Having identified a contract, unpacked its performance obligations, determined the transaction price, and allocated that price to each obligation, the final step answers the most fundamental question in revenue accounting: when does revenue get recognised?
Step 5 of the revised IFRS for SMEs framework, effective for annual periods beginning on or after 1 January 2027, requires entities to recognise revenue only when—or as—a performance obligation is satisfied. This occurs when control of the promised good or service transfers to the customer.
The shift from risks and rewards to control represents one of the most significant conceptual changes introduced by the revised Standard. It determines not only the timing of revenue but the pattern of recognition across reporting periods.
Two Types of Performance Obligation: Point in Time versus Over Time
The first assessment an entity must make under Step 5 is whether each performance obligation is satisfied over time or at a point in time.
This determines the pattern of revenue recognition for the entire obligation.
A performance obligation is satisfied over time if any one of the following criteria is met:
If none of these criteria are met, the performance obligation is satisfied at a point in time.
Recognising Revenue Over Time
Where a performance obligation is satisfied over time, the entity must select a method that faithfully depicts progress toward complete satisfaction of that obligation.
Acceptable methods include:
- Output methods, which recognise revenue based on direct measures of value delivered to the customer—such as milestones reached, units delivered, or surveys of work completed.
- Input methods, which recognise revenue based on the entity's efforts relative to total expected efforts—such as costs incurred to date as a proportion of total expected costs.
The method chosen must be applied consistently and updated as circumstances change.
Example: Jozi Solar Solutions – Revenue Over Time
Recall that Jozi Solar Solutions (Pty) Ltd has a contract comprising two performance obligations: a combined design and installation obligation, and ongoing monitoring services.
The monitoring services are consumed by the customer as Jozi Solar performs them—the customer benefits from system oversight each day. This satisfies the first criterion for over-time recognition. Revenue allocated to monitoring services is therefore recognised over the contract period, in line with the passage of time or service delivery.
The design and installation obligation, by contrast, creates a solar system that the customer controls as it is constructed on the customer's property. This satisfies the second criterion. Revenue allocated to this obligation is recognised progressively, based on the proportion of costs incurred to date relative to total estimated costs.
If total estimated installation costs are R1.2 million and Jozi Solar has incurred R600,000 by the reporting date, 50% of the allocated revenue for that obligation is recognised in the current period.
Recognising Revenue at a Point in Time
Where a performance obligation does not meet any of the over-time criteria, revenue is recognised at the point when control transfers to the customer.
In making this determination, an entity considers the following indicators:
- The entity has a present right to payment for the asset.
- The customer has legal title to the asset.
- The entity has transferred physical possession of the asset.
- The customer has the significant risks and rewards of ownership.
- The customer has accepted the asset.
These indicators are considered together. No single indicator is determinative, and the weight given to each will depend on the specific facts and circumstances of the arrangement.
Example: Ubuntu Office Furnishings – Revenue at a Point in Time
Ubuntu Office Furnishings (Pty) Ltd has a contract to supply customised office furniture and to provide installation services, identified as two separate performance obligations.
The furniture supply obligation does not meet any of the over-time criteria. The furniture is not consumed as it is manufactured, it is not being built on the customer's premises, and Ubuntu does not have a contractual right to payment prior to delivery.
Revenue allocated to the furniture is therefore recognised at the point in time when control transfers—most likely on delivery and acceptance by the customer, when physical possession passes, legal title transfers, and the customer assumes the significant risks and rewards of ownership.
The installation services obligation, however, is performed at the customer's premises after delivery. The customer benefits from the installation progressively as Ubuntu's technicians work. This satisfies the over-time criteria, and revenue for the installation is recognised as the work is performed.
Why Step 5 Completes the Revenue Recognition Model
The five-step model is a sequential framework, and each step builds on the last. Steps 1 through 4 determine what has been promised, to whom, at what total price, and at what allocated value. Step 5 determines when that value enters the financial statements.
Together, the five steps prevent the two failure modes that characterised revenue recognition under earlier standards:
- Front-loading, where revenue is recognised earlier than the transfer of value to the customer.
- Deferral, where revenue is recognised later than the economic substance warrants, obscuring performance.
Step 5 anchors revenue to the economic reality of what has been delivered and accepted by the customer. This produces financial statements that more faithfully reflect the performance of the entity during the reporting period.
Governance and Practical Implications
Implementing Step 5 requires more than a policy decision. SMEs will need to:
- Document the over-time versus point-in-time assessment for each class of performance obligation.
- Select and consistently apply an appropriate progress measure for over-time obligations.
- Review standard contract terms to identify clauses that may affect the transfer of control.
- Align operations and finance to ensure that delivery records, acceptance confirmations, and project milestones feed accurately into the revenue recognition process.
- Maintain sufficient evidence to support the judgements applied, as auditors will scrutinise these determinations carefully.
The revised IFRS for SMEs does not prescribe rigid rules for every situation. Instead, it sets a principle—revenue is recognised when control transfers—and requires management to apply that principle with care, consistency, and appropriate documentation.
