Revenue Recognition Changes

The accounting landscape in the UK is set to undergo a significant transformation with the introduction of revised revenue recognition rules under FRS 102. Effective for accounting periods beginning on or after 1 January 2026, these changes are designed to align UK accounting practices more closely with international standards, particularly IFRS 15. The adoption of a new five-step revenue recognition model will provide a more consistent framework across industries, enhancing the comparability and transparency of financial statements.

The Five-Step Revenue Recognition Model

The new framework replaces the previous approach that focused on the transfer of risks and rewards. Instead, it introduces a systematic five-step process for recognising revenue. Businesses will need to follow these steps:

  1. Identify the contract with the customer
    Establish the agreement that creates enforceable rights and obligations between the business and the customer.
  2. Identify the performance obligations in the contract
    Determine the distinct goods or services that the company has promised to deliver.
  3. Determine the transaction price
    Establish the amount of consideration the company expects to receive in exchange for delivering the promised goods or services.
  4. Allocate the transaction price to the performance obligations
    Divide the total transaction price among the performance obligations based on their relative standalone selling prices.
  5. Recognise revenue when (or as) the performance obligation is satisfied
    Record revenue either at a specific point in time or over a period, depending on when the customer gains control of the goods or services.

This model aims to provide a clearer and more consistent methodology for recognising revenue, particularly in complex transactions involving multiple deliverables or services.

Key Implications for Businesses

The introduction of this model will require many organisations to reevaluate their current contracts, accounting processes, and financial reporting systems. Below are some of the primary impacts:

  • Contract Analysis
    Companies must review their existing contracts to identify distinct performance obligations and determine how revenue should be recognised for each.
  • System and Process Updates
    Accounting systems may need to be updated to capture and track the detailed data required to implement the five-step model effectively.
  • Financial Statement Impact
    The timing and manner of revenue recognition may change for many businesses, potentially altering reported profits and key financial ratios.
  • Staff Training
    Finance and accounting teams will need to be trained in the application of the new model to ensure compliance and accurate reporting.

Proactive planning will be essential for companies to minimise disruption and ensure a smooth transition.

Sector-Specific Considerations

Certain industries are likely to experience more significant impacts than others, depending on the complexity of their revenue arrangements:

  • Construction and Long-Term Contracts
    The recognition of revenue over time will require detailed tracking of performance obligations, which may demand significant system changes.
  • Software and Technology
    Businesses that bundle goods and services, such as software subscriptions with ongoing support, will need to carefully allocate the transaction price to the individual performance obligations.
  • Retail and Consumer Goods
    Revenue recognition in industries with customer loyalty programmes or complex discount structures may also require adjustment under the new framework.

Preparing for the Change

To manage the transition effectively, businesses are advised to take the following steps:

  1. Begin reviewing contracts and revenue streams to identify potential changes in revenue recognition timing.
  2. Update accounting systems and software to accommodate the new requirements.
  3. Train finance teams to apply the five-step model correctly.
  4. Engage with auditors and advisors early to identify any areas of complexity or uncertainty.
  5. Consider the impact of the changes on financial statements, budgets, and forecasts to prepare stakeholders for potential shifts in reported results.

Conclusion

The adoption of the new revenue recognition model under FRS 102 represents a fundamental shift in how businesses account for revenue. While the changes aim to improve transparency and consistency, they also bring challenges that require early preparation. By taking a proactive approach, businesses can ensure a seamless transition to the new framework and maintain compliance with the updated reporting requirements.