Revenue recognition under FRS 102: what businesses need to know about the 2026 changes
(nb-see upcoming Webinar links below)
The amendments to FRS 102 will introduce one of the most significant changes to UK GAAP in recent years. Effective for accounting periods beginning on or after 1 January 2026, Section 23 has been substantially revised, replacing the previous revenue recognition model with a new framework based on
IFRS 15 Revenue from Contracts with Customers.
For many organisations, the impact will extend far beyond the finance function. The changes may affect the timing of revenue recognition, reported profitability, contract management processes and financial reporting disclosures. While some organisations will see only limited changes, others may need to reassess extensively how revenue is recognised across multiple products, services and customer arrangements.
Understanding the new requirements now will help entities avoid surprises and prepare for a smooth transition.
Why is revenue recognition changing?
The Financial Reporting Council’s latest periodic review of FRS 102 aims to improve the quality and consistency of financial reporting while bringing UK GAAP closer to international accounting standards.
The revised standard moves away from the traditional risks-and-rewards approach and introduces a framework focused on the transfer of goods and services to customers. Rather than asking when ownership risks pass, companies must consider when they have fulfilled their obligations to the customer.
This shift may sound subtle, but for many companies it represents a fundamentally different way of assessing contracts and recognising revenue.
What is the new five-step model?
The revised Section 23 introduces a five-step revenue recognition model that entities will need to apply to contracts with customers
Step 1: Identify the contract
A business must first determine whether a contract exists and whether all parties have approved the arrangement. The contract must create enforceable rights and obligations, include commercial substance and make it probable the entity will collect consideration to which it is entitled.
In some circumstances, multiple contracts may need to be combined and accounted for as a single arrangement.
Step 2: Identify the performance obligations
A key feature of the new model is the identification of performance obligations. These are the distinct goods or services promised to a customer within a contract.
For example, a contract may include the supply of equipment, installation services, training and ongoing maintenance. Businesses must assess whether these are separate obligations or part of a single combined commitment.
Step 3: Determine the transaction price
The transaction price is the amount that an entity expects to receive in exchange for transferring goods or services.
This assessment is not always straightforward. Finance Teams may need to consider:
• Discounts
• Rebates
• Performance bonuses
• Incentive payments
• Penalties
• Refund arrangements
Estimating variable consideration may require significant judgement and ongoing review.
Step 4: Allocate the transaction price
Where a contract contains multiple performance obligations, the transaction price must be allocated between them.
This allocation is generally based on the standalone selling prices of the individual goods or services included within the contract.
Step 5: Recognise revenue
Revenue is recognised when, or as, performance obligations are satisfied.
Some obligations are satisfied at a single point in time, while others are fulfilled over time. Determining the appropriate recognition method will be critical for many businesses.
Which sectors are likely to be most affected?
Although all entities reporting under FRS 102 should assess the changes, some sectors are likely to experience a greater impact than others.
Construction and real estate
Long-term contracts, contract modifications, performance incentives and staged delivery arrangements may require significant review. The timing of revenue recognition on major projects could change under the new framework.
Manufacturing and engineering
Many contracts include multiple components such as product supply, installation, commissioning and ongoing support. Businesses may need to identify and account for separate performance obligations within a single customer arrangement.
Retail
Loyalty schemes, gift cards, warranties and customer return rights may require new approaches to allocating and recognising revenue.
Hospitality and leisure
Memberships, advance bookings, deposits, vouchers and bundled packages often involve multiple obligations and could be affected by the revised requirements.
Professional services
Legal firms, consultants, architects, accountants and other professional firms should consider if the services they offer satisfy the criteria for recognition over time and if so assess long-term engagements, fixed-fee projects and retainer arrangements to determine whether current accounting policies remain appropriate.
Common areas requiring judgement
While the five-step model provides a structured framework, applying it in practice often requires significant judgement.
Variable consideration
Many contracts include amounts that are not fixed at inception, such as bonuses, rebates or performance-related fees.
Businesses must estimate these amounts carefully and determine whether they should be included in the transaction price.
Contract modifications
Changes to existing contracts are common across many industries.
The revised standard includes detailed guidance on how modifications should be accounted for and whether they should be treated as separate contracts or amendments to existing arrangements, including where there are transition options.
Multiple performance obligations
Where businesses provide a combination of products and services, determining what represents a separate performance obligation can have a significant impact on revenue recognition.
Customer incentives and loyalty programmes
Retailers and hospitality businesses often provide customers with future benefits through loyalty schemes, vouchers or discounts.
In many cases, these benefits will need to be treated as separate obligations, resulting in a portion of revenue being deferred.
Warranties and support services
Enhanced warranties, maintenance agreements and support contracts may need to be accounted for separately from the original product sale.
This may alter both the timing and pattern of revenue recognition.
What are the practical implications?
For many businesses, implementation will involve more than updating an accounting policy.
The revised requirements may necessitate:
• Contract reviews
• Changes to finance systems
• Additional management information
• New internal controls
• Enhanced documentation
• Staff training
• Additional financial statement disclosures
Businesses should also consider the potential impact on key performance indicators, profit forecasts and stakeholder reporting.
Even where the accounting outcome does not change significantly, the process of reaching that conclusion may require additional analysis and documentation.
Transition to the revised standard
The revised standard adopts different transition approaches depending on the nature of the change. In some areas management has a choice of transition method, whereas in others the approach is prescribed. The revised revenue recognition requirements provide a genuine accounting policy choice on transition. Depending on the approach adopted, historical contract information may need to be reviewed and comparative information may be affected.
Preparing for implementation
With the effective date approaching, businesses should begin planning now.
A practical implementation plan should include:
• Reviewing key customer contracts
• Identifying performance obligations
• Assessing variable consideration arrangements
• Evaluating current accounting policies
• Reviewing finance systems and reporting processes
• Modelling the impact on financial statements
• Training finance and operational teams
• Communicating changes to stakeholders where appropriate
Starting early will provide time to address issues before the new requirements become mandatory.
How Moore South can help
The revised revenue recognition requirements are among the most significant changes introduced through the latest amendments to FRS 102. Although the extent of change will vary, the revised standard affects every entity reporting under FRS 102. Early assessment of contracts, systems and accounting policies will reduce implementation risk and help avoid unexpected accounting outcomes.
At Moore South, our audit and advisory specialists can help you understand the practical implications of the changes, review existing contracts, identify areas of risk and develop an implementation plan tailored to your business.
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
If you would like to discuss the impact of the new revenue recognition requirements under FRS 102, get in touch with our team today.