The importance of system-level context- and situation awareness increases with the growth of the Internet of Things (IoT). This paper proposes an integrated approach to situation awareness by providing a semantically rich situation model together with reliable situation inference based on Context Spaces Theory (CST) and Situation Theory (ST). The paper discusses benefits of integrating the proposed situation awareness framework with knowledge base and efficient reasoning techniques taking into account uncertainty and incomplete knowledge about situations. The paper discusses advantages and impact of proposed context adaptation in dynamic IoT environments. Practical issues of two-way mapping between IoT messaging standards and CST are also discussed.