IFRS for SMEs Section 23 — Core Rule
Under IFRS for SMEs Section 23 — Revenue Recognition, revenue is recognised when it is probable that future economic benefits will flow to the entity and those benefits can be measured reliably, with separate criteria applied to the sale of goods, rendering of services, interest, royalties, and dividends.
How IFRS for SMEs Section 23 Works
Section 23 predates the full IFRS 15 five-step model but achieves broadly similar outcomes through category-specific criteria:
- Sale of goods (Section 23.10): Revenue is recognised when all five conditions are met simultaneously: (1) significant risks and rewards of ownership have transferred; (2) the entity retains neither continuing managerial involvement nor effective control; (3) the amount of revenue can be measured reliably; (4) it is probable that economic benefits will flow to the entity; and (5) costs incurred or to be incurred can be measured reliably. This mirrors the former IAS 18 approach and differs materially from IFRS 15's control-transfer model.
- Rendering of services (Section 23.14): Revenue is recognised by reference to the stage of completion (percentage-of-completion method) at the reporting date when the outcome can be estimated reliably. Stage of completion is determined by surveys of work performed, services performed as a proportion of total services, or the proportion of costs incurred to date versus total estimated costs (Section 23.21). When the outcome cannot be estimated reliably, revenue is recognised only to the extent of recoverable costs incurred (Section 23.16).
- Interest, royalties, and dividends (Section 23.28–23.30): Interest is recognised using the effective interest method (Section 23.29(a)); royalties on an accruals basis in accordance with the agreement; dividends when the shareholder's right to receive payment is established (Section 23.29(c)).
- Measurement (Section 23.3–23.5): Revenue is measured at the fair value of the consideration received or receivable, net of trade discounts, volume rebates, and VAT/sales taxes. Where cash inflows are deferred, the arrangement contains a financing component and the fair value is determined by discounting future receipts at an imputed interest rate (Section 23.5).
- Multiple-element arrangements (Section 23.8–23.9): The recognition criteria are applied separately to each identifiable component of a transaction. Conversely, two or more linked transactions are combined where their commercial effect cannot be understood in isolation — a critical judgement for bundled goods-and-service contracts.
- Construction contracts (Section 23.17–23.27): Where a single contract covers construction of an asset, the percentage-of-completion method applies, consistent with service revenue. Contract losses are recognised immediately as an expense (Section 23.22).
IFRS for SMEs Section 23 — Practical Example
Scenario: An SME sells software licences (€60,000) bundled with 12 months of mandatory support services (fair value €15,000). Total contract price: €70,000. Allocation: licence €56,000 (€60k/€75k × €70k); support €14,000. Licence transfers on Day 1; support is 0% complete at year-end but 50% complete at interim.
Day 1 — Licence delivery
| Account | Dr (€) | Cr (€) |
|---|
| Trade receivables | 70,000 | |
| Revenue — software licence | | 56,000 |
| Deferred revenue — support | | 14,000 |
6-month interim — 50% support delivered
| Account | Dr (€) | Cr (€) |
|---|
| Deferred revenue — support | 7,000 | |
| Revenue — support services | | 7,000 |
The remaining €7,000 deferred revenue releases over the second six months, matching the stage of completion.
IFRS for SMEs Section 23 — Common Pitfalls
- Ignoring the reliable measurement condition for services: Many SME preparers recognise 100% of service revenue at contract inception without assessing whether the outcome (costs to complete, stage) can be estimated reliably. When it cannot, Section 23.16 limits revenue to recoverable costs — a frequent audit adjustment.
- Failing to separate components in bundled contracts: Treating a combined goods-and-service arrangement as a single performance obligation (a full-IFRS 15 term imported by error) understates deferred revenue and overstates early-period revenue. Each identifiable element requires separate assessment under Section 23.8.
- Applying IFRS 15 control-transfer language to an SME client: Section 23 still uses the "risks and rewards" framework for goods (Section 23.10(a)). Substituting IFRS 15 logic without eligibility can lead to incorrect revenue timing — especially on bill-and-hold or consignment arrangements where risks transfer later than legal title.
IFRS for SMEs Section 23 — Key Paragraphs
- Section 23.3–23.5 — Revenue measurement at fair value and treatment of deferred consideration/financing components.
- Section 23.10 — Five cumulative conditions for recognising revenue from the sale of goods.
- Section 23.14 & 23.16 — Percentage-of-completion for services and the cost-recovery fallback when outcome is uncertain.
- Section 23.21 — Methods for determining stage of completion (surveys, services proportion, cost proportion).
- Section 23.28–23.30 — Recognition of interest (effective interest method), royalties, and dividends.
- Section 23.8–23.9 — Disaggregation and aggregation rules for multiple-element and linked transactions.
