From 1 January 2026, updates to FRS 102 revenue recognition will introduce key changes to how businesses report income.

These updates aim to align UK accounting standards more closely with IFRS 15, ensuring a more consistent, transparent, and principle-based approach to recognising revenue.

For businesses, these changes will directly impact how and when revenue is reported, particularly for those with long-term contracts, upfront payments, and performance-based pricing models.

What’s changing?

Under current UK GAAP, revenue is typically recognised when a business delivers goods or services, often at the point of sale or invoice issuance.

However, under the new FRS 102 rules, revenue must be recognised based on the performance of obligations under a contract.

This means businesses must:

✔ Identify separate performance obligations within contracts.

✔ Allocate transaction prices based on standalone selling prices.

✔ Recognise revenue when control transfers to the customer—not simply when invoiced.

Transitional adjustments for revenue recognition

The adoption of the revised FRS 102 revenue recognition rules may require transitional adjustments, particularly for businesses that previously applied different methods for recording revenue.

Companies will need to carefully assess whether retrospective application of the new rules affects historical financial statements.

In some cases, businesses may opt for a modified retrospective approach to simplify implementation.

Key transitional considerations

• Reassessment of revenue contracts – Businesses must review current customer agreements and revenue streams to determine how they should be accounted for under the new standard.
• Initial recognition of revenue – Companies transitioning from legacy revenue methods will need to evaluate how to recognise revenue in accordance with the revised principles.
• Restatement of financial statements – Depending on the transition approach selected, businesses may need to adjust prior-year revenue figures to reflect the new accounting model.
• Deferred tax adjustments – The application of new revenue recognition rules may create temporary differences, requiring deferred tax adjustments to align tax reporting with financial statement disclosures.

These changes will impact contract-based revenue, performance obligations, and timing of revenue recognition, so businesses should prepare for a shift in financial reporting.

Impact on businesses

1. Timing of revenue recognition

Previously, many businesses recognised revenue when issuing an invoice. Under the new model:

• Revenue must be recognised when the business satisfies a performance obligation, which could be over time rather than immediately.
• Upfront payments may need to be spread over the contract period rather than recorded as income when received.
• Contract modifications may require reassessing revenue already recognised.

2. Accounting for long-term contracts

For businesses offering subscription services, staged project work, or milestone-based payments, revenue may now be recognised gradually over time, rather than upfront.

This will particularly impact:

• Construction firms with long-term project milestones.
• Software companies with annual contracts.
• Consultancy firms that deliver phased services.

3. Tax implications and profitability

Changes to revenue timing may shift taxable profits across financial years, affecting Corporation Tax payments.

Businesses that previously recognised revenue upfront may now delay tax liabilities.

Changes in revenue patterns could impact VAT reporting, requiring careful adjustment.

Differences between accounting profits and taxable profits may require deferred tax adjustments.

Worked example: How revenue recognition may change

Let’s consider an owner-managed marketing agency, ABC Ltd, which signs a £120,000 contract for a year-long digital marketing project.

Under old FRS 102 rules, ABC Ltd might have recognized £120,000 in full upon signing the contract.

Under new revenue recognition rules, the contract must be split into performance obligations (e.g., content creation, advertising campaigns, monthly analytics) and revenue must be recognised progressively throughout the year.

How this affects the financial statements:

Instead of showing a large revenue spike upon contract signing, ABC Ltd will now show consistent revenue across 12 months.

If ABC Ltd receives an upfront payment, it may need to defer recognition until services are delivered.

This could affect cash flow forecasts, profitability trends, and Corporation Tax planning.

What should businesses do?

✔ Review existing contracts and assess how revenue will be recognised under the new rules.

✔ Adjust financial forecasting models, ensuring revenue aligns with contractual obligations.

✔ Evaluate tax impacts, particularly if revenue shifts across financial periods.

✔ Train finance teams, ensuring compliance with updated revenue recognition standards.

Final thoughts

While these changes increase transparency and consistency, they also require adjustments in financial reporting and tax planning.

Businesses should prepare now to align their revenue recognition policies with the upcoming changes.

If you have any questions about how these changes impact your business or would like access to our TWP factsheet, don’t hesitate to contact TWP Accounting LLP for expert guidance.

Our factsheet is designed to support businesses with revenue recognition assessments.

If you’d prefer not to navigate these changes alone, our team is here to provide clear guidance and tailored support on the FRS 102 lease accounting updates.