For accounting periods beginning on or after 1 January 2026, amendments to FRS 102 (1A) introduce a revised approach to revenue recognition. The changes are intended to align UK GAAP more closely with IFRS 15. They provide a more consistent framework for recognising revenue from customer contracts.
Although the concepts are not entirely new, many businesses will need to revisit how their contracts are structured, how revenue is split between different elements, and when that revenue is recognised. This is relevant where contracts include setup activities, bundled services or usage-based charges.
The Five-Step Model
The revised standard introduces a mandatory five-step revenue recognition model:
- Identify the contract with the customer.
- Identify the performance obligations in the contract.
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognise revenue when or as the performance obligations are satisfied
Revenue is recognised either over time or at a point in time, depending on when control of the goods or services transfers to the customer.
Example 1: Setup Required to Provide Ongoing Access
An entity enters a 12-month contract that includes a one-off setup and configuration service together with ongoing access to an online platform.
The setup activity is required for the customer to access and use the platform and does not provide any stand-alone benefit. As the customer cannot benefit from the setup without the ongoing access, the setup and access are not distinct and together form a single performance obligation.
The total contract price is £16,000, comprising £4,000 for setup and £12,000 for ongoing access. Although these amounts may be invoiced separately, the accounting treatment is driven by the substance of the arrangement, not the billing structure.
As the combined service is satisfied over time, the full £16,000 is recognised evenly over the 12-month contract period. No revenue is recognised when the setup is completed. This often differs from previous approaches where setup fees were recognised immediately.
Example 2: Usage-Based Revenue from API Data Pulls
An entity provides customers with access to an online platform that allows data to be retrieved through API calls. Customers enter 12-month contracts starting on 1 January 2026.
Under the contract, the entity provides continuous platform access and processes API data pulls as requested. Pricing includes a fixed platform access fee of £500 per month and a variable usage charge of £0.10 per API call, billed monthly in arrears, with no minimum usage commitment.
The promise to the customer is to provide ongoing access to, and processing through, the platform. Platform access and API processing are highly interrelated and are treated as a single performance obligation.
The transaction price includes fixed consideration and variable consideration based on customer usage. Variable consideration is included only to the extent it is highly probable that a significant revenue reversal will not occur. In practice, where invoicing reflects actual usage in the period, revenue will usually be recognised as the API calls are processed.
The fixed access fee is recognised over time, while usage-based revenue is recognised in the period the service is delivered.
Transition Options
Entities can adopt the amendments using either:
- Full retrospective application, with comparatives restated, or
- Modified retrospective (cumulative catch-up) application, where comparatives are not restated and the cumulative impact is adjusted through opening balances in the year of adoption
The choice of approach can have a material impact and should be considered carefully.
Disclosure Requirements
Although small entities applying FRS 102 Section 1A are exempt from some of the more detailed disclosures required of larger entities applying full FRS 102, they must still provide sufficient information to help users understand their revenue recognition policies and patterns.
Small entities must disclose their accounting policy for revenue recognition, this may include:
- When revenue is recognised (e.g. point in time vs over time);
- Basis of measurement (e.g. fair value of consideration received or receivable); and
- Any significant judgements made in applying revenue policies.
The accounting policy note should also provide information about its performance obligations in contracts with customers, including a description of when the entity typically satisfies its performance obligations
Final Thoughts
The changes to FRS 102 (1A) place greater emphasis on understanding performance obligations and aligning revenue recognition with when value is delivered to the customer. Reviewing contracts and revenue policies early will be key ahead of the effective date.
