KC Rottok Chesaina - Chief IFRS Officer, Mueni Management Consulting

If you’re running a growing business, chances are you’ve wrestled with the question: When exactly should I recognise revenue? The rules used to feel fairly straightforward—record income when you hand over goods or complete a service. But with the third edition of the IFRS for SMEs, that old logic has been rewritten.

The new Section 23, released in February 2025, introduces a five-step model for recognising revenue. It’s inspired by IFRS 15, the global standard used mostly by large companies, and replaces the old “risks and rewards” approach with something more intuitive: recognising revenue when control passes to the customer.

Sound complicated? Let’s break it down using a real-world-style example of a small business — BrightBuild Interiors, a fictional Johannesburg-based SME that designs and fits out office spaces.

Step 1 – Identify the Contract with the Customer

First things first — you can’t recognise revenue without a proper contract. It doesn’t have to be a ten-page legal document; even an approved quote with agreed terms counts. But it must have commercial substance and a realistic chance that you’ll get paid.

How it used to work: BrightBuild would often book revenue as soon as the client accepted the quote and paid the non-refundable deposit, even if the payment plan was shaky.

What happens now: BrightBuild has to confirm that both sides are committed, that rights and payment terms are clear, and that collecting the money is probable. If there’s doubt, the deposit sits on the balance sheet as a liability until those boxes are ticked.

It’s a small but powerful shift — no more celebrating income before it’s truly earned.

Step 2 – Identify the Promises in the Contract

Every contract contains promises — in accounting-speak, “performance obligations.” These are the distinct goods or services you’re committing to deliver.

BrightBuild’s deal: R400 000 to design, supply materials for, and fit out a new corporate reception area.

Old way: The entire project was treated as one big job, with revenue recorded only when everything was done or in arbitrary stages.

New way: Each promise is analysed separately. The design work, supply of materials, and on-site construction are all distinct. If the client could, in theory, hire someone else to carry out one of those steps, it’s a separate performance obligation.

Now BrightBuild can recognise design-fee revenue once the drawings are approved, long before the last coat of paint dries.

Step 3 – Determine the Transaction Price

Here’s where things get real. The transaction price is the total consideration BrightBuild expects to receive — including discounts, penalties or bonuses.

Example: The contract includes a R40 000 bonus for finishing two weeks early and a R20 000 penalty for delays.

Previously: Those adjustments were ignored until the end.

Now: BrightBuild estimates them upfront. If it’s 70 % confident of earning the bonus and only 10 % likely to incur the penalty, it includes the portion of revenue that’s highly probable not to reverse.

It’s about painting a realistic picture of expected outcomes, not just wishful invoicing.

Step 4 – Allocate the Transaction Price

Once the total price is known, it must be split across the promises based on their relative standalone selling prices.

BrightBuild normally charges R50 000 for design, R150 000 for materials and R200 000 for construction. The total adjusted price (after bonuses or penalties) is R380 000.

Old rule: Recognise revenue progressively as the project moves along, often lumping everything together.

New rule: Allocate revenue proportionally based on the stand-alone prices — R47 500 to design, R142 500 to materials and R190 000 to construction — and recognise it as each promise is fulfilled.

This ensures your financial statements reflect what the client is actually getting value for at each stage.

Step 5 – Recognise Revenue When (or As) Performance Obligations Are Satisfied

Here’s the heart of the model — revenue is recognised when control of the goods or services transfers to the customer, either over time or at a point in time.

For BrightBuild:

• Design work transfers over time as drawings are approved — revenue follows progress.
• Materials transfer at a point in time — when ownership passes on delivery.
• Construction is recognised over time as milestones are achieved and verified.

Under the old rules: BrightBuild would not recognise revenue for design and materials until construction is progressively completed.

Under the new model: Revenue is spread throughout the project, providing a smoother and truer reflection of activity.

Why This Matters

For many SMEs, this feels like moving from a simple view to a performance-based one. Yes, it introduces more documentation — you’ll need to track contract terms, allocate prices, and estimate variable consideration — but it tells a far more accurate story.

Banks and investors will see clearer trends. Clients get transparency. And your income statement finally mirrors how your business actually delivers value.

The transition date is 1 January 2027, with early adoption permitted. The section is applied retrospectively with transitional relief to apply it prospectively to contracts already in progress.

The Takeaway

The new five-step revenue model doesn’t just change accounting mechanics — it changes mindset.

For SMEs like BrightBuild Interiors, it’s about recognising revenue not when the invoice goes out, but when the customer truly receives value. It’s smarter, fairer, and more globally aligned.

And by the time the new rules kick in, your revenue recognition will be as polished as that reception desk you just installed.