Significant amendments to FRS 102 from the 2024 Periodic Review take effect for accounting periods beginning on or after 1 January 2026. One of the most notable updates is the shift to an IFRS‑aligned framework for revenue recognition – a change that will reshape how many organisations measure and report income.
While early adoption is permitted, the scale of the changes means businesses should start preparing now to ensure systems, processes and disclosures are ready.
Section 23 has been substantively revised, replacing the long‑used “risks and rewards” approach with a five‑step model aligned to IFRS 15. The emphasis moves to recognising revenue as control transfers to the customer.
For many entities, this may mean a material shift in revenue timing. Income that was previously recognised at a point in time may now need to be recognised over a contract period, while others may see the opposite effect.
These changes apply to all entities using FRS 102, including small entities under Section 1A and micro‑entities applying FRS 105. Organisations can adopt either full retrospective application or a modified retrospective application approach with an adjustment to opening reserves.
Sectors involving long‑term contracts or multi‑element service arrangements are expected to see the most significant impact, including:
That said, no entity is untouched. Even straightforward revenue streams will require a review of contract terms, system capabilities and accounting policies.
To illustrate how the revised model may play out in practice, here are examples of how the changes could affect different industries:
margins may appear more uneven or “bumpy” from period to period – even where the anticipated overall profit for the contract is unchanged. This has implications for WIP reporting, project dashboards, covenant headroom, and bonus schemes. Construction finance teams should prioritise contract reviews, cost‑capture processes and project reporting in their transition plans.
Software and technology businesses often use subscription models or sell bundled offerings, meaning the revised model could significantly affect how revenue is split and when it is recognised.
revenue patterns may shift, particularly where hybrid or multi‑element contracts are involved. This may affect internal KPIs, sales incentives, ARR reporting and investor communications.
Media, creative and professional services businesses typically deliver project‑based or retainer‑based services, which are directly impacted by the five‑step model.
revenue may become less linear across a project, affecting forecasting, resource planning and management reporting.
To prepare for the transition, organisations should begin by:
Identify distinct performance obligations and whether each should be recognised over time or at a point in time.
Ensure accounting software and processes can track performance obligations, contract assets and contract liabilities, including allocations across multi‑element contracts.
Model how changes in revenue timing could influence EBITDA, profit‑related pay, bank covenants, credit ratings and the timing of tax liabilities – and consider the communications needed for boards, lenders and investors.
Revenue recognition is already one of the highest‑risk areas in audit, and the revised requirements heighten this risk. Auditors will need to:
Expect closer scrutiny and more robust audit files, especially where income streams are complex.
The transition to the revised FRS 102 framework is a significant change for all stakeholders. Starting early – by evaluating contracts, updating systems and modelling financial effects – will help organisations minimise disruption and approach the change with confidence.
If you would like tailored support in assessing how these changes may affect your organisation, our teams would be happy to help.
