Revised Section 23 was completely rewritten as part of the FRC's Periodic Review 2024. It is effective from 1 January 2026, with early application permitted, and is based on the principles of IFRS 15 rather than being a verbatim copy of it.
For some businesses, the eventual accounting outcome may remain close to previous practice. For others, particularly those with multi-element contracts, variable pricing, long-term services, warranties, contract modifications or principal-versus-agent questions, the analysis can change materially.
The practical challenge is therefore not to assume that “our revenue has always been straightforward”. Management needs to demonstrate that existing policies still produce the correct answer under the new model.
What are the FRS 102 revenue recognition changes?
The revised standard introduces one overarching model for revenue from contracts with customers.
The model asks an entity to:
- identify the contract with the customer;
- identify the performance obligations;
- determine the transaction price;
- allocate that price to the performance obligations; and
- recognise revenue when or as those obligations are satisfied.
Those five steps look simple on paper. The complexity comes from applying them to commercial contracts that were rarely written with accounting terminology in mind.
A single sales agreement may contain a product, installation, after-sales support, a rebate mechanism and a customer option for future services. The accounting question is no longer simply “when was the invoice raised?”
Step 1: identify the contract
Before applying the remaining steps, management needs a contract that satisfies the Section 23 criteria and creates the relevant enforceable rights and obligations.
This puts more emphasis on the substance of customer arrangements, including amendments and linked contracts.
A recurring implementation weakness can arise where accounting is driven from invoice data while the economically important terms sit elsewhere: signed contracts, side letters, customer portals, change orders or established business practices.
Finance therefore needs a route to information that traditionally may have remained in the sales or legal teams.
Step 2: identify the performance obligations
A performance obligation is, broadly, a promise to transfer a distinct good or service.
Some contracts contain only one. Others need to be separated.
Consider a business selling specialist equipment together with installation and two years of support. The correct accounting cannot be decided merely by looking at the invoice headings. Management must assess whether the different promises are distinct under Section 23.
This matters because different performance obligations may be satisfied at different times.
The FRC also identifies warranties, non-refundable upfront fees and customer options for additional goods or services as areas addressed by the revised model.
For businesses with standard-form contracts, a useful implementation approach is to create accounting “contract families”: analyse representative contractual structures carefully, document the conclusion and establish controls to identify non-standard departures.
Step 3: determine the transaction price
Fixed pricing is generally the easy part. Variable consideration is where judgement becomes more significant.
Discounts, refunds, rebates, penalties and performance bonuses can all affect the amount ultimately earned.
FRS 102 requires management first to estimate variable consideration using the expected-value or most-likely-amount approach, depending on which better predicts the outcome. That estimate is then subject to the constraint in Section 23 before it is included in the transaction price.
This creates two practical requirements.
First, finance needs reliable information about the variable terms. A year-end calculation is only as complete as the underlying contract population.
Second, estimates need updating at each reporting date.
Suppose a service provider can earn a bonus for delivering a project before a specified date. Recognising the maximum bonus simply because management currently expects successful delivery would miss the second part of the analysis. The uncertainty and the evidence supporting the amount included in revenue need to be considered under the standard.
Step 4: allocate the transaction price
Where there is more than one performance obligation, the transaction price has to be allocated appropriately.
This becomes particularly relevant where commercial pricing bundles different goods or services together or where one element is heavily discounted.
The accounting allocation and the customer's invoice allocation are not necessarily the same thing.
Businesses may therefore need information on stand-alone selling prices that their existing finance systems were never designed to retain.
That is a good example of why revenue implementation is partly a data project rather than solely an accounting-policy exercise.
Step 5: recognise revenue as obligations are satisfied
The final question is when control of the promised good or service passes to the customer.
Depending on the relevant criteria, a performance obligation may be satisfied over time or at a point in time.
This is especially important for businesses historically using work-in-progress calculations or percentage-completion approaches. The fact that an engagement lasts several months does not, by itself, determine the accounting.
Where revenue is recognised over time, management also needs an appropriate method of measuring progress.
The method should faithfully depict performance, and the underlying data may require significantly more control than a simple invoice-based revenue process.
Principal versus agent: gross revenue or net revenue?
For platform businesses, intermediaries and arrangements involving third parties, another important judgement is whether the entity is acting as principal or agent.
The FRC explains that the assessment focuses on whether the entity controls the specified good or service before it is transferred. A principal generally recognises the gross consideration as revenue; an agent generally recognises its fee or commission.
This can dramatically affect reported turnover without necessarily changing gross profit or cash.
It can also have knock-on consequences for:
- company-size thresholds
- revenue-based covenants
- management KPIs
- sector comparisons; and
- contractual fee calculations.
A principal-versus-agent conclusion should therefore be based on contractual and commercial substance, not on the presentation management would prefer.
Contract assets and contract liabilities
The new terminology may also change how revenue-related balances are explained and presented.
Where an entity's right to consideration depends on something other than simply the passage of time, the resulting position may be a contract asset rather than an ordinary trade receivable. Conversely, consideration received or due before the corresponding performance can give rise to a contract liability.
This matters operationally because finance systems frequently organise balances according to invoicing rather than performance obligations.
A business can have perfectly accurate sales invoices and still have an incorrect revenue cut-off.
Transition needs an accounting-policy decision
Unlike the revised lease requirements, the revenue transition provisions can permit different approaches.
The FRC explains that preparers can apply a fully retrospective approach, involving relevant comparative restatement, or a modified retrospective approach. Consequently, users may encounter 2026 financial statements in which comparatives have or have not been restated depending on the entity's transition choice.
Management should make that decision early enough to identify the data required.
Waiting until the first 2026 year-end is particularly risky if the chosen approach requires information that was not captured contemporaneously.
What this means in practice
A sensible revenue implementation programme starts with contracts, not journals.
Finance teams should consider:
Contract populations. What are the principal commercial revenue streams and contractual variants?
Non-standard terms. Who tells finance when sales teams negotiate unusual rebates, milestones or termination provisions?
Estimates. Which transaction-price inputs depend on forecasts or judgement?
Systems. Can the ledger or billing platform track revenue separately from invoicing where necessary?
Contract modifications. Is there a process to identify change orders and revised scope?
Accounting documentation. Have significant contract types been analysed against all five steps?
Disclosure data. Can the required financial statement information be produced reliably?
The strongest implementation does not require a bespoke technical paper for every routine customer invoice. It requires a proportionate framework that identifies where contracts differ and where judgement can affect the outcome.
Audit perspective
Auditors may focus on areas where management's commercial incentives and accounting judgements intersect.
That can include:
- completeness of significant contract terms
- identification of performance obligations
- variable consideration
- estimates of progress
- principal-versus-agent conclusions
- unusual contract modifications
- revenue cut-off
- contract assets
- manual spreadsheet calculations; and
- consistency between accounting policies and actual contract treatment.
Where revenue depends heavily on operational information, for example project completion data, the audit trail should normally extend beyond a finance spreadsheet to the evidence supporting those operational inputs.
Retrospective comparison can also be useful. If management historically estimated bonuses, rebates or completion percentages, comparing prior estimates with actual outcomes can identify systematic optimism or weaknesses in the estimation process.
What should businesses do now?
- Map revenue streams to contractual models rather than assuming one policy works for every sale.
- Analyse the five steps for significant contract types and document the conclusions.
- Identify variable consideration early and establish who owns the underlying estimates.
- Review principal-versus-agent arrangements, particularly where third parties deliver goods or services.
- Assess system and data gaps, including contract assets, deferred income and progress information.
- Choose and document the transition approach before year-end.
- Discuss material judgement areas with the auditor early, particularly where historic accounting may change.
Conclusion
The FRS 102 revenue recognition changes in 2026 create a more disciplined connection between contractual promises, commercial performance and reported revenue.
For many businesses, the biggest risk is not misunderstanding the five-step model in theory. It is failing to identify the contract terms, estimates and operational data that determine how the model applies in practice.
Frequently asked questions
When do the new FRS 102 revenue rules apply?
The revised Section 23 is effective from 1 January 2026, with early application permitted.
Is revised FRS 102 Section 23 the same as IFRS 15?
No. It is based on IFRS 15 principles, but FRS 102 contains proportionate adaptations.
Does every contract have multiple performance obligations?
No. Many contracts will have one. Separate accounting becomes relevant where promises meet the criteria to be distinct.
Can invoice date determine when revenue is recognised?
Not by itself. Recognition follows satisfaction of performance obligations under Section 23.
Can 2025 comparatives be restated?
Depending on the permitted transition method chosen, revenue comparatives may or may not be restated.
Technical verification notes
Industry-specific contractual arrangements should be checked against the detailed requirements of Section 23 rather than relying solely on general examples.
Primary authority: FRC FRS 102 Factsheet 10, Revenue from Contracts with Customers · FRC FRS 102 resources