By KC Rottok Chesaina - Chief IFRS Officer, Mueni Management Consulting

From Handshake to Hard Evidence: No Contract, No Revenue under the new IFRS For SMEs

The publication of the third edition of the IFRS for SMEs Accounting Standard, effective for annual periods beginning on or after 1 January 2027, introduces one of the most consequential changes to SME financial reporting in recent years. Central to these amendments is the transformation of revenue recognition, specifically the introduction of a structured approach to identifying a contract with a customer before revenue may be recognised.

Historically, revenue recognition under IFRS for SMEs was rooted in principles inherited from IAS 18 Revenue and IAS 11 Construction Contracts, where entities focused largely on the transfer of risks and rewards or completion stages of projects. In practice, many SMEs recognised revenue once goods were delivered or invoices issued. The revised Standard fundamentally changes this approach by aligning Section 23 with the contract-based philosophy introduced in modern revenue accounting frameworks. Revenue recognition now begins with a critical threshold assessment: does a valid contract exist?

From Delivery-Based Accounting to Contract-Based Accounting

Under the revised requirements, revenue may only be recognised when an agreement creates enforceable rights and obligations between an entity and its customer. A contract need not always be written; it may arise from customary business practice or verbal arrangements, provided enforceability exists under law or commercial convention. However, the emphasis has clearly shifted toward demonstrating commitment and accountability between parties.

This represents an important behavioural change for SMEs. Revenue recognition is no longer triggered merely by operational activity but by the existence of a legally or commercially binding arrangement. Finance teams must therefore evaluate contractual substance before recording income, introducing greater alignment between commercial reality and financial reporting outcomes.

The Five Criteria for Identifying a Contract

The new IFRS for SMEs establishes five mandatory conditions that must all be satisfied before revenue recognition can commence. An entity must conclude that:

• the parties have approved the contract and are committed to perform their obligations;
• each party’s rights regarding the goods or services can be identified;
• payment terms are identifiable;
• the contract has commercial substance; and
• it is probable that consideration will be collected.

The inclusion of collectability as a gateway requirement represents one of the most practical changes. Previously, SMEs often recognised revenue and later accounted for doubtful debts through impairment. Under the revised model, revenue recognition may be delayed entirely if collection is uncertain.

Example: Ubuntu Office Furnishings (Pty) Ltd – Johannesburg

Consider Ubuntu Office Furnishings (Pty) Ltd, a fictitious Johannesburg-based SME supplying customised office furniture to corporate clients in Sandton and Midrand. The company receives an order from a newly established technology start-up requesting R2 million worth of fitted office workstations, with payment due six months after installation.

Under the previous IFRS for SMEs requirements, Ubuntu may have recognised revenue once the furniture was delivered and installed, particularly if risks and rewards had transferred. Under the new Standard, management must first assess whether a contract exists. Although a signed purchase order is present, Ubuntu must evaluate whether collection of consideration is probable. If the start-up lacks sufficient financing history or creditworthiness, the contract criteria may not be met despite delivery occurring.

Commercial Substance and Economic Reality

Another significant enhancement introduced by the revised Standard is the requirement that contracts possess commercial substance. This ensures that revenue reflects genuine economic activity rather than transactions structured solely to achieve accounting outcomes.

SMEs engaged in related-party arrangements or bundled service offerings must carefully assess whether future cash flows are expected to change as a result of the agreement. Transactions lacking economic impact may fail the contract test altogether.

Example: Jozi Solar Solutions (Pty) Ltd – Contract Combination

A second illustration can be seen in Jozi Solar Solutions (Pty) Ltd, a Johannesburg-based SME installing rooftop solar systems for commercial buildings. The company signs two agreements with a property developer at the same time: one contract for equipment installation and another for ongoing maintenance services at a highly discounted rate.

Previously, Jozi Solar Solutions might have accounted for these agreements separately, recognising installation revenue immediately while spreading maintenance income over time. Under the revised IFRS for SMEs, management must assess whether the contracts were negotiated as a single commercial package.

Because pricing of the maintenance agreement depends on the installation contract, the arrangements are economically linked and must be combined and treated as one contract.

This assessment directly affects the timing of revenue recognition, potentially requiring part of the installation revenue to be deferred and recognised over the service period. The example highlights how identifying the contract now drives the entire revenue recognition outcome.

Strengthening Governance in SME Environments

These changes will be particularly impactful for SMEs operating in environments where agreements have historically been informal. The new requirements encourage stronger governance around contracting practices, customer onboarding, and credit evaluation.

Entities may need to formalise agreements, clarify payment terms, and integrate accounting considerations into sales processes. Revenue recognition increasingly becomes a cross-functional responsibility involving finance, legal, and commercial teams rather than an isolated accounting judgement made after transactions occur.

Increased Use of Professional Judgement

Although the revised Standard introduces structure, it simultaneously increases reliance on management judgement. Determining enforceability, commitment, and probability of collection requires careful evaluation supported by documentation. Auditors are therefore expected to place greater emphasis on evidence supporting management’s conclusion that a contract exists.

This evolution reflects a broader shift in global financial reporting toward substance over form, ensuring revenue reflects sustainable economic performance rather than transactional timing.