This series has covered what changes under the third edition of the IFRS for SMEs Accounting Standard, effective 1 January 2027. A more basic question comes first: who may use it?
The name suggests a small business with a handful of staff and a modest turnover. The definition says nothing of the sort.
The definition
Section 1 of the Standard describes small and medium-sized entities as entities that:
- do not have public accountability; and
- publish general purpose financial statements for external users.
That is the full test. There is no turnover limit, no employee count and no asset threshold. The IASB deliberately left size criteria to individual jurisdictions, and the third edition leaves the definition unchanged.
What public accountability means
An entity has public accountability in only two situations. The first is where its debt or equity instruments are traded in a public market, or it is in the process of issuing them for trading in a public market. The second is where it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. Banks, insurers, securities brokers, pension funds and unit trusts are the typical examples.
Meet Khumalo Family Foods
Khumalo Family Foods (Pty) Ltd is a fictional food manufacturer started by a grandfather and now owned by 14 members of the same family. It employs an average of 3,200 people, has annual turnover of R500 million and owes R180 million to banks and suppliers. None of its shares or debt is listed on any exchange.
Regulation 26 of the Companies Regulations, 2011 requires every company to calculate a public interest score (PIS) each year:
| Factor | Points |
|---|---|
| Employees (one point each) | 3,200 |
| Third-party liabilities (one point per R1 million) | 180 |
| Turnover (one point per R1 million) | 500 |
| Individuals with a beneficial interest in its shares (one point each) | 14 |
| Total | 3,894 |
That is more than ten times the 350-point threshold at which an audit becomes mandatory. Khumalo must be audited every year, and its annual financial statements must be filed with the CIPC in XBRL format.
Now apply the IFRS for SMEs test. Khumalo has no instruments traded in a public market and is not a bank, insurer or fund. It publishes general purpose financial statements for its lenders, its family shareholders who are not involved in running the business, and key suppliers. It has no public accountability. Khumalo is an SME for purposes of the IFRS for SMEs Standard.
Two tests, two different questions
This is where people get confused. A mandatory audit feels like it should come with full IFRS. It does not. The public interest score measures a company’s economic and social footprint: staff, debt, turnover and owners. That footprint drives the level of assurance required.
Public accountability asks a different question: who relies on the financial statements, and can they demand the information they need? Khumalo’s banks can set reporting covenants. Its shareholders can ask the board directly. Investors buying shares on the JSE cannot do either, which is why listed entities need full IFRS.
The Companies Regulations reflect this. Regulation 27 allows a profit company with a PIS of 350 or more to prepare its financial statements under either IFRS Accounting Standards or the IFRS for SMEs Standard, provided it falls within the Standard’s scope. Khumalo’s auditor simply reports on fair presentation under that Standard.
When the answer changes
SME status is not permanent. If Khumalo starts preparing a bond issue on the JSE debt market or a share listing, it becomes publicly accountable from the moment it is in the process of issuing, not from the listing date. That is the point to start planning the move to full IFRS.
If a listed group acquired Khumalo, the subsidiary could still apply the IFRS for SMEs Standard in its own financial statements. The parent, however, would need full IFRS numbers for consolidation.
The PIS thresholds are also under review as part of the revised Companies Regulations following the Companies Amendment Act, 2024. Any change will affect who needs an audit, not who qualifies as an SME. That test sits in the Standard.
Should a large SME use the Standard?
Qualifying is not an obligation. A business of Khumalo’s size should weigh the lower cost and lighter disclosure of the IFRS for SMEs Standard against its plans. If a listing, private equity investment or sale to an international group is likely within a few years, adopting full IFRS now may avoid a costly transition later.
The third edition has narrowed that gap. As earlier articles showed, the revised revenue, fair value and financial instruments sections now track IFRS 15, IFRS 13 and parts of IFRS 9 closely.
The key point is simple. An SME is defined by who uses its financial statements, not by how big it is. A R500 million company with 3,200 employees and a mandatory audit can still be one.
