FRS 102: THE SMALL PRINT
FRED 82 brings some big changes, especially around revenue recognition and lease accounting. But it’s not just these areas, there are other important updates to FRS 102 that are worth highlighting too. Let’s take a look.
REVENUE RECOGNITION REVAMP
UK GAAP’s changes to revenue recognition now align more closely with IFRS 15, introducing the five-step model. This update means many businesses will need to reassess how they account for revenue, especially for com
What’s Changing with Revenue Recognition Under UK GAAP?
The latest update to Section 23 brings UK GAAP closer to IFRS 15, which means we’re now using the five-step revenue recognition model, with a few simplifications.
For most businesses, this means a reassessment of how revenue contracts are accounted for, especially when they’re more complex. Think bundles of goods and services, variable considerations, warranties, customer options, or significant financing components.
If you’re applying the updated Section 23 for the first time, you’ll also want to take another look at how you’re handling principal vs agent decisions, plus how and when revenue is recognised ‘over time.’
What’s the five-step revenue model?
We’ve broken down the five steps for you below.
At first, the five-step model might seem pretty simple, but the real challenges often hide in the finer details. Join us for a virtual training webinar where we will dive into these nuances and explore them in more depth.
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THE STEPS EXPLAINED:
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The 5-step model is applied to contracts meeting certain conditions:
- Both parties approved the contract.
- Rights to goods or services are clearly identified.
- There are clear payment terms.
- The contract has commercial substance; and
- The customer has the ability and intention to pay the agreed consideration when it is due.
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At the beginning of a contract, an entity should identify the performance obligations in the contract.
A performance obligation is a promise to transfer a distinct good or service, or a series of distinct goods or services.
A good or service is distinct if both of he following criteria are met:
- The customer can benefit from the good or services on its own or in conjunction with other readily available resources; and
- The entity’s promise to transfer the good/service is separate from other promises.
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The transaction price is the amount of consideration to which the entity expects to be entitled, excluding amounts collected on behalf of third parties.
Adjustments for time value of money are made for deferred or advanced payments.
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The transaction price is allocated to each performance obligation in proportion to the stand-alone selling prices of the goods/services underlying each performance obligation.
The stand-alone selling prices are based on observable prices or suitable estimation methods, such as an adjusted market assessment, expected cost plus margin, and a residual approach.
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An entity should determine at contract inception whether a performance obligation is satisfied over time or at a point in time.
If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time.
The point in time for revenue recognition is determined by assessing when control of the asset passes to the customer. Control indicators in paragraph 23.85 may be considered in assessing when control passes to the customer.
HOW WILL THESE CHANGES AFFECT YOUR FINANCIAL STATEMENTS?
KEY CHANGES IN REVENUE RECOGNITION AND WHAT YOU NEED TO DISCLOSE
The timing of revenue recognition might change, which could affect tax payments, available profits for distribution, and key performance indicators.
Here’s a quick look at the main disclosures required in your financial statements:
- Revenue Breakdown: You’ll need to provide detailed info on revenue from customer contracts, including: Revenue split by economic factors (like types of goods/services, markets, customer types, transfer timing, and agent/principal). Clear details on contract balances and movements.
Performance Obligations: You’ll need to disclose the nature of these obligations, when they’re satisfied, and typical payment terms.
Over Time Recognition: If your revenue is recognized over time, you’ll need to explain the methods used.
Unfinished Business: Provide both quantitative and qualitative info about any unsatisfied performance obligations and when they’re expected to be fulfilled.
Contract Costs: You’ll also need to disclose balances, including any amortization or impairment losses.
WHAT YOU CAN BE DOING NOW
Although the changes to FRS 102 won’t kick in until periods starting on or after 1 January 2026, it’s a good idea to start assessing their impact on your financial statements now.
Here are some practical tips to get ahead:
Review Your Sales Contracts: Take stock of the different types of sales contracts you have in place.
Revisit Customer Contracts: Understand how the new revenue standard could affect the terms of your current contracts.
Consider Future Contracts: Think about whether the upcoming changes to FRS 102 will require new contractual terms for future sales.
Understand the Impact on Key Metrics: The five-step model could affect tax payments, profits available for distribution, and key performance indicators in business agreements like lending covenants, earn-outs, and performance-related pay. The earlier you identify potential impacts, the more time you’ll have to take action and communicate effectively with stakeholders.
Starting this process now will help you stay ahead of the game and make sure everything is in place when the changes come into effect.
Learn More
UNDERSTANDING FRED 82
Big changes are coming to financial reporting, and FRED 82 is leading the way. We get that compliance can feel like a headache, but getting ahead now will save you a world of hassle later.
LEASE ACCOUNTING OVERHAUL
Big changes are coming for lessees. The FRC’s latest update to FRS 102 brings lease accounting in line with international standards, meaning most leases will now need to be recognised on the balance sheet.
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