KC Rottok Chesaina - Chief IFRS Officer, Mueni Management Consulting

Following the identification of a contract and the unpacking of its performance obligations, the revised IFRS for SMEs now turns to a deceptively simple question: how much revenue should be recognised?

At first glance, this may appear straightforward—the invoice amount. In reality, Step 3 introduces one of the most judgement-intensive elements of the new five-step revenue model: determining the transaction price.

The transaction price is not merely what is billed. It is the amount of consideration an entity expects to be entitled to in exchange for transferring promised goods or services to a customer. This distinction moves SMEs away from fixed, invoice-based thinking and into an expectation-based model.

From Fixed Prices to Expected Consideration

Under previous requirements, SMEs often recognised revenue based on agreed contract values, adjusting only when uncertainties crystallised. The revised Standard, effective for year ends beginning on or after 1 January 2027, requires entities to anticipate those uncertainties upfront.

The transaction price must reflect:

• fixed amounts,
• variable consideration,
• the time value of money (where applicable),
• non-cash consideration, and
• consideration payable to customers.

For many SMEs, the most significant shift lies in variable consideration—amounts that depend on future events such as discounts, rebates, performance bonuses, or penalties.

Variable Consideration: Estimation Before Certainty

Variable consideration arises whenever the final amount receivable is uncertain. The Standard requires entities to estimate this amount using either:

• an expected value approach (probability-weighted), or
• the most likely amount.

However, this estimate is subject to a critical constraint: revenue is only recognised to the extent that it is highly unlikely to reverse in future periods.

This constraint introduces prudence at the heart of the model, preventing premature recognition of uncertain income.

Example: Ubuntu Office Furnishings – Early Payment Discounts

Returning to Ubuntu Office Furnishings (Pty) Ltd, assume the company offers its customer a 10% discount if payment is made within 30 days, reducing the R2 million contract price to R1.8 million.

Under the previous approach, Ubuntu may have recognised the full R2 million and accounted for any discount when taken.

Under the revised Standard, management must estimate the expected transaction price at inception. If historical experience suggests that most customers take advantage of early payment discounts, Ubuntu may determine that the transaction price is closer to R1.8 million.

Revenue is therefore recognised at this lower, expected amount from the outset—not adjusted later.

This seemingly small change significantly enhances the predictive value of financial statements by aligning revenue with expected cash flows.

The Constraint: Protecting Against Overstatement

A defining feature of Step 3 is the constraint on variable consideration.

Even where variable amounts can be estimated, they are only included in revenue if it is highly unlikely that recognising them will result in a significant reversal in future periods.

This requires SMEs to assess:

• historical experience,
• external factors such as market volatility,
• customer behaviour, and
• contractual terms.

Example: Jozi Solar Solutions – Performance Bonus

Jozi Solar Solutions (Pty) Ltd enters into a contract to install a solar system, with a R500,000 performance bonus payable if installation is completed within 30 days.

Management believes there is a reasonable chance of achieving the deadline, but the project involves regulatory approvals that are outside their control.

Under the revised Standard, Jozi Solar cannot automatically include the R500,000 bonus in the transaction price. Instead, it must assess whether it is highly unlikely that recognising this amount would result in a reversal.

Given the uncertainty, management may conclude that the bonus should be excluded initially and only recognised once the performance condition is met.

This approach ensures that revenue reflects outcomes that are sufficiently certain, rather than optimistic projections.

Financing Components: When Timing Matters

Another important consideration is whether the contract includes a significant financing component.

Where payment timing provides a financing benefit—either to the customer or the entity—the transaction price must be adjusted to reflect the time value of money.

While this requirement may not affect all SMEs, it becomes relevant in:

• long-term construction contracts,
• deferred payment arrangements, or
• advance payments received well before delivery.

Example: Deferred Payments in Practice

Assume Ubuntu Office Furnishings agrees to a R2 million contract, payable two years after delivery.

Economically, this arrangement includes a financing element. The entity is effectively providing credit to the customer.

Under the revised Standard, Ubuntu must discount the promised consideration to its present value, recognising:

• revenue at the discounted amount, and
• interest income over the two-year period.

This separates operating performance from financing effects, enhancing transparency.

Why Step 3 Changes Financial Reporting Behaviour

Determining the transaction price fundamentally reshapes how SMEs approach revenue.

It:

• introduces forward-looking estimates into revenue recognition,
• aligns reported income with expected economic outcomes,
• prevents the overstatement of revenue through premature recognition, and
• separates operating activity from financing effects.

Most importantly, it moves SMEs away from reactive accounting toward anticipatory financial reporting.