Accounting periods beginning on or after 1 January 2026 will need to follow the new revenue recognition requirements introduced by the amendments to Section 23 of FRS 102.
These amendments were made to align FRS 102 more closely to the international standard IFRS 15, to improve consistency and comparability, also replacing separate rules for goods, services and construction contracts with a more consistent framework. The aim is to better reflect the economic substance of transactions by determining when control of promised goods or services transfers to the customer.
For many businesses, straightforward “pay at the till” sales may see little or no change from the current accounting treatment.
However, businesses that provide services over time, or bundle multiple goods and services into one sale, may see significant changes to how revenue and balance sheet items are reported.
Now is a good time for businesses to begin reviewing their sales processes and contracts before the new rules take effect.
For some businesses, this may result in revenue being recognised earlier or later than under existing accounting policies.
The New Five-Step Model
The amendments introduce a five-step process to determine what revenue should be recognised and when.
The five stages are:
- identifying the contract with the customer,
- identifying the performance obligations within the contract,
- determining the transaction price,
- allocating the transaction price between obligations, and
- recognising revenue when the obligation is satisfied.
In practice, businesses will need to assess whether goods and services should be bundled together or treated as separate “distinct” promises.
Analysing Customer Contracts Will Be Key
One of the biggest practical challenges under the new rules will be analysing customer contracts properly.
Historically, many businesses have applied revenue recognition policies closely linked to invoicing, payment points, or contractual milestones. Under the amended Section 23 rules, greater emphasis is placed on the contractual promises made to the customer and when those promises are fulfilled.
This means businesses may need to review contracts in more detail than before. The accounting treatment will depend less on how the invoice is presented and more on the commercial substance of the arrangement.
By completing the five-step process businesses can determine when revenue should be recognised and how it should be allocated between the different obligations within the contract.
The first 2 steps can be reviewed now
Right now, businesses can start reviewing the first two steps in preparation for the changes.
Step 1: Identifying the Contract
All sales will need to have a contract identified and its terms analysed. The contract may set these out in a formal written agreement, or it may be an implied contract based on the agreement of the supplier and customer. However, in all cases the following must be determined for the contract to be identified per the new rules:
- the customer and supplier have approved the arrangement and are committed to perform their respective obligations,
- the rights and obligations of both parties regarding the sale can be identified,
- the payment terms can be identified,
- the contract has commercial substance,
- the supplier reasonably expects to collect payment.
The contract must be identified therefore businesses will need to review not only formal contracts, but also how agreements are reached in practice.
Multiple contracts for a single customer may need to be accounted for as a single contract depending on the analysis of the substance of the obligations and rights of the parties.
Step 2: Identify the performance obligations within the contract
Once the contract has been identified distinct performance obligations need to be identified– this should involve determining whether goods or services covered in the contract should be bundled together, or unbundled, to identify separate performance obligations.
Distinct Obligations
When goods or services to be provided are distinct, the contract can include more than one performance obligation. Goods or services are considered separate and distinct if both of the following are met:
- the customer can benefit from the good or service on its own or together with other resources the customer already has,
- the promise to transfer the good or service is separate from other promises in the contract.
Examples of distinct obligations could include:
- certain warranties,
- support or maintenance packages,
- customer options for additional goods or services,
An example of this would be the sale of a mobile phone with airtime included where:
- the delivery of the handset itself is transferred when the customer takes possession,
- while support services or airtime is a separate obligation transferred over the life of the contract.
Note that set up costs or administrative tasks that don’t transfer a good or service are disregarded for the purposes of identifying a distinct obligation.
Ultimately this will result in income being recognised at different times and possibly across multiple accounting periods for the same contract.
Bundled Obligations
Where multiple goods or services being provided are highly interdependent or represent a combined result that the customer has contracted, these should be bundled together and considered as one obligation.
An example of this would be the sale of bespoke software together with installation services that only the developer can provide. This would likely be treated as one contract ‘promise’ because the customer is effectively purchasing one combined outcome — a functioning software system.
Similarly, this may arise in construction contracts. For example, a contract to build a property extension may integrate several stages of work, including structural work, plumbing and electrical installation. Although these activities may appear separate, they could form part of one overall performance obligation where the customer is ultimately contracting for a single combined outcome — the completed extension. In these circumstances, the various elements of the work may need to be bundled together for revenue recognition purposes.
The timing of revenue recognition is considered later in the five-step process, once performance obligations have been identified.
Accounting Treatment May No Longer Follow the Invoice
One important practical issue is that the accounting treatment may no longer follow how invoices are raised.
For example, a business may issue a single invoice covering equipment, installation, support and maintenance, under the new rules, the business will need to split that income across multiple performance obligations and recognise revenue at different times.
Transition Rules – Two Possible Approaches
While the changes take place for accounts starting on or after 1 January 2026, unless your business has opted for earlier adoption, the comparative figures or opening balance figures may need be to be adjusted depending on the transition option taken.
The amended standard provides two transition options for prior-year contracts.
- Full Retrospective Approach
Businesses can fully restate comparative figures as though the new rules had always applied.
- Modified Retrospective Approach
Alternatively, businesses may use a modified retrospective approach, where comparative figures are not fully restated, instead the cumulative effect of the changes is adjusted in the retained earnings opening balance.
Thankfully, for those concerned with additional accounting time, contracts completed before 1 January 2026 generally will not need to be restated.
What Businesses Should Do Now
For some businesses, the accounting impact may be relatively small.
For some businesses — particularly those with long-term contracts or those determined to have bundled sales arrangements — there could be significant changes in their revenue and balance sheet reporting.
This could potentially affect projected income, taxable profits, as well as bonuses and share options based on performance, depending on the business’s circumstances. Balance sheet items, especially deferred income, could increase in some cases. Contracts that weren’t completed in 2025 will need to be analysed according to the new rules. Going forward, bookkeeping systems and management reporting may also need updating.
Therefore, businesses should start reviewing their sales processes now to determine how they will be affected. Closer to implementation management should go over what changes will be made with their accountant.
As with many accounting changes, early planning can help ensure a smooth and orderly transition to the new rules.
If you need assistance or guidance on how the new rules will affect your business and transitioning to the new rules going forward, please email me at zac.marks@fkgb.co.uk to book a free consultation.
