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

The publication of the third edition of the IFRS for SMEs, effective for annual periods beginning on or after 1 January 2027, introduces a fundamental shift in revenue recognition for small and medium-sized entities. Moving away from the traditional risks-and-rewards model, the revised Standard adopts a structured, contract-based approach aligned to IFRS 15. Revenue is now recognised through a five-step framework that begins with identifying a valid contract and then requires entities to unpack that contract into its underlying promises before determining how and when revenue should be recognised. It is at this second step—identifying performance obligations—that the real dissection of a transaction begins.

From a Single Sale to Multiple Promises

Historically, many SMEs treated contracts as single, indivisible transactions. A sale was a sale. Delivery triggered revenue.The revised Standard disrupts this simplicity.
Under the new model, a contract may contain multiple performance obligations, each of which must be identified and accounted for separately. This requires entities to look beyond the invoice and into the substance of what has been promised to the customer.
A performance obligation is, at its core: a promise to transfer a distinct good or service to a customer. The word distinct becomes the defining test.

What Makes a Promise “Distinct”?

A good or service is distinct if both of the following are satisfied:

• The customer can benefit from it on its own or together with other readily available resources; and
• It is separately identifiable from other promises in the contract.

This assessment introduces a level of judgement that many SMEs have not previously had to exercise.
In practical terms, finance teams must ask:  Could the customer use this component independently, and is it truly separate from the rest of the arrangement?

Example: Ubuntu Office Furnishings

Ubuntu Office Furnishings (Pty) Ltd enters into a contract to supply and install customised office workstations.
At first glance, this appears to be a single transaction. However, under the new model, management must assess whether the contract contains multiple promises:

• Supply of office furniture
• Installation services

If the installation is routine and could be performed by another supplier, it may be distinct, resulting in two performance obligations. However, if the installation is highly specialised and integral to making the furniture functional, the two elements may be combined into a single performance obligation. The distinction directly affects when revenue is recognised—either upfront (goods) or over time (services), or a combination of both.

Bundling, Integration and the “Single Solution” Trap

Many SMEs, particularly in construction, technology, and engineering sectors, offer bundled solutions. These arrangements often appear as one deliverable but are, in substance, a series of interdependent activities.
The Standard requires entities to assess whether:

• Goods and services are highly integrated,
• One significantly modifies or customises another, or
• They are interdependent or interrelated.

If so, they are treated as one combined performance obligation.

Example: Jozi Solar Solutions (Pty) Ltd – A Step Further

Building on the Jozi Solar Solutions example, assume the contract includes:

• Design of a solar system
• Installation of panels
• Ongoing monitoring services

While monitoring services may appear separate, the design and installation are likely highly integrated, forming a single performance obligation.
Monitoring, however, may be distinct and recognised over time.
This analysis determines not just how much revenue is recognised, but the pattern of recognition over the life of the contract.

Why This Step Changes Everything

Step 2 is where the revenue model begins to reshape financial reporting behaviour.
It forces SMEs to:

• Move from transaction thinking to promise-based accounting
• Align finance with commercial contract structuring
• Evaluate deals at a level of detail previously reserved for large corporates

Most importantly, it prevents the front-loading of revenue by ensuring that income is only recognised as each promise is fulfilled.

Governance and Practical Implications

Identifying performance obligations is not merely an accounting exercise—it is a commercial and operational discipline.

SMEs will need to:

• Review standard contracts and sales bundles
• Clearly articulate deliverables in agreements
• Align sales, legal, and finance teams
• Document judgements supporting what is “distinct”

Auditors will increasingly focus on whether entities have appropriately identified performance obligations, making this a key area of scrutiny.