Key Changes to FRS 102 Revenue Recognition

The Financial Reporting Council (FRC) has updated FRS 102 to bring its rules for recognising revenue in line with the international standard, IFRS 15. This updated guidance will be mandatory for accounting periods starting on or after 1 January 2026. (Early adoption is permitted from 1 January 2025.)

Why the Change?

The old FRS 102 rules (Section 23) were often criticised for being too simple, making it hard to apply them consistently to complex contracts (especially those with multiple components). The goal of the new standard is to:

• Improve comparability and transparency in financial reports.
• Provide a clearer, more consistent framework for revenue recognition.
• Better reflect the true economics of customer contracts.

Industries with multi-phase or contract-based revenue—like construction, manufacturing, and tech—are likely to see the biggest impact.

What’s New? The Five-Step Model

The current FRS 102 approach simply recognizes revenue when it’s probable economic benefits will flow to the entity and the amount can be reliably measured. The new standard replaces this with a structured five-step framework:

1. Identify the Contract(s) with the Customer: A contract is a legally enforceable agreement that creates rights and obligations for both parties.
2. Identify the Separate Performance Obligations: Determine the promises to transfer distinct goods or services. This is a key area of judgement, especially for things like warranties or options for additional items.
3. Determine the Transaction Price: Establish the total amount of payment expected in exchange for the goods/services.
   Crucial Considerations: Factor in variable consideration (like discounts or bonuses), the time value of money (if payment terms exceed 12 months), and non-cash payments (measured at fair value).
4. Allocate the Transaction Price: If a contract has multiple obligations, the total price must be split among them based on their standalone selling prices (or a reasonable estimate).
5. Recognise Revenue: Revenue is recognized when (or as) the performance obligation is satisfied by transferring control of the goods or services to the customer. This shift to the transfer of control is a fundamental change.
   For obligations satisfied over time (e.g., a long-term service contract), revenue is recognized over that period using input (e.g., costs incurred) or output (e.g., milestones achieved) methods.

Transition and Commercial Impact

Transition Options

Entities can adopt the new standard using one of two methods:

Commercial Considerations

The change isn’t just an accounting issue—it affects the wider business:

• Performance Metrics: Key figures like EBITDA and Gross Profit may change. This could impact bonus schemes, dividend policies, and loan covenants (like interest cover ratios). You must discuss this with your lenders and investors.
• Contract Structuring: Businesses should review and potentially re-structure customer contracts to clearly define distinct performance obligations and when ‘control’ passes to the customer.
• Training: Sales, finance, and operations teams need training to understand the new rules and ensure contract terms align with the recognition model.

Starting preparations early is essential for a smooth and compliant transition to the new FRS 102 standard.

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