Revenue recognition is the set of rules deciding when a sale counts as revenue and how much is recorded. For UK companies using FRS 102, the revised Section 23 now applies a five-step model taken from IFRS 15, for accounting periods beginning on or after 1 January 2026. Revenue is recognised when, or as, control of goods or services passes to the customer, at the amount the business expects to be entitled to.
For a company with a December year end, the year to 31 December 2026 is the first under the new rules. Many businesses will see no change. Those with bundled contracts, long projects, subscriptions, rebates or licences may find revenue moving between years.
What changed in FRS 102
The FRC's Periodic Review 2024 amendments, issued in March 2024, replaced the old Section 23, which was based on IAS 11 and IAS 18, "entirely" with a new Section 23 Revenue from Contracts with Customers. The old section described separate rules for sales of goods, services and construction contracts. The new one applies a single model to all contracts with customers, except leases, insurance contracts within FRS 103, and financial instruments.
The FRC set out to keep the model "proportionate". Section 23 is drafted to be simpler than IFRS 15, but a company can choose accounting policies that satisfy both, which helps UK subsidiaries of IFRS groups.
The five steps
- Step 1: identify the contract. The model applies only when the contract is approved, rights and payment terms can be identified, it has commercial substance and it is probable that the customer will pay;
- Step 2: identify the performance obligations. Each promise to transfer a distinct good or service, or a series of substantially similar ones, is a separate performance obligation;
- Step 3: determine the transaction price. This is the consideration expected, including estimates of variable amounts such as discounts, rebates, refunds or performance bonuses;
- Step 4: allocate the price. Split the price across the performance obligations in proportion to their stand-alone selling prices;
- Step 5: recognise revenue. Recognise revenue when, or as, each performance obligation is satisfied.
Over time or at a point in time
Step 5 is where most judgement sits. Under paragraph 23.81, a performance obligation is satisfied over time if any one of three tests is met:
- The customer consumes the benefit as you perform. Routine services such as cleaning, or freight logistics;
- The customer controls the asset as it is created. For example, a construction contract where the customer controls the work in progress;
- No alternative use, plus a right to payment. The asset has no alternative use to you, and you have an enforceable right to payment for work completed to date.
If none applies, revenue is recognised at the point control passes, usually on delivery, but sometimes later where there are acceptance clauses or consignment arrangements. Bespoke manufacturing is the area to watch. A contract that passes the third test can move revenue forward from delivery to the period in which the work is done.
Worked example: equipment with a service contract
A supplier sells a machine with 12 months' servicing for a single price of £50,000. Sold separately, the machine would cost £45,000 and the servicing £10,000, so the stand-alone selling prices total £55,000 and the customer has received a £5,000 discount.
| Performance obligation | Stand-alone price | Allocated price | When recognised |
|---|---|---|---|
| Machine | £45,000 | £40,909 | On delivery (point in time) |
| Servicing | £10,000 | £9,091 | Over 12 months, about £758 a month |
| Total | £55,000 | £50,000 |
The discount is spread in proportion to stand-alone prices (£50,000 × 45/55 and × 10/55). If the supplier had booked all £50,000 on delivery, it would have overstated revenue in the delivery period by £9,091 less whatever servicing had been provided. Unearned servicing sits on the balance sheet as a contract liability until it is performed.
FRS 102 versus IFRS 15
Because the model is the same, most transactions give the same answer under both. The FRC's main simplifications are:
- Payments in advance. FRS 102 permits, but does not require, an adjustment for the time value of money when a customer pays upfront (paragraph 23.59);
- Allocating discounts and variable consideration. Section 23 merges the rules into one requirement with more flexibility (paragraph 23.74);
- Costs to obtain a contract. Capitalising costs such as sales commission is an accounting policy choice under FRS 102 (paragraph 23.113);
- Disclosures. They are based on the IASB's lighter draft for the IFRS for SMEs Standard rather than on IFRS 15.
Where payment is deferred beyond normal business terms, FRS 102 does require the financing element to be separated, though no adjustment is needed if payment is expected within 12 months of transfer. Our guide to IFRS 15 covers the full standard for groups reporting under IFRS.
Transition
Companies can apply the revised Section 23 either fully retrospectively, restating comparatives, or with the cumulative effect taken to opening retained earnings at the date of first application. Under the second route comparatives are not restated, and only contracts not yet completed at that date are brought into the new model. That route also requires disclosure of how the new section has affected revenue and profit in the first year.
Micro-entities are not exempt from the change in thinking. FRS 105 also moves to a five-step model in its revised Section 18 from the same date, applied only to contracts that begin after the change. For an overview of which standard applies to whom, see our guide to UK GAAP, and our lease accounting guide covers the other big 2026 change.
Getting ready
The practical starting point is a review of contract types: which ones bundle goods with services, carry rebates or return rights, or run across a year end. Those are where the five steps can change the answer. Our FRS 102 accounts and financial reporting teams help companies assess the impact, update policies and prepare the first-year disclosures.