Impact of New Revenue Recognition Rules: What Small Businesses Need to Know
Accounting rules are always changing, and one of the biggest updates in recent years is the shift in how businesses recognize revenue. If you’re a small business owner in South Africa, this change might seem like just another accounting headache—but understanding it is key to keeping your finances in check and avoiding compliance issues down the road.
What is Revenue Recognition, Anyway?
Simply put, revenue recognition is about when your business records income. In the past, many businesses recorded revenue when cash was received. But with the introduction of International Financial Reporting Standard (IFRS) 15 – Revenue from Contracts with Customers, the focus has shifted. Now, revenue should be recognised when you actually fulfill what you promised in a contract, rather than just when the money hits your account.
What’s Changing Under IFRS 15?
The new standard introduces a five-step model for recognising revenue:
Identify the contract with the customer – Revenue can only be recognised when there’s a valid contract in place.
Identify what you’re delivering (performance obligations) – Clearly define the goods or services you owe to the customer.
Determine how much you’ll be paid (transaction price) – Establish the total amount you expect to receive.
Allocate that price to different obligations – If you’re delivering multiple goods or services, figure out how much revenue belongs to each.
Recognise revenue when you deliver – Record income when you complete your obligations, not just when you get paid.
What Does This Mean for Small Businesses?
Your Revenue Might Show Up Differently on Paper – If you typically recognise revenue as soon as you get paid, you might need to adjust your books. Depending on your contracts, you may now recognise revenue over time, instead of all at once. This could affect how your financials look to investors or lenders.
More Paperwork (Sorry!) – You’ll need to keep detailed records of contracts, performance obligations, and how you determine pricing. If your bookkeeping was on the simpler side before, now might be the time to invest in a solid accounting system.
Tax Implications – Since revenue affects taxable income, shifting the timing of revenue recognition could impact your tax liabilities. It’s a good idea to chat with a tax professional to avoid any surprises.
It Could Affect Funding and Loans – Lenders and investors look at revenue trends when making decisions. If your revenue recognition changes, it might affect how your business appears financially—even if nothing has actually changed in your cash flow.
Talk to an Expert – By getting ahead of the curve, you can keep your business financially sound and make sure you’re fully compliant. If you’re unsure how this affects your specific situation, don’t hesitate to reach out for guidance through the process!
Red Dot Now provides accounting, payroll and tax compliance services using the best of breed online technology.
Should you want to discuss this, or any of our services further, contact Ryan Coates on e-mail at ryan@reddotnow.com
