By KC Rottok Chesaina - Chief IFRS Officer, Mueni Management Consulting

For many small and medium-sized entities (SME’s) in South Africa, the move to IFRS for SMEs was originally welcomed as a practical alternative to full IFRS. Reduced disclosures, simplified language and fewer complex options made it attractive, particularly for owner-managed and privately held businesses.

One fictitious Johannesburg-based manufacturing and distribution company, which we will call Makwande Trading (Pty) Ltd, was one such adopter. In 2010, Makwande transitioned from full IFRS to IFRS for SMEs, confident that the standard better reflected the scale and complexity of its operations.

At the time of adoption, Makwande made a choice that many SMEs did: it elected to retain the recognition and measurement principles of IAS 39 for its financial instruments, as permitted by earlier versions of the IFRS for SMEs Standard. This decision allowed the company to continue applying accounting treatments that management and auditors were already comfortable with, particularly in respect of loans, trade receivables and impairment.

However, with the revised IFRS for SMEs Standard coming into effect for annual periods beginning on or after 1 January 2027, that familiar comfort has come to an end.

Previous IAS 39 requirements

Under IAS 39, Makwande classified its financial assets into categories that had become second nature:

• Trade receivables and loans sat comfortably under loans and receivables
• Long-term investments were labelled available-for-sale
• Certain fixed-income instruments were treated as held-to-maturity

The revised IFRS for SMEs sweeps this framework away. The familiar IAS 39 labels are no longer permitted.

A Simpler Model, But Not a Superficial One

Under the revised IFRS for SMEs, financial assets are broadly classified into two main measurement categories:

1. Financial assets measured at amortised cost
2. Financial assets measured at fair value through profit or loss

There is no longer a residual category like available-for-sale, and there is no separate category for loans and receivables. For Makwande, this immediately raised a practical question: where do our financial assets now sit?

Re-thinking Trade Receivables

Previously, Makwande’s trade receivables were automatically classified as loans and receivables. Under the revised Standard, the classification is not driven by the name of the instrument, but by its cash flow characteristics.

The new Section 11 (which now combines the old Sections 11 and 12) uses a two-step approach to determine if a debt instrument can be measured at amortised cost:

1. The Conditions/Examples List: You first check if the instrument meets the specific conditions or matches the examples of "basic" debt instruments already listed in the standard.
2. The SPPI Principle: If an instrument does not clearly meet those specific conditions, you can now apply the SPPI principle. If the contractual terms give rise to cash flows that are solely payments of principal and interest, it qualifies for amortised cost measurement.

What Happened to Available-for-Sale?

One of the biggest conceptual shifts for Makwande involved assets previously classified as available-for-sale. These included small strategic equity investments held for long-term business relationships rather than short-term trading.

Under IAS 39, fair value movements on these assets were parked in equity and only recycled to profit or loss on disposal or impairment. That category no longer exists.

Under the revised IFRS for SMEs:

• Equity instruments are generally measured at fair value through profit or loss, and
• If fair value cannot be measured reliably, cost less impairment may be used, but this is a practical exception, not a category choice.

For Makwande, this meant that fluctuations in the value of certain investments would now flow directly through profit or loss, introducing volatility that had previously been absorbed in equity.

Loans and Intercompany Balances Re-examined

Loans advanced to related parties were another area where old labels had quietly shaped thinking. Under IAS 39, these were neatly classified as loans and receivables and carried at amortised cost, often without much debate.

Under the revised IFRS for SMEs, Makwande had to reassess:

• Whether the loans met the criteria for amortised cost, and
• Whether their contractual terms reflected market conditions.

In some cases, loans with no fixed repayment terms required closer scrutiny, including discounting and reassessment of their economic substance. The removal of IAS 39 categories forced finance teams to confront issues that had previously been masked by familiar classifications. A loan with no or below market interest rates not at market value would result in a day one adjustment as follows:

Parent to Subsidiary (Investment): If a parent lends to a subsidiary interest-free, the fair value difference is usually treated as an additional investment in the subsidiary (Debit Investment in Subsidiary) because the parent is providing a capital benefit.

Subsidiary to Parent (Distribution): If a subsidiary lends to a parent interest-free, the difference is treated as a distribution (effectively a dividend in substance).

Employer to Employee (Benefit): The difference is recognised as an employee benefit expense in Profit or Loss.

A Final Reflection

Makwande Trading’s experience highlights a broader truth for SMEs: the revised IFRS for SMEs is not just a trimmed-down version of full IFRS, nor a continuation of old habits. It is a modernised standard that deliberately closes the door on IAS 39 thinking.

For finance teams, the challenge is to let go of familiar categories and embrace a principles-based approach to classification. While the transition may feel uncomfortable at first, it ultimately leads to financial statements that are more transparent, more comparable and more aligned with how the business actually operates.