For accounting periods beginning on or after 1 January 2026, significant amendments to UK Generally Accepted Accounting Practice (UK GAAP) are coming relating to revenue recognition. Below we explore what these changes are, their potential impact on your organisation, and the actions you should consider taking.

What are the changes?

The revised FRS 102 and FRS 105 introduces a new approach to revenue recognition that aligns more closely with when control of goods or services is transferred to customers. Under the new rules, revenue will be recognised based on the satisfaction of distinct performance obligations within a contract rather than simply when risks and rewards pass, as was done previously. The new rule introduces 5 step model to assess a contract with customers to determine when to recognise revenue, and at what amount. The 5 steps involves:

  1. Identifying the contract(s) with a customer
  2. Identifying all the separate performance obligations in the contract.
  3. Determining the transaction price
  4. Allocating the transaction price to each performance obligations in the contract.
  5. Recognising revenue when (or as) each performance obligation is satisfied.

While there are simplified methods available for less complex transactions and micro entities, these changes are expected to affect most revenue contracts, altering both the timing and amount of revenue reported.

Here is an example to explain the impact of this change - Imagine a tech company offers a cloud platform subscription for £1,200 per year, which includes a one-time £200 setup service. Under the old revenue model, the company might have recognised £100 in revenue each month across the year. Under the revised rules, the £200 setup fee is recognised upfront once the service is delivered, while the remaining £1,000 is recognised evenly over the 12-month subscription period for platform access.

What could be the impact of this?

The new revenue standard may not only affect when and how much revenue is reported, but could have broader consequential impacts on your business, including:

  • Increased or re-timed revenue recognition might push some organisations past audit thresholds, possibly triggering the need for a full audit.
  • Adjustments in revenue recognition could influence critical ratios and metrics, such as EBIT and EBITDA, that are closely monitored by lenders and investors.
  • Contract modifications. Existing contracts may need to be reviewed to ensure revenue is measured and disclosed consistently under the new standard.
  • Enhanced disclosures about revenue policies, judgements made, and the financial effect of applying the new standard during the transition year.

The standard offers two transition methods for this amendment - the modified retrospective approach and the full retrospective approach. The modified retrospective approach is simpler as it doesn’t require restating comparatives, and companies can adjust their opening balances to reflect the new requirements. This makes the transition process more manageable and allows companies to focus on how revenue will be recognized in the future. Most companies are expected to adopt this approach unless they are part of an IFRS reporting group or decide otherwise.

When should I act?

Given the potential impact of these changes, it’s important to act early to ensure a smooth transition. We recommend that companies start evaluating their revenue contracts now. Key steps include:

  • Identify all revenue-generating contracts and assess the performance obligations, transaction pricing, and any variable consideration elements. Understand how the new requirements will affect your balance sheet and profit and loss account.
  • Evaluate your current revenue recognition systems on whether it can handle the new requirements and consider upgrading software if necessary.
  • Communicate with auditors, lenders, and other key stakeholders to discuss the expected changes and their impact on financial reporting.
  • Ensure your finance teams understand the new requirements so that the transition can be managed effectively.
  • Assess any potential tax impacts and adjust your planning accordingly. For example, review how changes in revenue recognition timing and amounts may affect taxable income and deferred tax liabilities, and collaborate with your tax advisors to update your tax forecasts and deferred tax schedules.
  • Incorporate the new requirements when drafting new customer contracts or modifying existing ones to ensure that all terms and conditions clearly align with the updated standards.

By taking proactive steps now, your organisation can mitigate risks and ensure a seamless transition to the new revenue recognition model under FRS 102 and FRS 105.