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

On a quiet Monday morning in Johannesburg, the finance team of Makwande Engineering (Pty) Ltd opens a new working paper titled:

“IFRS for SMEs – First-time application (effective 1 January 2027)”

This is an imagined scenario — but one that will soon be very real for many South African medium-sized companies. The third edition of the IFRS for SMEs Accounting Standard is effective for annual periods beginning on or after 1 January 2027, with early application permitted.

For Makwande, this will be the first set of financial statements prepared under the revised Standard. And before the team touches revenue, provisions or financial instruments, they start where the IASB clearly intends them to start:

Section 2 – Concepts and Pervasive Principles.

Why Section 2 suddenly matters on Day One

In previous years, Section 2 felt academic — useful for exams, rarely decisive in practice. Under the revised Standard, it becomes operational.

Section 2 now explicitly mirrors the 2018 Conceptual Framework for Financial Reporting, and it is designed to guide preparers when the Standard does not contain a specific requirement.

Redefining an asset: reading the Standard, not relying on instinct

One of the first balance-sheet debates at Makwande concerns specialised tooling used in long-term customer contracts. Instead of relying on habit, the team goes straight to the new wording.

The revised Section 2 defines an asset as:

“a present economic resource controlled by the entity as a result of past events.”

It then explains that:

“An economic resource is a right that has the potential to produce economic benefits.”

This wording forces a change in thinking. The question is no longer “Do we own it?” but:

• What right does Makwande control?
• Can that right produce economic benefits, even if resale is limited?

For first-time adoption, this clarity is critical. The team documents the rights arising from customer contracts, links them to future cash inflows, and concludes — with confidence — that the tooling meets the asset definition.

Recognition: uncertainty is no longer an excuse

As Makwande prepares opening balances, provisions come under scrutiny — particularly warranties on exported equipment.

The revised Section 2 is explicit that recognition is not blocked by uncertainty. It states, in substance, that an item is recognised if:

• it meets the definition of an element, and
• recognition provides relevant information and a faithful representation.

The Standard acknowledges that estimates are part of financial reporting. Measurement uncertainty does not prevent recognition if the information is still useful.

For Makwande, this is a turning point. Instead of deferring recognition because outcomes are uncertain, the finance team recognises provisions using reasonable assumptions and explains the estimation clearly in the notes.

Materiality: no longer about size alone

One of the most practical changes Makwande encounters during first-time adoption is the refreshed concept of materiality.

Section 2 now explains that information is material if:

“omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of financial statements make.”

This wording changes behaviour.

Small related-party transactions — previously dismissed as immaterial by value — are reconsidered in context. The team asks a different question:

Could this information influence how users assess governance, risk or stewardship?

For Makwande’s first IFRS-for-SMEs-compliant statements, disclosure becomes more thoughtful, not more verbose.

Faithful representation beats false precision

First-time adoption exposes estimates everywhere: long-term incentives, decommissioning obligations, variable consideration in contracts.

Section 2 reinforces that faithful representation means information must be:

• complete,
• neutral, and
• free from error - within the limits of estimation.

The Standard does not demand perfection. It demands transparency.

Makwande embraces this. Estimates are recognised, assumptions are disclosed, and uncertainty is explained rather than hidden.

When the Standard is silent, Section 2 speaks

The real test comes when Makwande encounters a supplier-financing arrangement that does not fit neatly into any single section of the Standard.

Instead of forcing an analogy, the team builds an accounting policy from first principles:

• Does the arrangement create a new liability?
• Does it change the nature of existing trade payables?
• What measurement best reflects the economic substance?

Section 2 explicitly directs entities to use its concepts to develop policies in such cases. For the first time, the finance team feels authorised — not exposed — when exercising judgement.

What first-time adoption really changes

When Makwande signs off its first financial statements compliant with the revised IFRS for SMEs (effective 1 January 2027), the numbers are not dramatically different.

But the thinking behind them is.

Section 2 has reshaped how the company:

• defines assets and liabilities,
• recognises uncertainty,
• applies materiality,
• and defends judgement.

The quiet message of the new Section 2

For South African medium-sized companies preparing for 2027, the message is subtle but firm:

This is no longer a checklist Standard.

It is a thinking Standard.

As Makwande’s CFO reflects in this imagined moment of first-time adoption:

“The biggest change wasn’t the accounting. It was how we explained it — to ourselves first, and then to everyone else.”

And that is precisely what the revised Section 2 was designed to achieve.