FRS 102: Amendments to revenue accounting: where should you start?

Overview of the changes

The revisions to Section 23 Revenue from Contracts with Customers introduce a new revenue model based on a comprehensive ‘five-step’ approach. This may mean changes in the timing and profile of revenue recognition for many entities. The new model is a more detailed and prescriptive approach to accounting for revenue and is largely aligned with the principles of IFRS 15 Revenue from Contracts with Customers.

In some areas the changes are very significant, so all entities will need to consider the requirements in detail to facilitate careful planning, both for reporting and commercial purposes.

Revenue will now be recognised by a vendor when, or as, control over the goods or services is transferred to the customer. In contrast, the previous Section 23 was based on an analysis of the transfer of risks and rewards (which now is only one of the criteria for determining whether control has transferred).

New Section 23 sets out prescriptive requirements on several areas, including:

Whether revenue is recognised over time or at a point in time
How to account for contract modifications
Bundling’ or ‘de-bundling’ of services
Treatment of variable consideration, including payments to customers.

Where should you start?

The effective date for the Revenue amendments is 1 January 2026, with early adoption permitted. This is no longer a future issue, and there’s potentially a lot to do ahead of first implementation. FRS 102 preparers are encouraged to start planning. The earlier entities begin to understand what impact the new standard may have on your entity, the better prepared they will be to address issues and to reduce implementation costs and compliance risks.

Entities should consider the following:

Impact assessment - Perform an impact assessment to understand the qualitative and quantitative impacts of the amendments
Training - Train the finance team on the new revenue accounting requirements and judgements involved
Assess contracts - Catalogue revenue contracts in accordance with the five-step model (discussed further below) and develop compliant accounting policies
IT System - Assess capabilities of the current system(s) and the ability to handle new data requirements. Given the nature of the revenue amendments, some entities may need to make significant changes to their accounting systems. For example, do systems adequately analyse separate goods and services delivered together where these may now be subject to different recognition profiles
Processes and controls - Design and implement revised processes and enhanced controls to ensure compliance
Transition approach – Assess the practical implications (discussed further below) of each approach available under the amendments as this will affect data needs on date of initial application

Overview of 5 step model

Understanding the five-step revenue model is crucial to implementing the amendments to FRS 102. Entities will need to apply the model to each of their revenue streams to determine the timing and amount of revenue recognition.

The five steps can be summarised as follows:

Step 1: Identify the contract - This involves looking at all aspects of the customer relationships, including explicit and implicit contractual terms. Separate contracts may need to be combined for accounting purposes while others may need to be disaggregated, with some terms considered under the revenue model and other terms under other sections of FRS 102
Step 2: Identify performance obligations - Previously an entity would apply the recognition criteria to separate 'components', which led to diversity in practice as there was limited guidance as to what a ‘component’ is. Under the revised Section 23, detailed guidance is provided regarding what constitutes a separate performance obligation
Step 3: Determine the total transaction price – Entities should consider new guidance on issues like variable consideration and sales with a right of return
Step 4: Allocate the transaction price - The total transaction price (as determined in step 3) should be allocated to each performance obligation identified (as determined in step 2)
Step 5: Recognise revenue – Entities will need to determine whether each performance obligation is transferred over time or at a point in time to determine when to recognise revenue. For revenue to be recognised over time, certain criteria must be met. If not, revenue will be recognised at a point in time when control passes to the customer.

Transitioning to the new Revenue model

Entities have a choice of either:

1. Full retrospective application - Restate comparatives with the detailed effects of the adjustments presented for the immediate prior period or
2. Modified retrospective application – Comparatives are not restated and any cumulative effect of initially applying the amendments is presented as an adjustment to opening balances at the start of the current year.

If option 2 is chosen, the entity will be required to disclose the effect of the revisions on profit or loss for the current period, as opposed to the usual disclosures required when an accounting policy is changed (which focuses on the effect on prior periods).

The standard also provides practical expedients that allow for the use of hindsight for variable consideration and contract modifications.

Transition approaches - practical implications

FRS 102 preparers need to give due thought and consideration in choosing a transition approach. Some of the practical considerations include:

Systems and data collection – Under the full retrospective approach entities must identify and reassess all contracts (including completed and ongoing) from the earliest comparative period. This will require access to and analysis of historical contract data. Under the Modified retrospective approach, only active contracts at transition date need to be assessed – completed contracts will remain under the old rules. Sectors with long-term contracts (eg. construction or telecoms) may face greater challenges under the full retrospective approach due to the historical data demand.
Comparability and impact on trend analysis – Restated comparatives under the full retrospective approach alter historical financial results, providing more consistent information for trend analysis going forward (eg. revenue growth). Under the modified retrospective approach, there will be a cumulative adjustment to the opening balance, reducing consistency between the two years presented and delaying the accumulation of trend analysis under the revised requirements.
Stakeholders – The full retrospective approach provides additional information for users of the financial statements, providing greater context for the current year performance.

Recommendations for navigating the amendments

Entities may wish to consider the following:

Engage with auditors early to discuss transition plans and align methodology, documentation requirements and timing
Communicate the chosen transition approach to stakeholders proactively and highlight the implications thereof. Update the relevant governance bodies on progress and associated risks as they arise
Maintain clear records of judgements (e.g. estimating variable consideration) as this will support both transition methods
Adopt a cross-functional project team involving stakeholders from finance, operations, IT and legal to address the interdependencies of implementing the five-step model. Consider engaging external advisors on complex areas
Draft disclosure templates early and test disclosures using the current data to identify gaps in data requirement.

The adoption of the amendments will require months of preparation. An early start will minimise disruption and ensure compliance. Entities should not think of this as a project for the finance team alone as a cross-functional approach is essential to promote a successful implementation.

If you would like to discuss how the amendments might impact your business and how BDO can help support your business through the transition to the new standard, please get in touch with Financial Reporting Advisory Partner Frederic Larquetoux or your usual BDO contact.