FRS 102 Amendments to UK GAAP: Part 2 - Revenue

From 1 January 2026, the UK accounting standards for revenue recognition changed. The updated FRS 102 brings the UK in line with international standards and introduces a more structured, principle-based approach to how and when revenue should be recorded in your accounts.

If you run a business that deals in contracts with customers — particularly if those contracts involve multiple promises, long-term arrangements, or bundled pricing — this is something you need to get to grips with. The changes affect businesses across a wide range of industries, and some sectors will feel the impact more than others.

What's actually changed?

Under the old rules, revenue recognition in UK GAAP was relatively straightforward for most businesses. The new approach introduces a five-step model that requires you to work through each customer contract more carefully before deciding when and how much revenue to record.

The central concept is the "performance obligation" — essentially, a promise you've made to a customer to deliver a distinct good or service. Revenue can only be recognised once that obligation has been satisfied, i.e. once control of the good or service has genuinely passed to the customer.

That sounds simple enough in principle, but in practice it means unpicking your contracts in a way many businesses haven't had to do before.

The five-step model explained

The new framework works as follows.

Step 1 — Identify the contract. This is the agreement with your customer that creates enforceable rights and obligations. Most commercial contracts will qualify, but it's worth making sure your contracts are properly documented and meet the criteria.

Step 2 — Identify the performance obligations. You need to identify every distinct promise within the contract — the individual goods, services, or components that the customer can benefit from separately. A contract that looks like one thing on the surface may contain several separate obligations once you examine it properly.

Step 3 — Determine the transaction price. This is the amount you expect to receive for fulfilling those obligations. Where the price varies — for example, because of volume rebates, discounts, or variable elements — you need to use a reasonable estimate, typically the most likely amount.

Step 4 — Allocate the transaction price to each performance obligation. If you're selling a bundled package and the components aren't priced separately, you'll need to make a judgement about how to split the total price across each obligation. This requires careful thought, particularly where pricing isn't itemised in the contract.

Step 5 — Recognise revenue when each obligation is satisfied. Revenue is only recognised as each individual performance obligation is met. For a product sale, that's typically when ownership transfers to the customer. For a service delivered over time, revenue is spread across the delivery period. Warranties, installations, and ongoing support arrangements may all be treated differently.

Which industries are most affected?

The honest answer is that any business operating under contracts with multiple elements, variable pricing, or long-term arrangements will need to think carefully about how the new rules apply to them. Below are some of the sectors where the impact is likely to be most significant.

Construction

Construction businesses are likely to feel the impact of these changes acutely. Long-term contracts, staged payments, retentions, and variations are all common features of construction projects — and all of them require careful consideration under the new model.

The key question is usually whether revenue should be recognised at a single point or over time as the project progresses. Where a customer simultaneously receives and consumes the benefit of the work being done — as is often the case with infrastructure or fit-out projects — revenue recognition over time is likely to be appropriate. But the method used to measure progress, whether that's costs incurred, surveys of completion, or milestones reached, needs to be clearly defined and consistently applied.

Retention amounts add another layer of complexity, as does the treatment of variations and claims where the final contract value isn't certain at the outset.

Telecoms

Telecoms businesses — particularly those that supply equipment alongside ongoing service or rental agreements — sit right in the crosshairs of the new rules. A typical contract might bundle together a handset or piece of hardware with a multi-year service agreement for a single monthly fee.

Under the new standard, the equipment and the ongoing service are likely to be treated as separate performance obligations. That means a portion of the contract value needs to be allocated to the equipment — potentially recognised upfront when it's delivered — and a portion allocated to the service, recognised over the contract term.

This can result in revenue being recognised earlier than under previous practice, with a corresponding contract asset on the balance sheet. For businesses with large volumes of customer contracts, the cumulative effect of this can be material and needs careful modelling ahead of transition.

Software and SaaS

Software and technology businesses face some of the most nuanced questions under the new rules, particularly where contracts include a combination of software licences, implementation or customisation work, training, and ongoing support or hosting.

Whether a software licence is recognised upfront or over time depends on the nature of the licence — specifically, whether the customer is receiving a right to access the software as it exists at a point in time, or a right to use it as it evolves over the contract period. Implementation and customisation work may be a separate performance obligation, or it may be so closely linked to the licence that the two need to be treated together.

For SaaS businesses where customers access software hosted by the provider, revenue is generally recognised over the subscription period — but any upfront set-up fees or onboarding costs need to be assessed carefully rather than simply deferred.

Professional services

Law firms, consultancies, accountants, and other professional services businesses may assume the new rules don't apply to them — but that's not necessarily the case, particularly where engagements involve multiple deliverables or fixed-fee arrangements.

A fixed-fee project that includes initial scoping, delivery of work product, and post-delivery support may contain more than one performance obligation. Retainer arrangements also need to be assessed to determine whether the service is being delivered evenly over time or whether the pattern of delivery is uneven and therefore requires a different approach to recognition.

Variable elements such as success fees or contingent arrangements need careful treatment too, with revenue only recognised to the extent that it's highly probable it won't subsequently need to be reversed.

Property and real estate

Property businesses — including developers, agents, and those with mixed portfolios — face a range of considerations under the new standard. For developers, the key question is whether revenue on a sale should be recognised at a point in time or over time as construction progresses. Where a buyer has a right to the asset as it's being built — for example, under certain off-plan arrangements — over-time recognition may be appropriate. Where there's no such right, revenue is recognised on completion.

Service charges, management fees, and other recurring income streams also need to be reviewed to ensure they're being matched to the period in which the service is actually delivered, rather than simply billed.

For businesses with mixed contracts that combine the sale of a property with ongoing management or maintenance obligations, those elements will need to be split out and recognised separately.

Retail and subscriptions

For straightforward retail transactions — a customer buys a product, you deliver it — the new rules are unlikely to cause significant disruption. Revenue is recognised when control passes to the customer, which in most cases is on delivery.

Where it gets more complex is in subscription models, loyalty schemes, gift cards, and bundled product-and-service offers. Subscription revenue should be recognised over the subscription period as the service is delivered, but any bundled elements — say, a subscription that comes with an initial product or one-off benefit — may need to be separated out. Loyalty points and gift cards create their own considerations around deferred revenue and the likelihood of redemption.

Returns policies and variable pricing arrangements, including discounts and promotional pricing, also need to be factored into the transaction price at the outset rather than adjusted after the fact.

What's the impact on your financial statements?

Because the new standard changes the timing of when revenue is recognised, it can materially affect what your accounts show in any given period. Profitability margins, key performance indicators, and cut-off adjustments for purchases and work in progress can all be affected. For businesses with borrowing facilities or investor reporting, changes to reported revenue and profit timing are worth communicating in advance.

It's worth noting that for some businesses — particularly those with straightforward contracts where goods are sold and delivered in a single transaction — the practical impact may be minimal. But you won't know that until you've actually worked through your contracts under the new model. Assuming nothing changes without doing that analysis is a risk.

What should you do now?

If you haven't already started reviewing your contracts and revenue recognition processes, now is the time. Practically speaking, that means going through your existing customer contracts and identifying the distinct promises within each one, updating contract templates going forward so that performance obligations and pricing are clearly set out, reviewing bundled pricing arrangements where components aren't currently itemised, communicating with stakeholders — including lenders or investors — about any changes to the timing of reported revenue, and considering whether your current systems are capable of tracking and calculating revenue splits accurately.

The key thing is not to leave this until accounts preparation time. The more complex your contracts, the more time you'll need to work through the analysis properly.

We can help

The updated FRS 102 revenue recognition rules are one of several significant changes coming into effect for UK businesses under the revised standard. If you're unsure how the new rules apply to your contracts, or you want help working through the five-step model for your specific circumstances, the team at Alera Accounting & Advisory is here to help.

Get in touch today and let's make sure your accounts reflect the new rules correctly from the outset.