FRS 102: recruitment businesses impacted by changes to revenue recognition

FRS 102 (the accounting standard used by many UK businesses) is having its biggest shake-up in years. The revised standard was published in September 2024 and comes into effect for accounting periods beginning on or after 1 January 2026. 

That leaves less than two months for recruitment business owners to consider how this will impact their business and particularly how revenue is recognised. Finance teams can reflect statutory changes in management accounts, should they choose to. 

How the changes to revenue recognition will impact recruitment consultants 

The current revenue recognition requirements under UK GAAP are fairly brief and not overly prescriptive, giving businesses the ability to use a variety of revenue recognition policies in practice. The new standard adopts a more detailed five-step model, closely aligned to IFRS but simplified, as follows: 

• Step 1 – identify the contract(s) with a customer. 
• Step 2 – identify the performance obligations in the contract. 
• Step 3 – determine the transaction price. 
• Step 4 – allocate the transaction price to the performance obligations in the contract. 
• Step 5 – recognise revenue when (or as) the entity satisfies a performance obligation. 

How the contracts with customers are structured will be key to determining how the revised requirements impact the business. Consequently, two businesses doing the same thing can recognise revenue differently if their contracts are structured differently. 

There is specific detailed guidance on each step in the revised standard. For recruitment consultants, accounting for temporary/contract revenue is not likely to change. However, more thought will be required when accounting for permanent income, with additional nuances for executive search, retainer fees, contingent recruitment and project type work. The identification of the performance obligation (step 2) will need careful consideration to ensure that it is accounted for correctly.  

The standards mention a “distinct good or service” that a business promises to transfer to a customer. A contract with a customer explicitly states the services to transfer, but these can also be implied from customary business practices or published policies. The standards specifically mention that performance obligations do not include administrative tasks. 

Contingent permanent revenue 

The “promise to transfer” under a standard contingent model is to provide an employee to a business. Underpinning this performance obligation are other implied promises, such as creating a shortlist, screening and interviewing candidates, managing the interview progress, handling offers, dealing with counteroffers and the notice period, and post-placement care. However, in most contracts, the firm promises to transfer all these services as a bundle rather than individually, so the revenue is recognised when the entire performance obligation is satisfied. 

Most recruitment consultants currently adopting IFRS recognise contingent permanent recruitment income on the employee’s start date, meaning this is likely to become the industry standard under the new FRS 102 model. For revenue to be recognised on acceptance date, the contract should clearly state that acceptance date is the point at which the business has fulfilled its obligations to its client. A provision for drop-outs is also required, whereby firms use past data to estimate the number of accepted offers which do not eventually end in a placement. 

This is something of a grey area in practice so judgement must be used. Businesses will need to be able to justify their accounting policy in line with the new requirements. Recognising revenue on acceptance is usually a more difficult accounting policy to justify than start date so will potentially see more challenge.  

Executive search (and retainers) 

In most executive search arrangements, the search for a candidate is more pre-defined and takes place over a longer period. Unlike in contingent search, there are usually specific and distinguishable performance obligations. These are usually a retainer to start the search, the submission of a candidate shortlist and the placement of the successful candidate.  These are all likely to be separate performance obligations for which revenue should be apportioned to. 

Under the new requirements, revenue cannot be recognised until an entity has performed a service that fulfils a performance obligation. Therefore, a retainer fee usually cannot be recognised until some work has been undertaken. This may take the form of a briefing meeting to scope out the work, although this depends on the specific contract terms. If a contract specifies that no work is required in order to be entitled to the retainer fee, and the fee is non-refundable, it may be recognised up-front. The shortlist fee should be recognised upon submission of a shortlist and the final fee should be recognised on candidate start date (or, if the terms of the contract permit, acceptance date with a drop-out provision). 

Refund provisions 

It is also common under IFRS for all types of revenue to recognise rebate and refund provisions. This falls under the “warranties” section of the new standard. Each business will have its own specific rebate periods and contract terms, which should be applied to calculate a provision. For example, if a 50% refund is payable should a candidate drop out in the first six weeks of placement, a provision for this should be recorded. The provision will require judgement but will usually be calculated using historical data (e.g. percent of drop–outs in the last year) that is applied to the population of placements that are still within the rebate period.  

The new version of FRS 102 can be found here.

Help from the experts 

Because the terms and conditions of each individual contract are key to how revenue is recognised, the above interpretation of the new requirements may not apply to all recruitment businesses. Seek professional guidance should you be unsure of the correct accounting treatment for your business. Our specialist recruitment team are available to contact below.