The changes to revenue recognition under FRS 102 represent some of the most significant accounting developments since the standard was first introduced in 2013. While many businesses may ultimately see no meaningful change to the amount of revenue recognised compared with the existing rules, the way they assess, document and justify revenue recognition may change considerably.
Why are the rules changing?
For accounting periods commencing on or after 1 January 2026 (primarily 31 December 2026 year-ends onwards), the existing revenue recognition requirements in FRS 102 will be replaced by an entirely new framework for accounting for ‘Revenue from Contracts with Customers’ (Section 23), with early adoption permitted.
As noted in our previous articles, the latest round of changes following a periodic review of FRS 102 are intended to modernise the standard and bring it closer in line with international accounting standards – particularly IFRS 15 (Revenue) in this instance. The previous FRS 102 requirements were based on older accounting standards that were widely regarded as lacking guidance in important areas.
The new rules introduce a single five-step model for recognising revenue and place much greater emphasis on understanding contractual arrangements, identifying obligations to customers and assessing when control of goods or services transfers. The revised standard also introduces significantly expanded disclosure requirements.
Conversely, the revised standard includes a number of simplifications (‘practical expedients’) to ensure the requirements remain proportionate and cost-effective for UK businesses on initial application, as covered in our previous article focusing on the initial application of the FRS 102 amendments.
What is changing?
Under the existing rules, many businesses have historically focused on when the risks and rewards of ownership transfer. Under the new model, the focus shifts to when control of goods or services passes to the customer.
This does not necessarily result in substantial changes to reported revenue. In many cases, the pattern of revenue recognition may remain similar. However, the analysis supporting that conclusion is likely to become much more detailed and contract-focused than many finance teams are used to providing.
The five-step model
1. Identify the contract
The starting point is determining whether a valid customer contract exists. Key considerations include approval of the contract, identifying each party’s rights, payment terms, commercial substance and whether it is probable that the customer will have the ability and intention to pay.
In some cases, contracts entered into around the same time may need to be assessed in aggregate.
2. Identify performance obligations
A key feature of the new model is identifying the separate ‘promises’ to transfer distinct goods or services to customers.
A single contract may contain multiple deliverables that need to be accounted for separately if considered distinct. Alternatively, what appears to be multiple deliverables may actually represent one combined obligation.
The assessment depends on the substance of the arrangement rather than simply how individual items are described within a contract or invoice.
3. Determine the transaction price
Businesses must determine the amount they expect to be entitled to receive. While straightforward contracts may simply use the stated contract price, more judgement will be required where arrangements involve variable consideration, such as discounts, rebates, refunds, penalties and performance-related bonuses, with alternative approaches available in providing a best estimate.
Further judgement may also be required where a significant financing component or non-cash consideration exists within a contract.
4. Allocate the transaction price
Where a contract contains more than one performance obligation, the transaction price must be allocated between them.
This allocation is generally based on the stand-alone selling prices of the various goods or services provided, where observable. Complexity will arise where this is not the case and an alternative approach is required.
5. Recognise revenue when control transfers
Revenue is recognised when, or as, the business satisfies a performance obligation and the customer obtains control.
Depending on the nature of the arrangement, as specified in the contract (Step 1), revenue may be recognised at a single point in time or progressively over the life of a contract. Determining which approach is appropriate can require significant judgement.
Where are the biggest challenges?
Performance obligations and contract analysis (Step 2)
For many businesses, identifying performance obligations is likely to be one of the most challenging aspects of initial application.
The standard requires businesses to look beyond contractual wording and assess the substance of what is being promised to customers. Goods, services, upgrades, support arrangements, warranties, incentives and other obligations may all need to be considered. Warranties are a clear candidate requiring more detailed analysis, where some arrangements simply provide product assurance, others clearly provide an extended, stand-alone service to customers.
This could result in revenue being allocated differently across components of a contract compared with the accounting treatment under the existing rules.
Variable consideration (Step 3)
Businesses that offer customers volume discounts, rebates, refunds, performance-related incentives, penalties or rights of return may see a particularly significant impact.
The new rules require an estimation of variable consideration, based on either expected values or the single most likely outcome, with revenue only recognised once there is sufficient confidence it will be earned and received.
This could delay the recognition of some revenue compared with existing practices and create a need for more robust forecasting, documentation and analysis of past arrangements, including likely volume discounts and rates of return. This concept extends to other customer incentives and renewal options, such as loyalty schemes, renewal discounts / rights and promotional offers which potentially create additional contract obligations and deferral of revenue.
Timing of revenue recognition (Step 5)
One of the most commercially sensitive challenges is whether revenue should be recognised at a point in time or over time.
As noted above, this may result in no change to existing accounting policies. However, the route taken in reaching that conclusion must be subject to a robust assessment.
Guidance in this area highlights circumstances where goods that would traditionally have been recognised on delivery may instead generate revenue during production if certain contractual conditions are met. Conversely, some service arrangements may no longer qualify for over-time recognition. Arrangements involving non-refundable upfront fees, such as set-up costs, onboarding and joining fees, are a clear example of where revenue recognised immediately should be reviewed if they relate to services delivered over a period of time.
Over-time versus point-in-time recognition
The distinction between point-in-time and over-time recognition has implications beyond the financial statements, including for reported profitability, working capital metrics and management reporting.
Construction contracts, long-term service arrangements, consulting engagements and certain manufacturing contracts are most susceptible to substantial changes to the profile of revenue recognised, where even relatively minor differences in contract terms can alter the conclusion.
Those already familiar with long-term contract accounting should also be aware that the changes impact how certain contract costs are accounted for. Under the existing rules, both revenue and contract costs are often recognised by reference to the stage of completion, producing relatively consistent contract margins throughout the life of a project, driven by various methods for measuring progress including costs incurred, time elapsed, milestones achieved etc.
Under the revised requirements, revenue may continue to be recognised over time and based on stage of completion. However, the associated contract costs are generally recognised as they are incurred, irrespective of progress, subject to costs incurred in obtaining or fulfilling a contract that meet certain capitalisation criteria.
This has the potential to create more volatile margins from one reporting period to the next, even where the overall profitability of a long-term contract remains unchanged. Understanding and communicating the reasons behind such fluctuations to lenders, investors and other stakeholders will therefore be important.
Contract balances
The introduction of ‘contract assets’ and ‘contract liabilities’ may prove to be a new concept for FRS 102 reporters, with a potential impact on balance sheet presentation and the timing of revenue recognised, particularly across long-term projects or any arrangements where the timing of invoicing does not align with delivery (where work is performed ahead of invoicing or customers pay in advance). In practical terms, the focus will shift from consideration simply given to amounts invoiced or cash received, towards an assessment of whether goods and/or services have already transferred to a customer or whether they have received settlement in advance of contractual obligations, with a subsequent impact on what is presently shown within trade debtors, accrued or deferred income on the balance sheet.
Contract modifications
The revised standard includes detailed guidance on changes to customer contracts.
Businesses that frequently amend scope, pricing or deliverables will need clear processes to assess whether changes should be treated as separate contracts, prospective changes or retrospective adjustments.
This can become particularly complex where pricing adjustments are still under negotiation.
Principal versus agent arrangements
The distinction between acting as a principal or an agent remains one of the areas that has historically created challenges and requires careful consideration.
The assessment can affect whether revenue is reported on a gross or net basis and may also influence the timing of recognition. Businesses operating as intermediaries, distributors or service arrangers should review such arrangements as early as possible.
Disclosure requirements
The revised standard introduces extensive additional qualitative and quantitative disclosure requirements.
Businesses will need to provide information about revenue streams, contract balances, performance obligations, revenue recognised from prior-period obligations, methods used for over-time recognition and other key judgements.
Importantly, this means that even where there is little or no change to the amount or timing of revenue recognised, businesses may still need to capture and disclose considerably more information under the revised standard.
Are certain industries / sectors impacted more than others?
Although all entities reporting under FRS 102 will require a robust assessment of the changes, some sectors are inevitably likely to be impacted more than others.
Construction and engineering businesses should carefully review arrangements involving long-term projects, contract modifications and staged delivery.
Manufacturers should assess contracts involving customised products, rights of return, volume discounts / rebates and customer-specific production arrangements.
Software and technology businesses may encounter complex judgements around licensing income, installation / implementation services, upgrades, support arrangements and stand-alone selling prices.
Professional services and other businesses with long-term contractual relationships should evaluate whether revenue should be recognised at a point in time or over time, and review how progress is measured.
Distributors, brokers, platforms and other intermediaries should carefully review principal versus agent conclusions.
Where do I start?
Start by reviewing material income streams, major customer contract types, typical performance obligations, potential variable consideration and the ultimate timing of revenue recognition when assessing whether existing accounting policies remain appropriate.
The biggest practical challenge is likely to be implementation – ensuring existing systems and processes capture the information required both to support revenue recognition and meet the additional disclosure requirements.
UNW’s team includes specialists who supported clients during their adoption of IFRS 15 in 2018–2019 and have experience with current IFRS clients who are effectively already applying the revenue recognition approaches now being reflected in FRS 102.
Whether you need commercial impact assessments, guidance papers or practical implementation support, we can tailor our approach to your needs.
If you are unsure how the new revenue recognition rules may affect your organisation, please get in touch with your usual UNW contact or email enquiries@unw.co.uk.
