Revenue Recognition Changes 2026: UK Financial Reporting Guide

The UK financial reporting standards are undergoing a significant transformation. In September 2024, the Financial Reporting Council (FRC) released updated standards, specifically FRS 102 and FRS 105, which will impact how businesses in the UK and Republic of Ireland present their financial information. These changes, particularly concerning Revenue Recognition, will take effect for accounting periods beginning on or after January 1, 2026. However, proactive preparation throughout 2025 is crucial. This guide will delve into the key changes related to the new control-based revenue recognition model, providing practical steps to ensure a smooth transition and compliance with the updated Financial Reporting Standards UK.

Understanding FRS 102 and FRS 105

FRS 102: This standard applies to the majority of companies operating within the UK and Republic of Ireland.

FRS 105: This simplified standard is designed for micro-entities, defined as businesses meeting the following criteria:

• Annual turnover not exceeding £632,000 (pro-rated for periods outside 12 months).
• Balance sheet total not exceeding £316,000.
• Average number of employees not exceeding 10.

For the new Revenue Recognition model there is a limited amount of difference between FRS 102 and FRS 105. This is limited to the transition arrangements and the amount of disclosure.

 The Major Shift: Revenue Recognition

The most significant change lies in how revenue is recognized from contracts. The previous risk and rewards-based approach, often lacking detailed disclosure, is being replaced with a more robust, control-based model. This aligns UK and Irish reporting more closely with international standards like IFRS and US GAAP.

The 5-Step Revenue Recognition Model

The new standard mandates a five-step process for calculating the amount of revenue to be recognised and companies will need to assess the accounting treatment of all but the simplest contracts. Below is a summary of the new requirements:

1. Identify the contract with a customer
   • The model is applied to contracts meeting certain conditions:
     • Both parties approved the contract
     • Rights to goods or services are clearly identified
     • There are clear payment terms
     • The contract has commercial substance, and
     • The customer has the ability and intention to pay the agreed consideration when it’s due
   • There are a couple of additional important points to note when identifying a contract with a customer:
     • A contract does not need to be in written form for it to be applicable for the five-step process. If you’re supplying goods or services and the customer is making predictable payments, then a contract exists.
     • Contracts with the same customer should be combined if:
       • They’re negotiated as a package with a single commercial goal
       • One contracts consideration depends on the other contract: or
       • They form a single performance obligation
2. Identify Separate Performance Obligations
   • By contract inception companies should have identified the performance obligations inherent in the contract. Ideally this will be done during a bid phase, or contract formation.
   • Separate performance obligations exist if the following conditions are met:
     • The customer can benefit from the good or service on its own or in conjunction with other readily available resources; and
     • The entity’s promise to transfer the good/service is separate from other promises
   • A good example of a separate performance obligation is where extended warranty is purchased as an additional service. In this case, as the extended warranty is distinct from the initial delivery and the customer can benefit from it on it’s own it represents a separate performance obligation.
3. Determine the Transaction Price
   • Establish the total amount of consideration the entity expects to receive. Adjustments for the time value of money are made for deferred or advanced payments if certain criteria are met.
   • Importantly, if the consideration includes variable amounts an estimate should be made of the variable element, with the following caveats:
   • Variable consideration is included in the transaction price only if it’s highly probable that the entity will be entitled to the cumulative revenue. For those operating long-term contracts with incentive elements, periodic performance assessment is required to ensure that the accounting treatment of the incentive element is appropriate with the current circumstance.
4. Allocate the Transaction Price
   • The transaction price is allocated to each performance obligation in proportion to the stand-alone selling prices of the goods or services underlying each performance obligation.
5. Recognize Revenue
   • At contract inception companies need to determine whether performance obligations are being satisfied over time or at a point in time
   • Indicators that a performance obligation is satisfied over-time are:
     • The customer simultaneously receives and consumes the benefits provided by the company’s performance as it is performed. Typical examples of this are service based contracts.
     • Performance creates or enhances an asset that the customer controls during performance of the contract. An example of this would be a facility refurbishment contract.
     • Contract performance does not create an asset with alternative use to the company and the company has an enforceable right to payment for performance completed to date. Most Defence contracts fall into this due to the inclusion of termination for convenience clauses that include recovery of reasonable costs incurred to date.
   • Where these indicators aren’t met then revenue should be recognised at a point in time

For performance obligations satisfied over time a measure of progress needs to be applied to calculate the revenue. For long term contracts, often the Cost To Cost methodology is used to measure progress and this makes your Estimate At Completion (EAC) process a critical internal control.

Disclosures

For companies reporting under FRS 102 the following disclosures will generally be required:

• Disaggregation of revenue by economic factors (i.e. goods/services, geography, customer type etc)
• Details of contract balances and movements in those balances
• Information about performance obligations, such as the nature of the performance obligations, and typical payment terms
• The method used to recognise revenue where over time revenue recognition is used
• Explanation of significance of unsatisfied performance obligations and when they’re expected to be satisfied
• Disclosure of contract cost balances and the amount of amortisation and any impairment losses recognised

No disclosure is required for micro-entities reporting under FRS 105.

Transition

Similar to with Disclosures, there are differing requirements for transition arrangements between FRS 102 and FRS 105.

Micro-entities using FRS 105 have a single, simple, mandated method for transitioning to the new standard. Contracts in place on transition date aren’t impacted and the new standard is only applicable for new contracts started after the transition date.

For FRS 102 entities there is a choice between full retrospective approach or a modified retrospective approach:

• Modified Retrospective: the company does not have to restate comparative information and applies the new standard only to contracts not completed by the initial application date. The cumulative effect of initial application is treated as an adjustment to the opening balance of retained earnings at the date of application.
• Full Retrospective: if the company chooses to apply the amendments fully retrospectively then comparatives are restated.

Why This Change Matters

Increased Transparency: The new model enhances the transparency and comparability of financial statements.

Impact on Systems and Processes: Businesses will need to review and potentially modify their accounting systems and processes to comply with the new requirements.

Training and Education: Finance teams, and the business more generally, will need to be trained on the new revenue recognition principles.

How to Prepare

Early Analysis is Key: Commence a thorough analysis of existing contracts and revenue streams during 2025. This will help identify potential challenges and ensure a smooth transition.

Documentation: Maintain comprehensive documentation of the application of the five-step model for audit purposes.

Seek Professional Advice: Consult with your accountant or financial advisor to understand the specific implications for your business.

Actionable Steps for 2025

Review Existing Contracts: Analyze current contracts to identify potential performance obligations and determine how revenue will be recognized under the new model.

Assess System Capabilities: Evaluate whether your accounting software can accommodate the new requirements.

Develop Implementation Plans: Create a detailed plan outlining the steps needed to implement the new standards.

Provide Staff Training: Organize training sessions for finance and sales teams to ensure they understand the new revenue recognition principles.

Perform Dry Runs: Conduct test runs of the new revenue recognition process to identify and resolve any issues.

Conclusion While the 2026 FRS 102/105 updates may seem distant, proactive preparation is essential. By understanding the key changes and taking the necessary steps, businesses can minimize disruption and ensure a seamless transition. Don’t wait until the last minute – begin your preparation now to ensure compliance and maintain financial clarity.