Over the past few articles, we have walked through the five-step revenue recognition model introduced by the revised IFRS for SMEs Accounting Standard, effective for annual periods beginning on or after 1 January 2027, one step at a time: identifying a contract, unpacking its performance obligations, determining the transaction price, allocating that price, and recognising revenue as each obligation is satisfied.
This article brings those five steps together, applying them in sequence to a single contract from start to finish. We return to Ubuntu Office Furnishings (Pty) Ltd, the Johannesburg-based SME supplying customised office furniture, to see how the model plays out in practice.
The Contract
Ubuntu Office Furnishings signs an agreement with a well-established Sandton-based corporate client to supply and install customised office workstations for a fixed contract price of R2 million. Payment is due on completion of installation. There is no deferred payment term, no performance bonus, and no rebate structure attached to this particular deal.
Step 1: Identifying the Contract
Before any revenue can be recognised, Ubuntu must confirm that a valid contract exists under the five gateway criteria: the parties have approved the arrangement and are committed to perform, each party's rights are identifiable, payment terms are clear, the contract has commercial substance, and collection is probable.
A signed purchase order is in place, deliverables and pricing are clearly specified, and the customer is a financially sound, established corporate with a strong payment history. All five criteria are satisfied. Ubuntu concludes that a contract exists and revenue recognition may proceed to Step 2.
Step 2: Identifying Performance Obligations
Ubuntu next unpacks the contract into its distinct promises. The arrangement includes two components: the supply of furniture and installation services.
The installation is routine and could, in principle, be carried out by another supplier. It does not significantly modify the furniture itself, and the customer could benefit from each element on its own. Ubuntu therefore identifies two separate performance obligations: furniture supply and installation services.
Step 3: Determining the Transaction Price
The transaction price is the fixed contract amount of R2 million. There is no variable consideration to estimate, no constraint to apply, and no significant financing component, since payment falls due on completion rather than being materially deferred. The transaction price to be allocated across the two performance obligations is therefore R2,000,000.
Step 4: Allocating the Transaction Price
With two performance obligations identified, Ubuntu allocates the R2 million based on relative stand-alone selling prices:
- Furniture: R1.8 million
- Installation services: R400,000
The stand-alone selling prices total R2.2 million, R200,000 more than the contract price. That implicit discount is spread proportionately across both obligations:
- Furniture: R1.8m ÷ R2.2m × R2m = R1,636,000
- Installation: R400k ÷ R2.2m × R2m = R364,000
Step 5: Recognising Revenue
Finally, Ubuntu determines when control transfers for each obligation.
Furniture supply does not meet any of the over-time criteria: it is not consumed as it is made, it is not built on the customer's premises, and Ubuntu has no enforceable right to payment before delivery. Revenue of R1,636,000 is recognised at a point in time — on delivery and acceptance, when legal title, physical possession, and the risks and rewards of ownership all pass to the customer.
Installation services are performed at the customer's premises and benefit the customer as the work progresses, satisfying the over-time criteria. Revenue of R364,000 is recognised over time, using an input method based on costs incurred relative to total expected costs. At the reporting date, installation is 60% complete, so Ubuntu recognises R218,400 of the allocated installation revenue.
Putting It Together
At the reporting date, before installation is complete, Ubuntu's revenue recognised on this contract is as follows:
| Performance obligation | Allocated transaction price | Pattern of recognition | Revenue recognised at reporting date |
|---|---|---|---|
| Furniture supply | R1,636,000 | Point in time (on delivery) | R1,636,000 |
| Installation services | R364,000 | Over time (as performed) | R218,400 (60% complete) |
| Total | R2,000,000 | R1,854,400 |
Under the previous, delivery-based approach, Ubuntu may simply have recognised the full R2 million on delivery of the furniture. Under the revised Standard, revenue is instead built up obligation by obligation, each recognised at its allocated value and in the pattern that reflects when the customer actually obtains control.
The Takeaway for SMEs
No single step in the five-step model operates in isolation. Whether a contract exists shapes what can be unpacked into performance obligations; how those obligations are defined shapes how the price is allocated; and that allocation, in turn, shapes the amount recognised as each obligation is satisfied.
For SMEs preparing for the 1 January 2027 effective date, the practical lesson is this: model a real contract, end to end, well before transition. It is only when the five steps are applied together, to one transaction, that the scale of the change — and the systems, documentation, and judgement it demands — becomes clear.
