FRS102: New Revenue Recognition Model
In March, the Financial Reporting Council (FRC) issued final amendments to FRS 102 Section 23, Revenue from Contracts with Customers, introducing a comprehensive five-step model for revenue recognition. These changes will take effect for accounting periods beginning on or after 1 January 2026, aligning FRS 102 more closely with IFRS and enhancing comparability between the two standards.
The five-step model standardizes the approach to revenue recognition across all contracts with customers. It emphasizes identifying distinct goods or services promised to the customer and determining the consideration the entity will be entitled to in exchange. The steps are as follows:
Identify the contract(s) with a customer.
Identify the performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to the performance obligations in the contract.
Recognize revenue when (or as) the entity satisfies a performance obligation.
Benefits
Enhanced Accounting Accuracy: Provides a more robust framework for accounting for revenue transactions, leading to more reliable and useful information regarding the nature, amount, and timing of revenue and cash flows.
Global Comparability: Aligns FRS 102 more closely with international accounting principles, improving consistency and comparability of financial statements across borders.
Increased Transparency: High-quality financial information supports broader outcomes, including improved access to capital markets.
Implications
The amendments may significantly impact the timing and amount of revenue recognized by entities, varying based on the nature and terms of customer contracts and current revenue recognition policies.
While the new model might seem familiar—particularly steps 1 through 4, which allocate the transaction price to goods or services in the contract—there are key differences. Step 5 introduces a unified approach for recognizing revenue, replacing the current distinction between when significant risks and rewards of ownership transfer for goods and when the stage of completion is measured for services.
Revenue recognition may also be affected by changes in contract scope or price, as well as by how costs incurred to obtain or fulfill a contract are accounted for.
The revised standard also introduces enhanced disclosure requirements. Entities will need to provide more detailed disclosures about revenue classes, the timing and method of revenue recognition, and unsatisfied performance obligations. Where significant judgments have been made in recognizing revenue, these must also be disclosed.
Entities can choose to either amend their comparatives and apply the new model to all customer contracts retrospectively or apply the model only to incomplete contracts at the start of the current period and adjust equity for the cumulative effect at that date.
Other Considerations
The transition to the five-step model could have broader implications, affecting tax payments, distributable profits, and key performance indicators (KPIs) used in business agreements such as lending covenants, earn-outs, and performance-related pay.
Identifying potential impacts on financial information early will allow entities to take mitigating actions and facilitate informed and timely communication with key stakeholders.