Overview

The FRC issued amendments to FRS 102, which will come into effect for accounting periods beginning on or after 1 January 2026. Early adoption is also permitted and would therefore be for beginning on or after 1 January 2025.

One of the key changes made by the FRC is the revision of revenue recognition, bringing FRS 102 more in line with IFRS 15 principles.

While the updated revenue model affects most industries, those with multi-phase or contract-based revenue—such as construction, tech, and manufacturing—will likely experience the most significant changes.

Below is a summary of the key elements of the new model, its potential impact on businesses, and how to prepare for the transition.

Why the Change?

The current FRS 102 model (Section 23 – Revenue) has been criticised for being too simplistic, especially when applied to complex contracts or contracts with multiple performance obligations. The updated standard aims to:

· Improve comparability and transparency in financial reporting

· Provide a more consistent framework for recognising revenue

· Better reflect the substance of contracts with customers

 

What’s Changing?

Old Model – Overview

Under the existing FRS 102, revenue is recognised when:

· It is probable that economic benefits will flow to the entity

· The revenue can be measured reliably

· For services, entities often use stage-of-completion or percentage-of-completion methods

This approach has led to multiple interpretations, particularly when dealing with complex contracts involving multiple elements.

New Model – Five-Step Approach

The revised standard introduces a five-step revenue recognition framework:

1. Identify the contract(s) with a customer

A contract is an enforceable agreement between two or more parties, which creates rights and obligations for each party involved.

There is a detailed description of a contract in paragraph 23.7 of the standard.

2. Identify the separate performance obligations

A performance obligation is the promise to transfer a distinct or series of distinct goods or services to a customer.

This section also includes guidance on:

· Warranties

· Option for additional goods and service

· Principal versus agent considerations.

3. Determine the transaction price

The transaction price is the amount of consideration receivable in exchange for the goods and/or services.

In determining the transaction price, the entity should consider:

· Variable consideration – Adjustments to the transaction price should be made when variable conditions are highly probable. This is a judgemental matter and may require disclosure.

· Time value of money – If the time between transfer of goods/services and payment exceeds 12 months, the arrangement is treated as financing under Section 11 of FRS 102.

· Non-cash consideration – Should be measured at fair value. If this cannot be reliably estimated, the transaction price should be set at the standalone selling price.

· Consideration payable to a customer – Should be accounted for as a reduction in revenue.

4. Allocate the transaction price to the performance obligations

Where a contract contains multiple performance obligations, the transaction price must be allocated based on the standalone selling price of each obligation. If not readily available, it must be estimated—requiring judgement and possible disclosure.

5. Recognise revenue when (or as) the performance obligation is satisfied

Revenue is recognised when or as a performance obligation is satisfied. For obligations satisfied over time, revenue should be apportioned and recognised over the relevant period.

Two common methods:

· Input method – Based on inputs such as costs incurred, labour hours, machine hours, etc.

· Output method – Based on value delivered to the customer, e.g. milestones, units delivered, or time elapsed.

This model shifts focus to the transfer of control, rather than the mere passage of time or incurrence of cost.

The standard also provides detailed guidance on the treatment of modifications to contracts.

Transition Approach

Entities have two options:

1. Cumulative catch-up approach (Modified retrospective)

A simpler approach where the entity adjusts the opening balance of the current period (i.e. 1 January 2026) for contracts still outstanding at the transition date. Comparative figures are not restated.

2. Full retrospective approach

Entities restate comparative figures as though the new principles had always applied. Adjustments are made to the opening position of the earliest comparative period.

 

Additional disclosures that may apply

Disclosures must clarify:

· Which transition option was chosen

· The nature and amount of any transitional adjustments

· Any significant judgements or estimates made under the new model

Commercial considerations

Some commercial aspects companies should consider:

· Performance metrics (e.g. EBITDA, gross profit, net profit) may be affected. This could impact bonus schemes, dividends, etc.

· Loan covenants and banking arrangements – Changes to EBITDA may affect covenants such as interest cover or debt/EBITDA ratios. It’s essential to discuss the impact with lenders, especially if using the modified retrospective method which may reduce year-on-year comparability.

· Business valuations – Financial statement changes might be viewed as operational, not accounting-related. Key metrics (e.g. EBITDA) influence valuations, so discussions with investors or acquirers are advisable.

· Contract structuring – Contracts may need to be restructured to clearly define performance obligations and when control passes. Sales and finance teams should work together to align revenue expectations with the new rules.

· Training – Relevant staff should be trained to understand the changes and how these will affect their roles.

Conclusion

The transition to the new revenue recognition model under FRS 102 represents a significant shift in how revenue is recognised and reported.

By starting preparations early and understanding the implications, businesses can ensure a smooth and compliant transition to the updated standard.