Amendments to FRS 102: how will this impact the construction and real estate sector?

The amendments to FRS 102, effective for most entities for accounting periods beginning on or after 1 January 2026, represent one of the most significant changes to UK GAAP in recent years. While all businesses reporting under FRS 102 will be affected, the construction and real estate sector faces unique challenges due to the nature of long-term contracts, property assets and valuation requirements.

For developers, contractors, housebuilders, property investors and real estate businesses, the revised standards could materially affect the timing of revenue recognition, asset valuations and reported profitability. As a result, finance teams should start assessing the impact now to avoid surprises when the new rules take effect.

Why construction and real estate businesses should pay attention

The construction and real estate sector often relies on complex contractual arrangements that span multiple accounting periods. Revenue is commonly recognised over time, while property assets may be measured using fair value accounting.

The revised FRS 102 introduces a new revenue recognition model based on performance obligations, alongside changes that bring fair value measurements more closely into line with international standards. Together, these changes could affect reported profits, project margins, financial forecasts and stakeholder expectations.

For businesses already operating in a highly competitive and cost-sensitive environment, understanding these changes early will be critical.

Revenue recognition: a significant shift for long-term contracts

One of the most important amendments is the introduction of a new five-step revenue recognition model aligned more closely with IFRS 15.

Under the revised framework, businesses must:
• Identify the contract
• Identify performance obligations
• Determine the transaction price
• Allocate the transaction price
• Recognise revenue as performance obligations are satisfied

For many construction businesses, this may result in a reassessment of how revenue is recognised on long-term projects.

Contract terms will require closer scrutiny

Construction contracts often contain multiple deliverables, variations, incentives and performance bonuses. The new requirements place greater emphasis on identifying distinct performance obligations and assessing how revenue should be allocated between them.

Businesses may need to reconsider the accounting treatment of:
• Design and build contracts
• Contract modifications
• Retentions
• Performance bonuses
• Liquidated damages
• Claims and variations

In some cases, revenue may be recognised differently from current practice, potentially affecting project profitability and reporting periods.

Variable consideration creates additional complexity

Many construction contracts include elements of variable consideration, such as milestone payments, incentive arrangements and contractual penalties.

Under the revised standard, management will need to estimate these amounts carefully and assess whether they should be included in transaction prices. This may increase the level of judgement required and place greater emphasis on robust documentation and forecasting processes.
Impact on project reporting

Changes in revenue recognition do not affect cash flow, but they can significantly affect the timing of reported revenue and therefore profits.

For contractors and developers managing multiple projects, this could influence:
• Reported revenue
• Project margins
• Profit forecasts
• Management reporting
• Stakeholder communications

Businesses should assess whether current systems can produce the information required under the new framework.

Fair value accounting: a second area of impact

Alongside the revenue changes, the amended FRS 102 also includes changes affecting fair value measurement, which may be particularly relevant for businesses holding investment property and other assets measured at fair value.

For property investors and other businesses holding investment properties, fair value remains a key area of consideration in their financial reporting.

Increased focus on valuation methodologies

Real estate businesses may need to revisit their valuation processes and assumptions to ensure they remain compliant with the revised guidance.

Areas requiring particular attention may include:
• Investment property valuations
• Market-based assumptions
• External valuation evidence
• Fair value disclosures
• Sensitivity assessments

Given the importance of property valuations to financial statements, businesses should ensure appropriate governance and documentation are in place.

Potential effects on profit volatility

Changes in fair value assumptions can have a direct impact on reported profits and net asset values.
For property investment businesses, this means stakeholders may see increased emphasis on valuation assumptions and fair value movements within financial reporting. Understanding how these changes interact with revenue recognition will be important when assessing overall financial performance.

The combined impact on the sector

Construction and real estate businesses face a unique challenge because both revenue recognition and property valuation can have a significant effect on reported results.

The new revenue model may alter when profits are recognised on contracts, while fair value updates may influence the carrying value of property assets. Together, these changes could affect:
• Financial statements
• Profitability metrics
• Lending covenants
• Investment decisions
• Shareholder reporting
• Business valuations

As a result, businesses should avoid considering each amendment in isolation and instead assess the broader financial reporting implications.

Preparing for 2026

Although the revised standards are not mandatory until 2026, early preparation will help minimise disruption.

Key actions include:
• Reviewing construction and development contracts
• Identifying performance obligations within existing agreements
• Assessing variable consideration arrangements
• Evaluating fair value methodologies and controls
• Modelling the impact on financial statements
• Reviewing reporting systems and processes

The sooner businesses begin their assessment, the more time they will have to implement any necessary changes.

How Moore South can help

The FRS 102 amendments present both technical and commercial challenges for construction and real estate businesses. Understanding the impact on contract revenue, project profitability, property valuations and stakeholder reporting is essential for a smooth transition.

At Moore South, our financial reporting specialists can help you assess the impact of the revised revenue recognition and fair value requirements, identify areas of risk and opportunity, and develop a practical implementation plan tailored to your business.

If you’d like to discuss how the FRS 102 amendments could affect your construction or real estate business, contact our team today.

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For those interested in learning more about the changes before deciding they need to request support in dealing with the transition our London office are putting on three Webinars in September (including one on leases and one on revenue) to give an in-depth update including practical examples encountered to date:

Leases-8th September
Webinar – FRS 102: Lease accounting – advanced insights
Revenue Recognition-15th September
Webinar – FRS 102: Revenue recognition – advanced insights
Section 1A & other changes-22nd September
Webinar – FRS 102: Section 1A and other changes – advanced insights