The current requirements on revenue in FRS102 are not particularly comprehensive, which can lead to variability in application across businesses. The new model aims to enhance consistency and comparability, providing more useful information to users of the financial statements and aligning the requirements with IFRS.
The five-step model in the updated standard
Step 1: Identifying the Contract
Paragraph 23.7 of FRS102 outlines specific criteria for a contract to be within the scope of this standard. The criteria include:
Approval and commitment by all parties to their respective obligations.
Clear identification of the rights and obligations regarding goods or services to be transferred.
Identifiable payment terms.
Contract has commercial substance.
There is a probability that the customer has the ability and intention to meet payment obligations.
Contracts negotiated as a package and entered into simultaneously (or nearly so) should be combined.
Step 2: Identifying Performance Obligations
A performance obligation represents a promise to transfer goods or services. It excludes activities where no transfer occurs (e.g. administrative tasks).
Contracts may include multiple performance obligations which must be accounted for separately.
If goods/services are not distinct, they must be grouped with others until a distinct bundle is identified.
Step 3: Determining the Transaction Price
The transaction price is the consideration an entity expects to receive in exchange for transferring goods or services to a customer.
Variable components (e.g. discounts, rebates, refunds) must be estimated using either the expected value or the most likely amount. Only amounts considered ‘highly probable’ are included.
The updated standard addresses the treatment of time value of money, non-cash consideration and amounts repayable to customers.
Step 4: Allocating the Transaction Price
The consideration must be allocated to each performance obligation based on its standalone selling price. If a standalone selling price is not observable, an estimate should be made using reasonably available information.
Discounts or variable consideration may also need to be allocated to individual obligations.
Step 5: Recognising Revenue
Revenue is recognised once the promised good or service is transferred to the customer, satisfying the performance obligation.
Obligations may be satisfied over time or at a specific point in time. Criteria for recognising obligations over time are detailed in the standard.
Effective dates and transition options
These changes will take effect for periods beginning on or after 1 January 2026, with December 2026 year ends likely the first impacted.
Unlike the previous FRS102 transition, the FRC offers an option for retrospective application, either with or without restatement. The latter requires a cumulative adjustment to opening reserves to reflect the standard’s impact.
What should you do now?
We recommend reviewing current contracts with customers to assess potential impacts on income recognition policies. Key areas requiring additional consideration may include:
provisions for warranties
non-refundable up-front fees
options for additional goods and services.
In summary
Whilst the new standard introduces some upfront considerations and may require some adjustment, it promises a positive outcome: more consistent and comparable financial information - a welcome change in the accounting world.