The Cost Model is the cheapest to administer, while the Equity Method requires complex calculations of the share in net assets.

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Section 16: Investment Property (vs. IAS 40)

The approach to investment property is one of the most illustrative examples of the “undue cost or effort” concept.

Definition

Investment Property (IP) is property (land or a building, or part of a building, or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both. This definition matches IAS 40.

Measurement Model

Here arises a fundamental discrepancy.

• IFRS for SMEs (Para 16.7): An entity is required to measure IP at fair value through profit or loss, provided this value can be measured reliably without undue cost or effort. This is not a free choice, but a requirement depending on circumstances. Only if the measurement involves undue effort, the item is transferred to Property, Plant and Equipment and accounted for under the Cost Model in accordance with Section 17 (Para 16.8).
• Full IFRS Standards (IAS 40): Provide a free accounting policy choice for the entire class of IP: either the Fair Value Model or the Cost Model.

Consequences for SMEs: SMEs are often forced to use Fair Value, leading to volatility in financial results due to revaluations (“paper” profits/losses). Companies under Full IFRS often deliberately choose the Cost Model to avoid this effect, whereas SMEs are deprived of such a choice if the market is active.

Mixed-Use Property

• IFRS for SMEs (Section 16): Requires separating objects that have mixed use (e.g., a building where one floor is occupied by the owner and others are rented out) if these components can be sold separately.
• Full IFRS (IAS 40): The separation criterion is similar, but the emphasis on “undue cost or effort” is a specific feature of the SME Standard, making life easier for accountants of medium-sized businesses.

Strategic Nuance: Under IFRS for SMEs, an entity may have part of its investment property at Fair Value and part at Cost (if measuring the second part is too costly). Under Full IFRS, mixing models within the same class of assets (Investment Property) is prohibited.

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Section 17: Property, Plant and Equipment (vs. IAS 16)

Section 17 regulates the accounting for tangible assets held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. Property, plant and equipment (PPE) does not include biological assets related to agricultural activity or mineral rights and mineral reserves.

Recognition and Initial Measurement

PPE items are measured at cost, which comprises the purchase price, costs of delivery and installation, and the initial estimate of costs of dismantling and removing the item (asset retirement obligation).

Critical Difference: Borrowing costs are not capitalized in IFRS for SMEs (Para 17.11(d)), whereas Full IFRS Standards include them in the cost of qualifying assets.

Subsequent Measurement

• Cost Model: Cost less accumulated depreciation and accumulated impairment losses.
• Revaluation Model: Fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses. Revaluation increases are recognized in Other Comprehensive Income (OCI) and accumulated in equity.

Depreciation and Review of Estimates

• Component Accounting: Paragraph 17.16 requires that major components of an item of property, plant and equipment that have a cost that is significant in relation to the total cost of the item be depreciated separately (e.g., an aircraft engine separately from the fuselage). This requirement coincides with IAS 16.
• Frequency of Review: IAS 16 requires reviewing the useful life, residual value, and depreciation method at least at each financial year-end. IFRS for SMEs (Para 17.19) requires a review only if there is an indication that they have changed.

Conclusion: This significantly reduces the administrative burden on SMEs, eliminating the mandatory annual procedure of reviewing estimates if the business environment is stable.

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Section 18: Intangible Assets other than Goodwill (vs. IAS 38)

Section 18 demonstrates the most conservative approach, aimed at eliminating subjectivity in measurements.

Research and Development (R&D)

This is one of the “red lines” between the standards.

• IFRS for SMEs (Para 18.14): All expenditure on research and development is recognized as an expense in the period in which it is incurred. Capitalization of internally generated intangible assets during the development phase is prohibited, even if the project is commercially successful.
• Full IFRS Standards (IAS 38): Require mandatory capitalization of development costs if 6 criteria are met (technical feasibility, intention to complete, availability of resources, etc.).

Why this matters for CFOs: This means that companies (especially in the IT sector and startups) transitioning to IFRS for SMEs will have a more “modest” balance sheet (without R&D assets) and lower current profit during the active investment phase compared to those reporting under Full IFRS. The IASB explains this decision by the desire to maintain comparability and avoid subjective management judgments.

Useful Life

• IFRS for SMEs (Para 18.19): All intangible assets are considered to have a finite useful life. The concept of an “indefinite useful life” is absent. If the useful life cannot be estimated reliably, it is determined based on management’s best estimate but shall not exceed 10 years (presumed rule).
• Full IFRS Standards: Allow intangible assets with indefinite useful lives (e.g., brands), which are not amortized but are tested annually for impairment.

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Section 19: Business Combinations and Goodwill (vs. IFRS 3)

Acquisition-related Costs (Transaction Costs)

• IFRS for SMEs (Para 19.11): Costs directly attributable to the business combination (legal, advisory, valuation fees) are included in the cost of the business combination. This increases the amount of recognized goodwill.
• Full IFRS Standards (IFRS 3, Para 53): Such costs are recognized as expenses in the periods in which the costs are incurred and the services are received. They are not capitalized.

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Goodwill: Amortization vs. Impairment

• IFRS for SMEs (Para 19.23): Goodwill is considered an asset with a finite useful life and is mandatorily amortized. If the useful life cannot be established reliably, it is presumed to be 10 years.
• Full IFRS Standards (IFRS 3 / IAS 36): Goodwill is not amortized. It has an indefinite useful life and is subject to mandatory annual impairment testing.

Practical Value: The amortization model for SMEs is cheaper to maintain (no expensive annual impairment tests) and ensures a predictable reduction in the carrying amount of goodwill, avoiding “shock” write-offs in crisis years.

Step Acquisitions (Business Combinations Achieved in Stages)

This is a situation where an investor obtains control over an investee not immediately, but in parts (e.g., held 20% of shares as an associate, and then bought another 40%, obtaining control). Here lies a significant methodological difference.

IFRS for SMEs (2015 Edition): Cost Accumulation Model

The Standard contains no explicit requirement to remeasure the previously held equity interest. In practice, the Cost Accumulation Model is applied.

• How it works: The cost of the investment at the date control is obtained is determined as the sum of the carrying amount of the previously held interest plus the cost of the new transaction.
• Result: No gain or loss from the change in value of the old interest is recognized at the moment control is obtained. This is a conservative approach that avoids recognizing “paper” gains.

Full IFRS (IFRS 3): Remeasurement Model

IFRS 3 “Business Combinations” (Para 42) views obtaining control as a fundamental change in the status of the investment.

• How it works: The previously held equity interest must be remeasured to fair value at the acquisition date.
• Result: The difference between the fair value and the carrying amount of the old interest is immediately recognized in profit or loss. This often leads to the recognition of significant income even before the asset is actually sold.

Contingent Consideration

In IFRS for SMEs terminology (official translation), this is defined as “Adjustments to the cost of a business combination contingent on future events.”

• IFRS for SMEs Approach (2015) (Paras 19.12–19.13): Such consideration is included in the cost of the combination only if its payment is probable and can be measured reliably. If the payment amount changes later, this is treated as an adjustment to the cost of the combination, resulting in an adjustment to goodwill.
• Full IFRS Approach (IFRS 3): Requires recognizing contingent consideration at fair value immediately, regardless of the probability of payment (probability is factored into the valuation itself). Subsequent changes in its value are recognized in profit or loss, without affecting goodwill.

Section 20: Leases (vs. IFRS 16)

This is the area of the widest gap between the standards to date. Section 20 is based on the principles of the old IAS 17.

Strategic Advantage: This is a huge benefit for companies with a large portfolio of real estate leases (retail, logistics), as it allows them not to inflate the balance sheet with lease liabilities.

Classification and Lessee Accounting

• IFRS for SMEs (Section 20): Retains the split into finance and operating leases.
  • Operating Lease: The lessee does not recognize an asset or liability in the balance sheet. Lease payments are recognized as an expense on a straight-line basis. This is classic off-balance sheet financing.
  • Finance Lease: An asset and a liability are recognized.
• Full IFRS Standards (IFRS 16): Introduced a single lessee model. Almost all leases (except short-term <12 months and low-value assets) are capitalized: a Right-of-Use (ROU) Asset and a Lease Liability are recognized.

Table 2: Impact on Financial Metrics (Lessee)

Metric	IFRS for SMEs (Operating Lease)	Full IFRS Standards (IFRS 16)
Assets	Not recognized (off-balance sheet)	Increase (ROU Asset)
Liabilities	Not recognized	Increase (Lease Liability)
EBITDA	Lower (rent is an operating expense)	Higher (rent = depreciation + interest)
Cash Flows (Operating)	Outflow (rent payment)	Increase (principal portion moves to financing activities)

Note: For SMEs with significant leased space (retail), switching to Full IFRS will sharply increase the debt load in the balance sheet.

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Section 27: Impairment of Assets (vs. IAS 36)

Section 27 regulates the procedure for recognizing impairment losses when the carrying amount of an asset exceeds its recoverable amount.

Indicators and Testing

• IFRS for SMEs (Para 27.7): An entity assesses at each reporting date whether there is any indication that an asset may be impaired. The recoverable amount is estimated only if there are indications of impairment.
• Full IFRS Standards (IAS 36): Require mandatory annual testing for goodwill, intangible assets with an indefinite useful life, and intangible assets not yet available for use, irrespective of whether there is any indication of impairment. Since under SMEs goodwill is amortized and indefinite life intangibles do not exist, mandatory annual testing effectively disappears.

Impairment of Inventories

IFRS for SMEs (Para 27.2) and IAS 2 have a similar approach: measurement at net realizable value (selling price less costs to complete and sell). Usually, this is done on an item-by-item basis, but grouping inventories (e.g., by product line) is permitted if individual assessment is impracticable.

Reversal of Impairment

IFRS for SMEs (Paras 27.28–27.31): If at the reporting date indicators suggest that an impairment loss no longer exists or has decreased, the entity shall recalculate the recoverable amount and reverse the asset’s value.

• The “Ceiling” Rule (Cap): The increased carrying amount of an asset attributable to a reversal of an impairment loss shall not exceed the carrying amount (net of depreciation) that would have been determined had no impairment loss been recognized for the asset in prior years. This prevents “revaluation” via the reversal mechanism.
• Goodwill: This is the only exception. Reversing (writing back) an impairment loss for goodwill is prohibited (Para 27.28). This rule is imperative, even if the business value has objectively increased.

Comparison with Full IFRS Standards (IAS 36):

The approach is identical. IAS 36 also strictly prohibits the reversal of goodwill impairment losses. The regulator’s logic in both standards is the same: reversing goodwill would effectively mean recognizing internally generated goodwill, which is conceptually prohibited.

Goodwill Specifics: Amortization vs. Impairment

In IFRS for SMEs, the approach to goodwill differs radically from Full IFRS, which simplifies impairment accounting:

1. Amortization (Para 19.23): Goodwill is considered an asset with a finite useful life and is subject to mandatory amortization (if the useful life cannot be established reliably – it is 10 years).
   • Implication for Impairment: Since the value of goodwill systematically decreases due to amortization, the Standard does not require an annual calculation of the recoverable amount (annual testing) without the existence of indications.
2. Prohibition of Reversal (Para 27.28): If indications appeared and an impairment loss was recognized, it is prohibited to reverse it in the future.
   • Logic: An increase in the value of goodwill after impairment is viewed not as a correction of a past estimate, but as the creation of new internal goodwill, which is prohibited.

Disclosures

IFRS for SMEs (Paras 27.32–27.33) imposes significantly fewer disclosure requirements compared to Full Standards. An entity shall disclose for each class of assets:

• The amount of impairment losses recognized in profit or loss during the period.
• The amount of reversals of impairment losses recognized during the period.
• The line item in the statement of comprehensive income in which those losses or reversals are included.

Key Difference from IAS 36: The SME Standard does not require disclosing assumptions used to determine the recoverable amount (e.g., discount rates or growth rates), nor does it require sensitivity analysis for goodwill, which is mandatory in Full IFRS. This significantly reduces the volume of notes to the financial statements.

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Section 34: Specialized Activities

Agriculture (vs. IAS 41)

Section 34 offers a hierarchical approach to the measurement of biological assets:

1. Fair Value Model: Mandatory if fair value can be measured readily without undue cost or effort.
2. Cost Model: Used for all other biological assets.

In IFRS for SMEs (both 2015 and 2025), biological assets are measured at fair value only if it is readily available. Otherwise – cost less accumulated depreciation and impairment. In Full IFRS Standards (IAS 41), the use of cost is permitted only at the stage where fair value cannot be measured reliably (a very narrow exception).

Bearer Plants: In Full IFRS (amendments to IAS 16 and IAS 41), bearer plants (orchards, vineyards) are accounted for as Property, Plant and Equipment at cost. In IFRS for SMEs (2015), they remain within biological assets but often fall under the “Cost Model” due to measurement complexity, which de facto aligns the results, although the methodology differs.

Extractive Activities (vs. IFRS 6)

IFRS for SMEs (Para 34.11) allows entities to develop their own policy for the recognition of exploration and evaluation assets, which aligns with the flexibility of IFRS 6.

Service Concession Arrangements (vs. IFRIC 12)

Accounting is analogous to IFRIC 12: the operator recognizes either a financial asset (unconditional right to receive cash) or an intangible asset (right to charge users), but not property, plant and equipment, as they are controlled by the grantor (the government).

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Conclusions and Recommendations

Transitioning between standards or selecting an accounting policy requires considering the following strategic points:

1. Transparency vs. Cost: IFRS for SMEs significantly reduces accounting costs (no capitalization of borrowing costs, goodwill amortization, absence of actuarial calculations and complex Fair Value measurements). However, this may reduce transparency for investors accustomed to Full IFRS models (e.g., regarding leases).
2. Volatility of Results: The prohibition on capitalizing borrowing costs and development costs (R&D) in IFRS for SMEs makes the financial result more sensitive to current investment projects – profit will drop during periods of active development.
3. Tax Planning: Different approaches to goodwill amortization and expense recognition may create different bases for calculating deferred taxes.

IFRS for SMEs (2015) remains a powerful tool for companies seeking international reporting intelligibility but not ready to bear the burden of implementing the full suite of standards, especially regarding IFRS 16, IFRS 9, and IFRS 15.

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Frequently Asked Questions (FAQ)