[Global Financial Insights] IFRS for SMEs | GRI-IFRS S2 | AI in Audit

Editorial Team – [2025] 176 taxmann.com 82 (Article)

Global Financial Insights is a weekly feature for the Accounts and Audit Module subscribers of Taxmann.com. It provides you with the latest updates on financial reporting and auditing practices from across the globe. Here is this week’s financial update:

1. IFRS Foundation releases June 2025 update on IFRS for SMEs accounting standard

In June 2025, the International Financial Reporting Standards (IFRS) Foundation released an important update on the IFRS for SMEs Accounting Standard, following the issuance of the third edition of the Standard in February 2025. A significant focus of this edition is the revision of financial instruments guidance, particularly in Section 11, which now includes requirements aligned with IFRS 9, Financial Instruments. These include the application of the incurred loss model for impairment of financial assets measured at amortised cost, as well as updated guidance on derecognition and hedge accounting. The structure of Section 11 has also been revised to consolidate and clearly distinguish between simpler financial instruments and more complex transactions, making the Standard more accessible for SMEs. In addition, a new principle has been introduced to support the classification of debt instruments, aimed at enhancing clarity and consistency in practice.

The updated Standard includes enhanced disclosure requirements to improve transparency and risk assessment. Notably, entities must now present an ageing analysis of trade receivables and other financial assets, and a maturity analysis of financial liabilities. These disclosures aim to provide users of financial statements with better insight into an entity’s exposure to credit risk and liquidity risk. To assist with implementation, the IFRS Foundation has released updated training materials, including the revised Module 11 (Financial Instruments), with further modules on core SME topics expected in Q3 2025. Additionally, support resources such as webcasts and podcasts have been made available to guide preparers through the transition.

The IFRS Foundation announced that the upcoming World Standard-setters Conference, scheduled for 29–30 September 2025, will feature dedicated sessions on the new edition of the IFRS for SMEs Standard. This conference will provide an opportunity for national standard-setters to engage directly with the IASB and gain deeper insights into the changes and implementation strategies.

Source – International Financial Reporting Standards

2. ISSB announces equivalence between GRI 102 and IFRS S2 for GHG emissions disclosures

The International Sustainability Standards Board (ISSB) has announced that disclosures made under its IFRS S2 Climate-related Disclosures standard are now recognised as equivalent to the requirements under GRI 102 – Climate Change 2025 for greenhouse gas (GHG) emissions reporting. This equivalence, jointly declared by the ISSB and the Global Sustainability Standards Board (GSSB) on 26 June 2025, marks a major step toward streamlined and interoperable sustainability reporting. It applies specifically to disclosures of Scope 1, 2, and 3 GHG emissions, provided they are measured using the GHG Protocol and the organization publishes a GRI content index.

The ISSB’s Vice-Chair welcomed the development, noting that it allows companies to report GHG emissions once in a way that satisfies both IFRS S2 and GRI 102. This alignment supports more efficient reporting practices and reduces duplication, while still meeting the needs of both investors and broader stakeholders. Both standards rely on established global measurement frameworks, particularly the GHG Protocol, reinforcing the credibility and consistency of reported information.

A joint statement issued by the ISSB and GRI also highlights areas where the two standards complement each other beyond emissions, such as in governance, transition planning, adaptation strategies, and social impacts related to the climate transition. The announcement builds on the 2022 Memorandum of Understanding between the IFRS Foundation and GRI, aimed at enhancing compatibility across investor-focused and impact-focused sustainability standards.

To apply this equivalence, companies must ensure GHG emissions are measured in line with the GHG Protocol (2004) and include clear cross-references in their GRI content index to show where relevant IFRS S2 disclosures are located. This announcement underscores the ISSB’s commitment to fostering global comparability and usability in climate-related reporting.

Source – International Sustainability Standards Board

3. FRC publishes its first guidance on the use of Artificial Intelligence (AI) in audit

On 26 June 2025, the Financial Reporting Council (FRC) published its first guidance on the use of Artificial Intelligence (AI) in audit, marking a significant step toward providing clarity and confidence to audit professionals as AI adoption accelerates. Developed in collaboration with the FRC’s Technology Working Group and informed by engagement with key stakeholders, the guidance aims to help auditors responsibly implement AI tools while maintaining audit quality, transparency, and regulatory alignment.

Accompanied by a thematic review of AI certification practices among the UK’s largest audit firms, the guidance addresses both current and emerging forms of AI, ranging from traditional machine learning to advanced generative AI, underscoring the importance of explainability, proportionate documentation, and alignment with government principles.

Key Features of the Guidance:

(a) Two-part structure – The guidance is split into two components – an illustrative example showing how AI may be used in an audit, and a set of principles to support proportionate and robust documentation of AI-enabled tools.

(b) Broad and forward-looking AI definition – It adopts a wide scope, covering both traditional machine learning and deep learning models, including generative AI, ensuring relevance for a variety of current and future technologies.

(c) Balanced documentation expectations – The FRC promotes a proportionate approach to documentation that avoids overburdening auditors while still ensuring that key risks and judgments are clearly recorded.

(d) Sophisticated view on appropriate explainability – The guidance acknowledges that the level of explainability required may vary depending on the context and specific usage of the AI tool within the audit process.

(e) Versatile principles – The principles are designed to be broadly applicable across different types of AI use, offering useful considerations and frameworks for auditors regardless of the specific tool or use case.

(f) Alignment with Government AI principles – The approach to documentation aligns with the UK Government’s five AI principles – safety, transparency, fairness, accountability, and contestability.

(g) Relevant across the market – The guidance also addresses situations where AI tools are obtained from third-party vendors, clarifying how expectations apply in those contexts as well.

This milestone publication reinforces the FRC’s commitment to supporting innovation in audit while safeguarding quality and public trust as the profession navigates the rapidly evolving AI landscape.

Source – Financial Reporting Council

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