FRS 102 revenue recognition changes are coming: is your business ready?

Changes are coming to revenue recognition under FRS 102 for accounting periods beginning on or after 1 January 2026.

While much of the focus has been on the lease accounting changes being introduced at the same time, businesses should not overlook the potential impact of the revised revenue recognition requirements.

The changes could alter the timing of revenue and profit recognition, affecting key performance indicators (KPIs), banking covenants, remuneration arrangements and business valuations.

The impact will depend on the nature of a business’s contracts. You won’t know whether you have major impacts until you work through the new five-step model with your contracts in hand.

What is changing?

The current FRS 102 requirements contain relatively broad principles, which can result in similar transactions being accounted for differently by different businesses.

The revised standard introduces a more structured approach based on a five-step revenue recognition model. Rather than focusing primarily on the transfer of risks and rewards, businesses will need to consider when control of goods or services passes to the customer.

The changes bring FRS 102 more closely into line with IFRS 15, the international accounting standard on revenue recognition.

Although the principles may sound straightforward, the new framework can lead to different accounting outcomes depending on how contracts are structured and the specific terms they contain. There is now a single ‘right answer’ for many situations, and you might need to change your accounting to align with this.

Which businesses are most likely to be affected?

All businesses reporting under FRS 102 or FRS 105 should consider the implications of the revised requirements. However, some arrangements are more likely to be affected than others.

Particular attention may be needed where businesses have:

• Long-term or complex contracts
• Contracts that include multiple products or services
• Variable pricing arrangements such as bonuses, rebates or performance-related fees
• Principal versus agent arrangements
• Contracts that are regularly modified or amended during their lifecycle

These types of arrangements often require greater judgement under the revised standard and may result in changes to the timing of revenue recognition.

If you report under FRS 105 for micro entities, the lease changes won’t apply to you, but the revenue changes will.

Revenue is only part of the story

The revised requirements also include guidance on costs associated with customer contracts.

In the past, companies have often ‘matched’ the revenue and costs on their long-term contracts. This no longer applies. Revenue and costs have different rules and may well be recognised at different times.

Businesses should therefore consider the potential impact on profitability and financial reporting as a whole, rather than focusing solely on revenue.

What should businesses be doing now?

Although the changes do not take effect until accounting periods beginning on or after 1 January 2026, which means for most businesses the first period affected will be their 2026 or 2027 accounts, businesses should start assessing their position well in advance.

A useful starting point is to identify the revenue streams most likely to be affected, review customer contracts and understand where significant judgements may arise. Early consideration can help avoid surprises later in the reporting process.

You should also build these changes into your forecasts and covenant checks, so the KPIs you disclose to your board today match the accounts you will give them later.

Download our practical guide

Our practical guide explores the changes in more detail and highlights the areas most likely to affect businesses reporting under FRS 102.

It includes:

• An overview of the new five-step revenue recognition model
• Key differences between the current and revised requirements
• Examples illustrating how the rules may apply in practice
• Considerations for contract costs, accounting policies and disclosures
• Practical next steps to help businesses understand and assess the potential impact of the changes

How we can help

The impact of the revised revenue recognition requirements will vary depending on the nature of your business and customer contracts.

We can help you understand the changes, discuss areas of judgement and support your assessment of the potential implications for your financial reporting.

If you would like to discuss the changes, please contact your usual adviser.

You can also read our blog and download the guide on the upcoming lease accounting changes.