Changes to UK financial reporting standards: Revenue recognition

In the second of our Audit and Accounting updates we explore how the latest updates to the Financial Reporting Standards may affect revenue recognition in your financial statements.

So, what has changed?

For accounting periods beginning on or after 1 January 2026, FRS 102 has changed to reflect the principles of international accounting standards (IFRS 15). To illustrate these changes:

	Previous FRS 102	Revised FRS 102
When is revenue recognised?	Through assessment of the transfer of risks and rewards from transactions	Through analysis of whether ‘performance obligations’ have been satisfied
Does the guidance vary depending on the type of revenue?	Separate guidance for supplying goods, services, and for construction contracts	Just one single framework for all revenue recognition, with assessment through a structured five-step model

The five-step model

Let’s look briefly at each of the steps in the new model:

Step 1 – Identify the contract(s) with a customer

Firstly, it’s important to note that a ‘contract’ does not need to be a formal, written, agreement between the parties. Any agreement with a customer (oral, implicit etc.) will be in scope when that agreement meets all these criteria:

“(a) the parties to the contract have approved the contract and are committed to perform their respective obligations;
(b) the entity can identify each party’s rights regarding the goods or services to be transferred;
(c) the entity can identify the payment terms for the goods or services to be transferred;
(d) the contract has commercial substance; and
(e) it is probable that the customer will have the ability and intention to pay the consideration to which the entity will be entitled when it is due.” [Para 23.7,FRS 102]

There is guidance on when contracts with the same customer can be combined and on how to account for contract modifications.

Step 2 – Identify the performance obligations in the contract

A ‘performance obligation’ is essentially a promise to transfer to the customer either:

“(a) a distinct good or service (or a distinct bundle of goods or services); or
(b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.” [Para 23.17 FRS 102]

The new standard provides further guidance on accounting for additional warranties, non-refundable up-front fees, and revised ‘principal v agent’ considerations. The last point here requires attention by companies where they involve another party in providing goods or services to a customer, as the focus of whether the company is the principal or an agent will shift from considering risks and rewards of the transaction to considering who controls the specified good or service before that good or service is transferred to the customer. There is guidance in the standard to help.

Step 3 – Determine the transaction price

The transaction price is the amount of consideration to which the entity expects to be entitled in exchange for transferring goods or services promised to a customer, excluding amounts such as VAT.

Where consideration is variable (maybe because of discounts, rebates, refunds, penalties etc.), estimations of the variable consideration must be made at the outset using either an ‘expected value’ – the sum of probability-weighted amounts in a range of possible consideration amounts, or the ‘most likely amount’ – the single most likely amount in a range of possible consideration amounts.

Guidance is available in the standard on accounting for refunds, sales with right of return, accounting for coupons and vouchers given the customers, etc.

Step 4 – Allocate the transaction price to the performance obligations in the contract

The allocation is based on the relative ‘stand-alone selling price’ of the distinct good or service underlying each performance obligation in the contract. The stand-alone selling price is the price at which an entity would sell a good or service separately to a customer.

The transaction price will be split in proportion to those stand-alone selling prices, so allocating any ‘bundling’ discount in proportion to each good or service unless there are specific reasons to apply discounts on another basis.

Step 5 – Recognise revenue when (or as) the entity satisfies a performance obligation

The most important element here is determining whether, for each performance obligation, it will be satisfied over time or at a point in time. For companies with construction contracts, and other contracts for services, it will be vital to determine the correct revenue recognition point.

Recognition over time will only be possible under new FRS 102 when one of these criteria is met:

(a) the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs (such as a cleaning service);
(b) the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced (such as where on a construction contract the customer controls the work in progress); or
(c) the entity’s performance does not create an asset with alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.

This could mean a significant change in a company’s revenue recognition on construction / service contracts under new FRS 102.

Other changes

There is currently no specific guidance on accounting for license revenue, but new FRS 102 classifies licenses into two types - a right to use (where revenue is recognised at point in time) and - right of access (where revenue is recognised over time)
Costs to obtain or fulfil a contract are currently charged to profit or loss as incurred but companies will now be able to select an accounting policy to capitalise incremental costs to obtain new contracts (e.g. sales commission) when incurred and amortise them as revenue is recognised. In addition, costs to obtain contracts that are not incremental can be capitalised if those costs are explicitly chargeable to the customer regardless of whether the contract is obtained
Guidance on accounting for arrangements such as ‘bill and hold’, consignment sales, customer acceptance clauses, and repurchase agreement are now included in the body of the standard, rather than an appendix.

Transition

Any change in accounting for revenue recognition under the new standard must be applied retrospectively, but with some options / practical expedients which can be applied. The practical expedients include using the benefit of hindsight to determine variable consideration for completed contracts and combining the effect of all contract modifications before the beginning of the earliest period presented, or before the date of initial application to identify the satisfied and unsatisfied performance obligations and the transaction prices of each.

Corporation tax

The impact of these changes on corporation tax needs separate consideration, but as an overall rule of thumb, we would expect tax to following accounting, so if your profit recognition has changed due to implementing new FRS 102, your corporation tax may well change too.

Practical considerations

Some of the practical considerations of this change are:

Have you assessed your arrangements against the revised guidance to create an impact assessment?
Have you revised your customer contracts? The wording of contracts can have significant implications on revenue recognition under the revised FRS 102.
Have you changed your data and IT system requirements to track revenue and to satisfy new disclosure requirements?
As profits and balance sheets could change, have you re-negotiated key agreements which are impacted? This could include bonus arrangements with targets linked to EBITDA, and loan covenants
Have you revised your dividend plans: where the timing of revenue recognition changes, there could be significant impacts on profits and thus distributable reserves, affecting a company’s ability to pay out dividends?

What should you be doing now?

Companies will have needed to prepare for the wider business impacts of these changes, including

1) undertaking an impact assessment on your revenue accounting
2) considering changes to data and IT system requirements to track revenue and to satisfy new disclosure requirements
3) as profits and balance sheets may now change, key agreements may have had to be re-negotiated. This could include bonus arrangements with targets linked to EBITDA, and loan covenants
4) consider dividend plans: where the timing of revenue recognition changes, there could be significant impacts on profits and thus distributable reserves, affecting a company’s ability to pay out dividends