The third edition of IFRS for SMEs brings the standard much closer to full IFRS. For medium-sized companies in Pakistan, revenue, financial instruments and consolidation are the areas to watch.
General information only. This article summarises rules, standards and effective dates as we understand them in October 2026. It is not tax, accounting or audit advice for your specific situation. Talk to us before making decisions.
What has changed
In February 2025 the IASB published the third edition of the IFRS for SMEs Accounting Standard, following its second comprehensive review. It applies to annual reporting periods beginning on or after 1 January 2027, with early application permitted.
In Pakistan, medium-sized companies prepare their financial statements under IFRS for SMEs, as set by the Third Schedule to the Companies Act 2017. Local application of the third edition depends on SECP notification, so check the notified date for your company. Either way, the changes are significant enough that preparation should start well before the first year end.
Revenue (Section 23)
Section 23 is rewritten around a simplified version of the IFRS 15 five-step model, which applies to all contracts with customers:
- identify the contract;
- identify the promises to transfer goods or services (performance obligations);
- determine the transaction price;
- allocate the price to the promises;
- recognise revenue when, or as, each promise is satisfied.
Businesses with bundled contracts, such as software with support, installation projects, construction, subscriptions or milestone-based services, may see their revenue timing change. Transition relief allows companies to keep their existing policy for contracts that are already in progress.
Financial instruments and fair value
- One financial instruments section: the old Sections 11 and 12 are combined into a single section based on IFRS 9, with simplifications. Debt instruments are classified by their contractual cash flow characteristics, and the option to apply IAS 39 is removed.
- New fair value section: fair value guidance is brought together in a single section based on IFRS 13, with a clear fair value hierarchy.
Groups and business combinations
- Consolidation (Section 9): the definition of control is aligned with IFRS 10, which may bring entities into or out of a group, with new rules on losing control of a subsidiary.
- Business combinations (Section 19): updated for IFRS 3, including the definition of a business, contingent consideration measured at fair value and step acquisitions.
Other changes
- Concepts and principles (Section 2): updated to reflect the IASB's 2018 Conceptual Framework.
- Employee benefits (Section 28): more detailed reconciliations for defined benefit obligations and plan assets, relevant to companies with gratuity schemes.
- Leases: unchanged. The IASB decided not to align lease accounting with IFRS 16 in this edition, so operating leases stay off the balance sheet for now.
Which framework applies to your company?
| Company type | Framework under the Third Schedule |
|---|
| Listed companies, public interest companies and large-sized companies | Full IFRS as notified by the SECP |
| Medium-sized companies | IFRS for SMEs |
| Small-sized companies | Accounting and financial reporting standard for small-sized entities |
Size depends on thresholds for paid-up capital, turnover and employees set in the Third Schedule, so companies growing quickly may move between frameworks. We can confirm where you sit.
Business impact
Revenue timingBundled and long-term contracts may recognise revenue earlier or later than today.
Group boundaryThe new control test can change which entities are consolidated.
Bank covenantsChanges in profit and equity can affect ratios agreed with lenders.
TaxAccounting profit is the starting point for income tax, so timing changes need tax review.
Action checklist
- Confirm which framework your company uses and the date the third edition applies.
- Review significant customer contracts against the five-step model.
- Reclassify financial assets using the new cash flow characteristics test.
- Reassess control over subsidiaries, joint ventures and other investees.
- Update accounting policies, disclosure checklists and gratuity reconciliations.
- Model the effect on profit, equity, covenants and tax before the first year end.
How Quantum Axis helps
We prepare IFRS for SMEs and full IFRS financial statements, run contract and control reviews, calculate transition adjustments and work with your auditors so the first year under the new edition goes smoothly. See our financial reporting service.
Need help applying the new standards?
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