5. Revenue, Taxes & Liabilities in IFRS for SMEs (Sections 21, 23-26, 28-30)

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

The fifth part of my systematic overview is dedicated to the fundamental components that directly shape the profit and tax profile of a company. If assets constitute the resource base, then Sections 21, 23–26, and 28–30 of IFRS for SMEs define the rules of the game for recognizing revenue, personnel expenses, and complex liabilities.

I analyze the current 2015 Edition of the Standard in comparison with Full IFRS Standards (such as IFRS 15 and IAS 19) and indicate changes in the new 2025 Edition. This analysis will be useful for CFOs and Chief Accountants seeking to deeply understand the Standard’s philosophy and prepare for future changes embedded in the 2025 Edition.

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Section 21: Provisions and Contingencies

1.1. Overview of Requirements (Section 21)

Section 21 regulates the accounting for liabilities of uncertain timing or amount. According to the text of the Standard, the scope excludes provisions covered by other sections (leases, construction contracts, employee benefits, income tax).

Recognition Criteria

The fundamental principle is that a provision is recognized only if three conditions are met at the reporting date:

1. Existence of an Obligation: The entity has an obligation (legal or constructive) as a result of a past event. A constructive obligation arises when the entity’s actions have created a valid expectation in other parties that it will discharge those responsibilities.
2. Probability of Outflow: It is probable (defined as “more likely than not”) that an outflow of resources embodying economic benefits will be required to settle the obligation.
3. Reliability of Estimate: The amount of the obligation can be estimated reliably.

Critical Requirement: Paragraph 21.6 prohibits the recognition of provisions for costs associated with future operations. For example, an intention to install filters at a factory in the future due to legal requirements does not create an obligation now, because the entity can avoid the costs by selling the factory or changing its method of production.

Measurement Methodology

The Standard requires measuring a provision at the best estimate of the amount required to settle the obligation at the reporting date.

• For single obligations: The best estimate may be the individual most likely outcome.
• For a large population of items (e.g., warranty obligations): The estimate is made by weighting all possible outcomes by their associated probabilities (expected value method).

If the effect of the time value of money is material, the amount of the provision shall be discounted. The discount rate shall be a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

1.2. Comparison with IAS 37 and Analysis of Differences

IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” is the direct counterpart to Section 21. While the core principles are identical, there are nuances that can significantly impact financial statements.

Onerous Contracts

Both Section 21 and IAS 37 require the recognition of a provision for onerous contracts (where the unavoidable costs of meeting the obligations exceed the expected economic benefits).

However, IAS 37 was recently clarified (May 2020) to explicitly define “costs of fulfilling” a contract as consisting of both incremental costs and an allocation of other costs. The current IFRS for SMEs (2015) lacks such detail, which in practice grants SMEs more judgmental freedom: whether to include allocated production overheads in the onerousness calculation or to limit it only to incremental costs. Using only incremental costs can reduce the provision amount or even allow avoiding its recognition altogether.

Discounting and Measurement

IAS 37 contains more stringent requirements for risk analysis when selecting a discount rate. Section 21 simplifies the approach to risk adjustment: risks can be reflected either in the cash flows or in the discount rate, but not in both simultaneously to avoid double counting. For SMEs, this often means using simpler risk-free rates if risks are already incorporated into the estimated payment amount.

Contingent Assets

Paragraph 21.13 prohibits the recognition of contingent assets. They are disclosed only when an inflow of economic benefits is probable. If the inflow becomes “virtually certain,” the asset is no longer contingent and is recognized in the balance sheet. This concept is fully harmonized with IAS 37; however, in practice, the “virtually certain” threshold for SMEs is often interpreted more conservatively, delaying the recognition of income from lawsuits or insurance claims.

1.3. Comparison Table: Section 21 vs. IAS 37

Criterion	IFRS for SMEs (Section 21)	Full IFRS Standards (IAS 37)	Practical Implication for SMEs
Recognition	Probability > 50%	Probability > 50%	Identical approach, but fewer requirements for formalizing probability calculations.
Measurement (Large Population)	Weighting by probabilities (Expected Value).	Expected Value.	Identical. Requires statistical data on defects/returns.
Measurement (Single Obligation)	Most likely outcome (adjusted if other outcomes are significantly different).	Most likely outcome.	Simplifies the calculation of reserves for legal cases.
Disclosure	Comparative information (reconciliation of provisions) for the prior period is not required.	Full comparative table of provision movements is required.	Reduces the workload when preparing Notes to the financial statements.
Onerous Contracts	General principle.	Detailed guidance on cost components (incremental + allocated).	Flexibility in cost definition may lead to lower reserves in SMEs (under the 2015 version).

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Section 23: Revenue — The Battle of Philosophies (Risks vs. Control)

2.1. Overview of Requirements (Section 23)

Section 23 demonstrates the largest conceptual gap with modern reporting practice, as it still relies on the “risks and rewards” model (analogous to the obsolete IAS 18 and IAS 11), while Full IFRS Standards have already transitioned to the control model under IFRS 15.

Scope and Exclusions

The section applies to the sale of goods, rendering of services, construction contracts, and the use by others of entity assets (interest, royalties, dividends). Significant exclusions include revenue from leases and financial instruments, which are regulated by other sections.

Measurement Principles

Revenue is measured at the fair value of the consideration received or receivable.

• Deferred Payment: If payment is deferred and contains a financing element, the fair value is determined by discounting all future receipts. The difference between the nominal amount and the fair value is recognized as interest income.
• Exchanges (Barter): An exchange of similar goods does not generate revenue. An exchange of dissimilar goods generates revenue measured at the fair value of the assets received.

Recognition Criteria

1. Goods: The key point is the transfer of significant risks and rewards of ownership. Additionally, the entity must not retain managerial involvement or effective control over the goods.
2. Services and Construction: The percentage of completion method is applied if the outcome can be estimated reliably. The degree of completion is determined via the proportion of costs incurred, surveys of work performed, or physical completion of stages. If the outcome cannot be estimated, revenue is recognized only to the extent of recoverable expenses incurred.

Note: The percentage of completion method in the current version is based on the reliability of the outcome estimate, whereas in IFRS 15 (and the new 2025 Edition) it is based on the transfer of control over time.

2.2. Agent vs. Principal: Gross Revenue vs. Commission

A critical aspect for trade intermediaries, logistics companies, and IT outsourcing is determining their role in a transaction:

1. Principal: Controls the good/service before it is transferred to the customer. Recognizes gross revenue (total sale value), with payments to the supplier recorded in the cost of sales.
2. Agent: Arranges the sale but does not control the good. Recognizes net income (only the amount of their commission).

Current Practice (IFRS for SMEs — 2015): The 2015 Standard focuses on the allocation of risks. If a company bears credit risk (customer does not pay) and inventory risk (unsold goods), it is likely a Principal.

2.3. The Fundamental Gap with IFRS 15

The implementation of IFRS 15 in Full IFRS Standards shifted the paradigm from “risks and rewards” to the “transfer of control.” For users of IFRS for SMEs (2015), this creates significant differences.

Control Model vs. Risks Model

• IFRS for SMEs (2015): An entity might transfer physical control but retain risks (e.g., a right of return or payment dependency on resale). In such cases, revenue is generally not recognized.
• IFRS 15: Focuses on the customer’s ability to direct the use of and obtain the benefits from the asset. The transfer of risks is merely one indicator of the transfer of control, not the sole criterion.

Identification of Obligations (Bundling)

• IFRS for SMEs (2015): Requires separating components (e.g., sale of goods + subsequent maintenance), but the “separability” criteria are general and based on the substance of the transaction.
• IFRS 15: Has rigid, detailed criteria for identifying “distinct performance obligations.” This often forces companies to “unbundle” complex contracts into more elements than is required under IFRS for SMEs.

Variable Consideration

• IFRS for SMEs (2015): Revenue is recognized if the amount can be “measured reliably” and there is a “probability” of obtaining benefits. This is a subjective threshold.
• IFRS 15: Introduces the concept of a “constraint.” Variable consideration is recognized only to the extent that it is highly probable that a significant reversal of revenue will not occur in the future. This is a more conservative approach.

Contract Costs

• IFRS for SMEs (2015): Costs of obtaining a contract (e.g., sales commissions) are generally recognized as period expenses (unless they are direct costs under a construction contract).
• IFRS 15: Requires capitalization of incremental costs of obtaining a contract if they are expected to be recovered (creating an asset that is then amortized). This improves EBITDA in the period of sale for companies under Full IFRS compared to SMEs.

2.4. Customer Loyalty Programs

Paragraph 23.9 of IFRS for SMEs specifically regulates loyalty points. They are accounted for as a separate component of the sale. The fair value of the consideration is allocated between the product and the points. This aligns with IFRIC 13 (the predecessor to IFRS 15), but the mechanics in IFRS 15 are more complex due to the concept of “standalone selling price” and the allocation of the discount.

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Section 24: Government Grants — The Performance Model, Not the Capital Model

3.1. Overview of Requirements (Section 24)

Section 24 offers a unique accounting model that differs from almost all other standards. It is based on the concept of fulfilling conditions rather than the concept of matching income and expenses.

Recognition Criteria

Grants are not recognized until the conditions attached to them are met.

1. Grants without conditions: Recognized in income immediately when the grant proceeds are receivable.
2. Grants with conditions: Recognized in income only when the performance conditions are met. Until that point, they are recognized as a liability (deferred income).

Prohibition of Netting

In Full IFRS (IAS 20), it is permitted to “net” a grant against the cost of the asset (crediting the asset). In IFRS for SMEs, Section 24 prohibits deducting the grant amount from the carrying amount of the asset. The grant is always a separate accounting object. Grants are measured at the fair value of the asset received or receivable.

3.2. Comparison with IAS 20 “Accounting for Government Grants”

IAS 20 utilizes the “matching approach,” which aims for the systematic recognition of grant income over the periods in which the entity recognizes the related costs for which the grant is intended to compensate.

Table 3. Fundamental Differences in Grant Accounting

Characteristic	IFRS for SMEs (Section 24)	Full IFRS Standards (IAS 20)	Impact on SME Financial Statements
Recognition Model	Performance Model: Income is recognized at the moment performance conditions are met.	Matching Model: Income is recognized systematically over the useful life of the asset.	Volatility: In SMEs, a large one-time income gain is possible in the year conditions are met, whereas in IAS 20, income is “spread” over years.
Grants for Assets	Gross Method: The Asset and the Grant (as income or liability) are shown separately.	Choice: Can be shown separately (deferred income) OR deducted from the cost of the asset (Net Method).	The SME balance sheet always shows the full cost of assets (“inflated” balance sheet compared to the IAS 20 net method).
Depreciation	Depreciation is calculated on the full cost of the asset.	If the net method is chosen, depreciation is calculated on the reduced cost.	Depreciation expenses in SMEs will be higher.

Example: Grant for Machinery Purchase

Situation: A company receives a grant of UAH 500,000 for the purchase of a machine. The conditions of the grant are met (the machine is purchased).

• Full IFRS Standards (IAS 20): The grant is recorded as “Deferred Income” (liability) or deducted from the asset’s value. Income is recognized gradually through depreciation.
• IFRS for SMEs (Section 24): Since the conditions are met, the entire amount (500k) is recognized as income immediately upon receipt. No deferred income.
• Consequence: In the year of purchase, the SME’s profit will be significantly higher, and in the following years (e.g., 9 years), it will be lower due to full depreciation without compensating grant income.

Key Takeaway for CFOs:

The most radical difference between the standards lies in the philosophy of revenue recognition.

IFRS for SMEs (Section 24) requires a grant to be recognized as income immediately once the performance conditions are met. The Standard does not allow for the deferral of income to future periods for depreciable assets. This leads to the instantaneous recognition of profit in the year the asset is acquired, followed by “naked” depreciation (without compensating income) in subsequent years.

In contrast, IAS 20 is based on the matching concept, requiring grant income to be recognized on a systematic basis over the periods in which the related costs (e.g., depreciation) are recognized.

Strategic Implication: When transitioning to IFRS for SMEs, a CFO must be prepared for sharp volatility in EBITDA and ROA indicators. This may necessitate a renegotiation of bank covenants, as the “paper” profit of the first year will be followed by losses in the future due to the asymmetry of income and expenses.

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Section 25: Borrowing Costs — The Prohibition of Interest Capitalization

4.1. Overview of Requirements (Section 25)

This section represents the ultimate simplification. Paragraph 25.2 unequivocally states: all borrowing costs shall be recognized as an expense in profit or loss in the period in which they are incurred.

Borrowing costs include:

• Interest expense calculated using the effective interest method.
• Finance charges in respect of finance leases.
• Exchange differences arising from foreign currency borrowings (to the extent that they are regarded as an adjustment to interest costs).

4.2. Comparison with IAS 23 “Borrowing Costs”

Capitalization: Prohibition vs. Obligation

• IAS 23: Requires the capitalization of borrowing costs that are directly attributable to the acquisition, construction, or production of a “qualifying asset” (an asset that necessarily takes a substantial period of time to get ready for its intended use or sale, such as the construction of a plant, software development, or the maturation of wine/cheese inventories).
• Section 25: Prohibits capitalization. No exceptions. This is one of the standard’s most significant simplifications, as it eliminates the need to calculate capitalization rates and track qualifying assets.

4.3. Analytical Conclusions for Capital-Intensive Industries

For construction companies, developers, and energy enterprises, transitioning to IFRS for SMEs will have a radical impact:

1. Lower Asset Value: Property, plant, and equipment (PPE) and work-in-progress will be measured only at direct costs, without the “mark-up” of interest.
2. Lower Current Profit: During the investment phase (construction), the company will show large losses due to interest write-offs, whereas under IAS 23, these costs would sit on the balance sheet.
3. Improved Future Profitability: Since the initial cost of assets is lower, future depreciation will be lower, which will increase the operating margin (EBIT) during the operational phase.

This approach eliminates the need for complex calculations of capitalization rates and the tracking of “suspension” of capitalization, significantly easing the accountant’s workload.

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Section 26: Share-based Payment

5.1. Overview of Requirements (Section 26)

Section 26 requires the recognition of expenses for goods or services received in exchange for equity instruments (e.g., employee stock options).

Measurement

• For Employees: Measured at the fair value of the equity instruments at the grant date.
• For Other Parties: Measured at the fair value of the goods or services received at the date of receipt.

Simplification: Intrinsic Value

A unique feature for SMEs is the simplification provided in Para 26.10. If an entity cannot reliably estimate the fair value of the options (e.g., there is no market price and applying the Black-Scholes model is difficult), it is permitted to use management’s estimate. Furthermore, research materials indicate that while the direct use of “intrinsic value” as a default method (as in US GAAP) is not prescribed as primary, the measurement hierarchy allows for methods based on net assets or business valuation, which is significantly simpler than complex option-pricing models.

5.2. Comparison with IFRS 2

• IFRS 2: Does not permit the use of “intrinsic value” (the difference between the share price and the exercise price) except in very rare cases where fair value cannot be estimated. It requires the use of complex option-pricing models.
• IFRS for SMEs: More tolerant of using simplified business valuation methods to determine the share price.
• Settlement Choice: If there is a choice of settlement (cash or shares), IFRS for SMEs usually treats this as a cash-settled transaction (liability), which simplifies accounting compared to IFRS 2, where this could be a complex compound instrument.

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Section 28: Employee Benefits

6.1. Overview of Requirements (Section 28)

The section covers all types of benefits: short-term, long-term, post-employment (pensions), and termination benefits.

Defined Benefit Plans

This is the most complex area. An entity must recognize a liability for its obligations under defined benefit plans net of plan assets. The liability is the difference between the Present Value of the Defined Benefit Obligation (DBO) and the fair value of plan assets.

Measurement Simplifications

Paragraph 28.19 provides a critical simplification: if an entity is unable to apply the projected unit credit method without undue cost or effort, it may use a simplified method:

1. Ignore future salary increases.
2. Ignore future service.
3. Ignore future mortality of current employees.

In effect, this turns the calculation into a “settlement” or “liquidation” liability based on current salaries, eliminating the mandatory need for an actuary.

6.2. Comparison with IAS 19 “Employee Benefits”

1. Measurement Method

• IAS 19: Requires the projected unit credit method in all cases. Simplifications are prohibited.
• Section 28: Permits simplifications, making accounting accessible for smaller companies.

2. Recognition of Actuarial Gains/Losses (Remeasurements)

• IAS 19: Mandatory requirement to recognize remeasurements (actuarial differences) exclusively in Other Comprehensive Income (OCI). They are never reclassified (recycled) to profit or loss.
• Section 28: Provides an accounting policy choice: recognize actuarial differences either in Profit or Loss or in OCI. Recognition in Profit or Loss (P&L) is simpler but creates volatility in the financial result.

3. Past Service Cost

Both Section 28 and IAS 19 require immediate recognition of expenses when a pension plan is amended (regardless of whether the benefits have vested). Here, the standards are synchronized.

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Section 29: Income Tax — Temporary Differences Without Simplifications

7.1. Overview of Requirements (Section 29)

Section 29 (similar to IAS 12) requires the recognition of deferred tax liabilities or assets for all temporary differences between the carrying amount of assets/liabilities and their tax bases.

Recognition Principle

Deferred tax is recognized for all temporary differences between the carrying amount of assets/liabilities and their tax bases, as well as for the carryforward of unused tax losses.

The “Undue Cost or Effort” Simplification

A unique feature of IFRS for SMEs is the exemption from the requirement to offset tax assets and liabilities if doing so requires undue cost or effort to verify the timing of their reversal.

Important: The Standard mandates the recognition of deferred taxes. The simplification applies only to the measurement methodology regarding uncertainty, but it does not abolish the principle of temporary differences itself.

7.2. Impact on Tax Differences

Transitioning to IFRS for SMEs often leads to the appearance of significant Deferred Tax Assets (DTA) that did not exist under national accounting. The main driver of this is the prohibition on capitalizing borrowing costs (Section 25) and development costs (Section 18). Since the Tax Code of Ukraine requires (or permits) the depreciation of such costs as part of the cost of non-current assets, the carrying amount of assets in IFRS reporting will be systematically lower than their tax base. This obligates the company to recognize a deferred tax asset, which is effectively a “right” to pay less tax in the future (via tax depreciation), despite the accounting expenses being recognized today.

7.3. Comparison with IAS 12 “Income Taxes”

Discounting

Both Section 29 and IAS 12 do not provide for (and actually prohibit) the discounting of deferred tax assets/liabilities.

Uncertainty (IFRIC 23)

Section 29 of IFRS for SMEs does not explicitly refer to IFRIC 23, but it mandates assessing the probability that sufficient taxable profit will be available to utilize the deferred tax assets. This effectively means a less formalized requirement for documenting tax risks compared to Full IFRS, where IFRIC 23 significantly deepens the approach to uncertainty.

Pillar Two (Global Minimum Tax)

In Full IFRS (IAS 12), temporary exceptions were introduced regarding the recognition of deferred taxes related to Pillar Two. IFRS for SMEs does not contain a separate, targeted amendment for Pillar Two, but due to the general simplification principle, SMEs are not required to provide detailed deferred tax accounting for the 15% global minimum tax rules, which is especially important for Ukrainian subsidiaries of large international groups.

Section 30: Foreign Currency Translation

8.1. Overview of Requirements (Section 30)

This section prescribes the rules for determining the functional currency and translating foreign currency transactions. A key focus is the accounting for investments in foreign operations.

8.2. Comparison with IAS 21: The “Recycling” Issue

This is one of the most significant differences in the entire suite of standards.

• IAS 21: Requires that exchange differences arising from the translation of a foreign operation be accumulated in a separate component of equity (Other Comprehensive Income – OCI). Upon the disposal (sale) of that operation, the accumulated amount must be reclassified (“recycled”) from equity to profit or loss as part of the gain or loss on sale.
• Section 30: Explicitly prohibits reclassification. Paragraph 30.18 states that accumulated exchange differences shall not be reclassified to profit or loss on disposal.

Practical Implications

For an SME accountant, this is a huge relief. There is no need to maintain a historical register of exchange differences for each subsidiary for all years of its existence (“track and tag”). When a foreign branch is sold, the financial result in the SME report will differ from the result under Full IFRS exactly by the amount of this historical reserve. The reserve remains in equity forever (or is transferred to retained earnings, but never through the P&L).

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Conclusions and Recommendations

9.1. Key Conceptual Discrepancies

1. Conservatism: IFRS for SMEs leans towards immediate recognition of expenses (interest, development costs, start-up costs), whereas Full IFRS allows capitalization, creating a “more optimistic” balance sheet.
2. Model Stability: The SME Standard is updated infrequently (every 5-7 years), protecting businesses from constant changes (like the transition to IFRS 9/15/16). However, this creates “time lags” where SMEs use outdated models (like “risks and rewards” for revenue).
3. Measurement Simplification: Permitting the avoidance of actuarial calculations and complex option-pricing models is the greatest advantage for the administrative resources of SMEs.

9.2. Looking Forward (3rd Edition)

The new edition of IFRS for SMEs (2025) brings mixed news. On one hand, there is full integration of the complex revenue recognition model (IFRS 15), which will require companies to review all customer contracts. On the other hand, the regulator declined to implement the Expected Credit Loss (ECL) model for financial instruments and retained simple rules for borrowing costs, providing relief for smaller businesses.

9.3. Recommendations for Transition

• When transitioning from Full IFRS to IFRS for SMEs: Conduct a detailed analysis of property, plant, and equipment (write off capitalized interest) and intangible assets (write off capitalized R&D).
• Carefully review customer contracts: Replacing the “control” model with the “risks” model (in the 2015 version) or preparing for the mandatory 5-step model (in the 2025 version) may change revenue recognition dates.
• Use “Undue Cost or Effort” exemptions cautiously: Always disclose the reasons in the Notes, as this is an area of increased focus for auditors.

The “Price” of Simplification: Key Differences in IFRS for SMEs

Table 9. Major methodological simplifications in the standards.

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Frequently Asked Questions (FAQ)