Amendments to FRS 102 – Focus on Section 23 revenue from contracts with customers

The aim of the amendments is to improve comparability between reporting entities and to ensure that more useful information is reported about the nature, amount and timing of revenue and cash flows arising from contracts with customers. These changes may impact the timing and amount of revenue recognised by companies.

Summary of the FRS 102 key changes

Extant Section 23 has been replaced in its entirety with a new Section 23 that is based on the requirements of IFRS 15 Revenue from Contracts with Customers ('IFRS 15').

The amendments introduce a five-step model to be applied to all contracts with customers. This model is based on the core principle that an entity should recognise revenue in a manner that depicts the transfer of control of the promised goods or services to the customer, as follows:

• Step 1: Identify the contract(s) with a customer;
• Step 2: Identify the performance obligations in the contract;
• Step 3: Determine the transaction price;
• Step 4: Allocate the transaction price to the performance obligations in the contract; and
• Step 5: Recognise revenue when (or as) the company satisfies a performance obligation.

Whilst Section 23 is structured as a series of consecutive steps, the elements are interdependent and generally need to be considered as a whole.

This “performance obligation approach” focuses on when control is passed to the customer which compares to the “transfer of risks and rewards” approach under the existing standard.

Section 23 will not distinguish between goods and services but instead includes detailed guidance on when to recognise revenue over time and when to recognise revenue at a point in time. Some entities may find that items for which they previously recognised revenue at a point in time will now be recognised over time, or vice versa.

The amendments include more extensive requirements and guidance than extant Section 23, including areas that were not specifically dealt with previously. These new or revised areas include warranties, non-refundable upfront fees, principal versus agent considerations, customer options for additional goods or services, variable consideration, refund liabilities, repurchase agreements, licensing, and contract costs, along with more prescriptive requirements on how the different elements of customer contracts are combined or disaggregated.

The amendments also include detailed disclosure requirements, which will enhance disclosures around classes of revenue, including how and when revenue is recognised and details surrounding unsatisfied performance obligations. Where significant judgements have been applied to the recognition of revenue, these are expected to be disclosed, for example, in relation to the identification and satisfaction of performance obligations and the allocation of the transaction price.

The standard includes key simplifications compared to the requirements of IFRS 15, which include:

• An accounting policy choice around whether to capitalise the costs to obtain a contract;
• Simplifications for allocating discounts;
• A choice of whether to adjust revenue for the time value of money when consideration is received in advance; and
• Reduced disclosures are reduced compared to IFRS.

Effective date and transition

The amendments are applicable for accounting periods beginning on or after 1 January 2026, with early application permitted, provided all other amendments to FRS 102 are applied at the same time.

On first-time application, there is a choice available to apply the amendments using either:

• A modified retrospective approach; or
• A fully retrospective approach.

Under the modified retrospective approach, the comparative period information is not restated and instead a cumulative “catch-up” adjustment is recognised in retained earnings at the date of initial application.

Under the fully retrospective approach, the amendments are applied for prior periods to the earliest date for which it is practicable.

A number of practical expedients are available under either of these approaches to aid companies on initial application.

Impact of the FRS 102 changes

The amendments are applicable to all FRS 102 reporters, including those reporting under FRS 102 Section 1A Small Entities. The impact for each UK business will vary depending upon the nature and terms of customer contracts and the current revenue recognition policies adopted.

All FRS 102 reporters will need to undertake an assessment to understand the impact of the changes, however, the greatest impact is expected to be seen for those entities with customer contracts that are longer term in nature and span the reporting period end.

The timing of revenue recognition affects the key metrics of companies which may have practical implications, such as impacting the timing of tax payable, an entity’s strength in negotiating contracts or the results for profit-related pay.

Industries that reported a high impact on their financial statements on the adoption of IFRS 15, and which may therefore be similarly impacted by the amendments to Section 23 include:

• Construction;
• Engineering;
• Software;
• Telecoms;
• Media;
• Real estate; and
• Other service activities

Although the amendments do not apply until periods beginning on or after 1 January 2026, companies should use this time to consider the potential impact. The complexity of applying a more prescriptive approach, along with more detailed disclosures, may require updates to existing accounting processes. A detailed analysis of the contracts in place should be performed at an early stage in order to ensure smooth implementation.

How our Accounting advisory professionals can help

The Accounting advisory services team has a significant amount of experience advising clients on the adoption of new and revised accounting standards. This includes detailed contract analysis, supporting with measurement differences, preparing and updating accounting policy manuals, and preparing additional disclosure notes for the first financial statements to which the revised accounting standards are applied.

Get in touch