FRS 102: changes are coming; are you ready? | Section 23: Revenue

On 27 March 2024, the FRC released The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review 2024 (FRS 102 (2024)).

The key accounting changes bring closer alignment with International Financial Reporting Standards (IFRS). These are a new lease accounting model (Section 20 Leases) and a new revenue recognition model (Section 23 Revenue from Contracts with Customers), although there are also increased disclosure requirements for smaller entities also.

These new requirements are effective for accounting periods beginning on or after 1 January 2026.

Impact

The amendments to FRS 102 Section 23 (Revenue from Contracts with Customers) introduces a 5-step revenue recognition model. This model is based on the requirements of IFRS 15. This is an entirely new revenue recognition model which may result in significant differences to the way in which an entity recognises revenue in its financial statements compared to previous periods.

Changes in revenue recognition can present a number of challenges and unanticipated consequences. Some of these impacts and challenges include:

• The involvement of significant judgements and estimates
• Impact on the timing of revenue recognition may impact on an entity’s key performance measures
• Impact on the level of profits available for distribution
• Lack of comparability in an entity’s financial statements

It is important that entities begin to analyse their contracts with customers now so that any changes to revenue recognition are understood and that stakeholders have an understanding of the impact that these changes will have on the entity’s financial statements.

Next steps

The adoption of Section 23 requires careful preparation and should not be thought of as simply a finance project. Understanding the contract, the performance conditions and the transaction price is likely to need input from multiple teams.

Some next steps could include:

• Understanding who holds your contracts.
• Reviewing your contracts in detail to understand the performance obligations within the contracts.
• Reviewing your contracts in detail to understand the components of the transaction price, including variable consideration, refunds, customer loyalty schemes.
• Considering where your IT systems capable of collecting the information. For example where the input method is used to assess the completeness of an ongoing contract consider whether your IT systems are capable of capturing the data needed to assess this.
• Decide which transition method you are going to apply and from which date you will need to analyse your contracts.
• Communicate your transition plan to stakeholders and highlight the implications therefore.
• Engage with your auditors early to discuss your transition approach, methodology and any significant judgements or estimates that may have been made.

Access our full guide