FRS 102 revenue recognition: a new framework for assessing revenue

One of the biggest updates to FRS 102 in recent years is now in effect, with the new requirements applying to accounting periods beginning on or after 1 January 2026. While some businesses may see only modest changes, others could experience a significant impact on their financial statements, disclosures and reporting processes.

The three key areas of reform are:
•    Revenue recognition
•    Lease accounting
•    Small company disclosures

One of the most significant changes under the revised FRS 102 is the introduction of a new revenue recognition model, more closely aligned with International Financial Reporting  Standards. 

While most businesses will continue to recognise revenue at the same point as before, it will change for some, and the process for reaching that conclusion will be very different for all. 

The five-step model

Businesses now need to assess revenue using a structured five-step approach:
1.    Identify the contract with the customer.
2.    Identify the performance obligations.
3.    Determine the transaction price.
4.    Allocate the transaction price to the performance obligations.
5.    Recognise revenue when or as performance obligations are satisfied.

The key change is the increased emphasis on identifying distinct performance obligations within a contract. This means a business may need to account separately for goods and services that were previously treated as a single revenue stream.

Who could be most affected?

Businesses that may face greater complexity include those with:

• Contracts that bundle several goods and services
• Contracts that are delivered over a period of time 
• Intellectual property licences 
• Frequent or significant contract modifications

However, the reality is that every business will need to get to grips with the new requirements. Because the standard is both prescriptive and nuanced, even a minor or previously overlooked contract term could have a surprising effect on revenue recognition. Businesses can no longer rely solely on experience or judgement to "just know" when revenue should be recognised.

For some businesses, the new rules will change when revenue is recognised, potentially affecting reported profits and key performance measures.

Practical advice

Businesses should:

• Review their revenue streams
• Assess contracts against the new five-step framework
• Identify areas requiring judgement
• Discuss their conclusions with advisers and auditors as early as possible

The message is clear: don't panic, but don't leave preparation until year-end.

Need help?

Understanding how the new revenue recognition rules affect your business is an important part of preparing for the revised FRS 102 requirements.

In a recent episode of Larking Gowen Insights, I discussed the changes in more detail with James Nichols. You can find the episode wherever you get your podcasts, watch our conversation on YouTube or click below to listen now.

If you'd like to discuss how the changes could affect your business, we're here to help.

Get in touch with your usual Larking Gowen contact or email enquiry@larking-gowen.co.uk

Chris Yeates | Director in our Corporate Audit and Advisory team | Norwich, Norfolk