KC Rottok Chesaina - Chief IFRS Officer, Mueni Management Consulting

The third edition of IFRS for SMEs has quietly dropped one of its biggest updates: a fresh, sharper definition of what counts as a business. And while it sounds like a small tweak, it will have a big impact on how SMEs account for many everyday acquisitions.

Think of someone purchasing a simple operation like a clothing store and adding it to its chain of stores. Under the previous rules, many of these deals were treated as full business combinations. But under the new guidance? Not anymore.

Let’s walk through what’s changed — and why something like a newly purchased clothing store may no longer qualify as a “business” at all.

The New Test: More Than Just a Set of Assets

If that engine is missing, you’re not buying a business.
You’re just buying assets. And for SMEs, that’s a surprisingly common scenario.

Under the updated IFRS for SMEs, a business is no longer simply “something that generates income.” The bar is higher. For a purchase to count as a business, you must be buying not just things, but also the engine that makes those things work — the people, processes, systems, and know-how that can produce goods or services on their own.

A Clothing Store That Isn’t a Business

Imagine a company, Urban Threads Proprietary Limited, buys a clothing store in a busy mall. They take over:

• The leased shop space,
• The shelves and fittings,
• The point-of-sale equipment, and
• All the unsold inventory.
• Some staff

What they don’t get are the things that make the store run:

• The management or operating procedures,
• Any IT systems they intend to keep,
• Or any store-level processes.

Urban Threads plans to close the shop, refurbish it and integrate it into its own brand. So what did they really buy? A space. Stock. Equipment. But no functioning operation.
In other words — not a business, according to the new rules.

A Helpful Shortcut: The Concentration Test

The Standard introduces a handy optional shortcut known as the concentration test: if almost all the value in what you’ve bought sits in one asset or a group of similar assets, you can immediately conclude it’s not a business.

In the clothing store example, the value sits mainly in:

• The right-of-use asset for the store space, and
• The inventory.

These are clearly assets, not an operating business.
So Urban Threads doesn’t have to perform any complex analysis.
Result? Asset acquisition.

Why This Matters for Your Financial Statements

This new classification has real consequences — and in many cases, good ones for SMEs.

1. No Goodwill, No Fuss - If it’s not a business, there’s no goodwill to calculate or amortise. That instantly removes a layer of complexity from accounting for the acquisition.

2. Transaction Costs Are Capitalised, Not Expensed - Under the current rules, buying a “business” meant immediately expensing legal fees and other acquisition costs.
Under the new edition, if it’s an asset acquisition, those costs are added to the cost of the assets — giving SMEs a softer landing on profit or loss.

3. Simpler Disclosures - Buying assets instead of a business makes the reporting lighter, leaner and more SME-friendly. Fewer tables. Fewer notes. Less admin.

The Bigger Picture: More Deals Will Now Be Seen as Asset Buys

The industries most affected by the new IFRS for SMEs definition of a business are those where companies frequently buy pieces of operations rather than full, self-contained enterprises. Retailers acquiring single clothing stores or distressed outlets, hospitality groups taking over individual restaurants or coffee shops, and real estate investors buying standalone rental properties will increasingly find that these purchases no longer qualify as business combinations.

The same applies to agriculture, where farms or orchards are often bought without the seller’s underlying management processes, and to mining, where SMEs may acquire individual quarry sites or mineral rights rather than full operating mines. Professional services firms taking over branch offices or client lists, healthcare groups purchasing small clinics or pharmacies, and manufacturers acquiring a single production line or workshop all face similar outcomes. Across these sectors, deals that once “felt” like business purchases will now be treated as simple asset acquisitions because they lack the substantive processes that define a true business under the updated Standard — meaning fewer goodwill calculations, simpler reporting, and a more intuitive reflection of economic reality.

Conclusion

The third edition of IFRS for SMEs is effective for annual periods beginning on or after 1 January 2027, with earlier application permitted. It sharpens the line between business combinations and asset acquisitions. By focusing on the presence of a substantive process and introducing an optional concentration test, the Standard makes it clear that many acquisitions of standalone stores or asset-rich operations are not businesses. The resulting accounting better aligned with the economic substance of the transaction.