Key changes to FRS 102: revenue recognition for construction businesses
The revised FRS 102 revenue recognition model is effective for accounting periods beginning on or after 1 January 2026. The amendments introduce a new five-step revenue recognition model aligned with IFRS principles.
To learn more about the impact the FRS 102 changes will have, read our previous insight here.
The construction industry presently uses the percentage of completion basis to recognise revenue and profit over time as the projects progress. It is likely that most contracts will still follow this approach under the revised standard, however businesses will need to assess each of the 5 steps and consider the impact of the guidance.
Key considerations for construction businesses following changes to FRS 102
Identifying performance obligations
Construction contracts often include different types of work, such as procurement, designing, building, installing and providing ongoing maintenance. One of the main changes in the revised FRS 102 rules is a stronger focus on identifying the separate parts of a contract that deliver value to the customer.
The new rules give more detailed guidance, which means businesses need to use more judgement, keep better records and clearly understand how the different parts of a contract interact.
Because of this, revenue now has to be looked at contract by contract. Each contract needs to be broken down into its individual parts and assessed based on how those parts work together. Therefore, taking expert advice is recommended.
Multiple contracts with the same customer
In construction projects, it’s common to have more than one contract with the same customer, particularly where work is complex or split into stages. Under the new rules, some of these separate contracts may need to be treated as one single contract.
This happens when the contracts were agreed together for the same overall purpose, depending on each other for pricing or delivery, or are really providing one combined service.
Depending on whether these conditions are met, this can change when and how much revenue is recognised. This means the way contracts are structured and timed is now more important than before.
Determining the transaction price
Contract modifications, including changes to scope, variations and liquidated damages are common in the construction industry. Each of these will need to be considered carefully in the context of the requirements on contract modifications and variable consideration. They will need to be reviewed carefully and regularly to decide how much revenue can be recognised and when and will need to be updated as the project progresses.
Recognising revenue as the contract progresses
While revenue is still expected to be recognised over time using the percentage of completion basis as the work is carried out this requires certain conditions to be met. Businesses will also need to decide on an approach to measuring progress (input or output) and apply it consistently across contracts. Obligations to correct defects may need to be factored in and assessment is required when circumstances change.
Under the revised FRS 102 rules, materials that have been purchased but not yet installed need careful consideration because their cost does not always reflect actual progress on the contract. When deciding whether to include uninstalled materials in progress to date, it is important to assess whether the materials are specific to the contract, who controls them, and whether including them would overstate how much work has really been performed.
Costs of tendering for new work
The amendments introduce new guidance on how the costs of winning a contract should be accounted for, which may differ from current practice. Costs incurred to secure a contract can be recognised as an asset where they are additional costs and are expected to be recovered. In addition, any costs that can be charged directly to the customer must be capitalised, regardless of whether the contract ultimately proceeds. Businesses will therefore need to review precontract expenditure, such as feasibility studies and early planning costs, to determine whether they meet the revised criteria for capitalisation.
Adopting the new rules
Businesses can choose either to adjust opening balances for existing contracts or restate prior periods. The right approach will depend on the impact on the business and the resources available to implement the changes.
Contact us
Early action can help avoid surprises and ensure a smoother transition to the updated FRS 102 reporting framework.
At Moore Kingston Smith, we are already helping clients understand the impact of the revised standard – we are providing clarity and direction by identifying how the changes affect them, highlighting accounting policy choices and advising on disclosure requirements. For many businesses this isn’t just an accounting change, it has real commercial consequences.
With the use of advanced, AI-based technology, we carry out impact assessments and lease contact reviews with detailed analysis.
We also provide strategic advice and tailored training for finance teams covering the impact of the changes on KPI’s and loan covenants and can advise on communication with lenders or investors regarding lease changes.
If you would like to discuss how the changes affect your business, please get in touch with our team who can reduce the burden of transitioning to the revised standard.
To discuss how the changes affect your business, please contact us for a no-obligation discussion.
