International Financial Reporting Standards for Small and Medium-Sized Enterprises: Mandatory Update

By Rebeca Sequeira.

The majority of Costa Rica's productive sector is comprised of small and medium-sized enterprises. According to recent data from the National Institute of Statistics and Census (INEC) and the Ministry of Economy, there are approximately 140,000 active SMEs, equivalent to 97% of the total number of companies in the country. This high proportion highlights the importance of having an accounting framework adapted to SMEs. In contrast, only approximately 3% of companies are large corporations or multinationals. This group includes approximately 10 stock issuers listed on the National Stock Exchange, banks, insurance companies, and other supervised financial entities.

Looking at economic data on national production, the so-called free trade zones, where many multinationals operate, generated nearly 14% of Costa Rica's GDP in 2024. These zones were also responsible for 40% of foreign direct investment and generated a large portion of the country's exports.

Companies subject to full International Financial Reporting Standards (IFRS)

In Costa Rica, full IFRS is mandatory primarily for entities with public accountability: publicly listed and regulated companies in the financial sector, as well as multinational corporations. In practice, this means that only dozens of companies (banks, multinationals, insurers, and stock issuers) must follow full IFRS, compared to tens of thousands of SMEs. For example, the National Stock Exchange reports only about 10 listed issuers. In contrast, SMEs—which are not subject to public accountability—can opt for IFRS for SMEs, a simplified standard designed for them. This differentiated framework reduces the accounting burden for SMEs and focuses full IFRS on those who prepare financial statements for investors and supervised entities.

Key changes to IFRS for SMEs (July 2025)

In February 2025, the IASB (International Accounting Standards Board) published the third edition of the IFRS for SMEs, effective for financial years beginning in July 2025. This update selectively incorporates recent improvements to full IFRS standards through an "alignment approach" focused on relevance and simplicity. Here are some highlights:

Financial instruments: the simplified incurred loss model for asset impairment is maintained in IFRS SMEs (instead of the complex expected loss model in IFRS 9).

Hedge accounting and derecognition: The new section eliminates complex hedge accounting requirements, eliminating the need for SMEs to manage these procedures.

Fewer disclosures: Many disclosure requirements from full IFRS have been omitted or reduced, so IFRS for SMEs requires far fewer measurement elements and disclosures.

These enhancements update the SME standards without sacrificing comparability: the core principles of full IFRS are retained, but without their full operational burden.

The IFRS for SMEs offers concrete benefits to domestic businesses. First, it reduces the administrative burden: because it is written in simpler language and requires only essential disclosures, SMEs do not need to invest as much time and resources in accounting reports. For example, a business can apply basic accounting policies and only resort to full IFRS in cases of growth.

Furthermore, as an international standard, it improves the comparability of Costa Rican SMEs. Financial statements under IFRS for SMEs are globally recognized, making it easier for foreign banks and investors to trust local information. IASB studies highlight that IFRS for SMEs can play a role in helping SMEs access capital. Indeed, an SME that adopts these standards presents more reliable financial statements, which can translate into better financing conditions and a lower cost of capital.

Finally, IFRS for SMEs promotes uniform accounting practices across the country: adopting a framework fosters understanding among national companies and facilitates an SME's future transition to the capital market or financial oversight if it grows. Overall, SMEs gain confidence without paying the price of the complexity of full IFRS.

Greater uniformity: Global standards facilitate credibility with investors and banks.

Fewer accounting requirements: Simple language and reduced notes reduce the accounting burden.

Lower operating costs: Complex processes (such as the IFRS 9 impairment model) are avoided, which reduces audit and report preparation time.

Comparison: Full IFRS vs. IFRS for SMEs

Aspect	Full IFRS	IFRS for SMEs
Information requirements	High complexity: technical language, numerous standards (∼8,000 pages) and extensive disclosure requirements.	Plain language and fewer disclosures: compact framework with minimal reporting requirements.
Financial instruments	Full IFRS 9 is applied (expected loss model, hedge accounting, etc.).	The incurred losses model for impairment is maintained, without hedge accounting.
Recipient companies	Mainly public or listed companies (stock market, banking, insurance).	Entities without public accountability.

In short, the IFRS for SMEs, which came into force in July, offers an ideal technical and operational balance for the Costa Rican context. It allows small and medium-sized enterprises to present high-quality international financial information without the complexity of full IFRS. This promotes national competitiveness by aligning SMEs with global standards while protecting their operational reality.

References: Consultations with institutional sources show that approximately 97% of Costa Rican companies are SMEs; full IFRS are mandatory only for stock issuers and financial institutions. International organizations highlight that IFRS for SMEs improves these companies' access to capital. Regulatory developments up to the third edition of IFRS for SMEs 2025 have sought to simplify without sacrificing financial quality, which is convincing for both entrepreneurs and investors. All figures and quotes come from official sources (MEIC/INEC, IFRS Foundation, SSE Initiative, among others) and underscore the practical relevance of this standard for national businesses.