FRS 102: Revenue recognition
Turnover, as the first reported figure in a profit and loss account or statement of comprehensive income, is of critical importance to users of financial statements. The recognition and measurement model for revenue is being altered for accounting periods commencing on or after 1 January 2026. We recommend starting the process of understanding how these amendments will affect you as soon as possible. The first step in that process is to understand the changes introduced by the periodic review of FRS 102.
A five-step revenue recognition model is being introduced, based on the model used in International Financial Reporting Standards but with a few simplifications.
The five steps are, in brief:
- identify your customer contract(s);
- identify the performance obligations in the contract;
- determine the transaction price;
- allocate the transaction price to the performance obligations;
- recognise revenue as or when the performance obligations are satisfied.
Some of these steps are similar to those you will already be used to. The revision to the standard provides more requirements on each of these, including combining contracts with the same customer and their related parties, contract modifications, etc..
The devil is in the detail
There are more prescriptive requirements when considering whether components of a contract should be combined or not. The amount and timing of when revenue is recognised within the financial statements will change for some businesses but not for others. All businesses will need to analyse the changes carefully to understand whether revenue recognition will change or not.
When the amendments are adopted, you will have a choice to either apply the new model to all customer contracts, altering the comparative amounts in the 2025 financial statements, or apply the requirements to contracts which had not been completed at the start of your 2026 accounting period, adjusting equity for the cumulative effect at that date.
What should you be doing now?
After obtaining an understanding of the five-step model:
- Review your current contracts.
Consider the different types of contracts and revenue streams your business has and evaluate the terms and conditions for each to identify both the amount and timing for revenue using the new model. - Compare this to your current accounting.
Consider how the above will affect compliance with your finance covenants and other agreements with finance hurdles such as bonus agreements, or deferred consideration for previously acquired businesses. - Consider if it is possible to amend terms and conditions for contracts which would allow revenue to be recognised in the optimal pattern for your business.
If terms can be amended, will all new contracts from a set date be required to use the new terms? - Consider the changes which may be required to your accounting and client relationship software.
Should a flag be added to identify contracts which are ongoing at the start of your 2026 accounting period? Are additional nominal ledger codes required to capture the information? What amendments are required to your accounting manual and how will your finance team be trained on the changes?
For more information on FRS 102 and revenue recognition, please contact us.
