What Is FRS 102 Revenue Recognition?

Financial Reporting Standard 102 (FRS 102) is the primary accounting framework for entities in the United Kingdom and Republic of Ireland. It provides a comprehensive set of rules for preparing financial statements to ensure consistency and comparability. A core component of this standard is revenue recognition, which governs how and when a company reports income. FRS 102, specifically in Section 23, establishes the principles for this process, preventing companies from reporting earnings prematurely or inconsistently.

A Major Shift in Revenue Recognition

The principles for revenue recognition in FRS 102 are undergoing a significant change. For accounting periods beginning on or after January 1, 2026, a new five-step model for recognizing revenue will become mandatory. This update aligns FRS 102 more closely with international standards and shifts the core principle from the transfer of “risks and rewards” to the satisfaction of “performance obligations.”

The new model requires a more structured approach based on the following five steps:

• Identify the contract with the customer.
• Identify the separate performance obligations in the contract.
• Determine the transaction price.
• Allocate the transaction price to the performance obligations.
• Recognize revenue when or as each performance obligation is satisfied.

This framework is designed to provide a more robust method for handling complex transactions, such as bundled goods and services or long-term contracts, by focusing on when the customer gains control of a good or service.

Measurement of Revenue

Under FRS 102, revenue must be measured at the fair value of the consideration received or receivable. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction. In most sales, this is the invoice amount. The revenue figure must be net of any trade discounts, prompt settlement discounts, and volume rebates. Value Added Tax (VAT) and other sales taxes are not considered revenue and must be excluded.

A more complex situation arises when payment is deferred, creating a financing arrangement. If a customer is allowed to pay over a period longer than normal credit terms, the revenue is measured at the present value of the future receipts. This involves discounting the future cash flows to their current worth. The difference between this present value and the total future payments is recognized as interest income over the payment period.

Applying Recognition Criteria to Specific Transactions

Sale of Goods and Rendering of Services

The upcoming five-step model focuses on identifying the distinct promises to a customer, known as performance obligations. For example, a contract to deliver software and also provide installation and training may contain three separate performance obligations. The total contract price would be allocated across these three obligations, and revenue for each is recognized only when that specific obligation is fulfilled.

Revenue for a performance obligation can be recognized at a single point in time, such as upon delivery of a product, or over time, for a service provided over a year. Recognizing revenue over time is appropriate if the customer simultaneously receives and consumes the benefits as the seller performs the work.

Construction Contracts

For construction contracts, the key determination will be whether the performance obligation is satisfied over time or at a point in time. For many projects, this will result in recognizing revenue over time, which is similar in outcome to the current stage of completion method. The underlying assessment, however, will be based on the transfer of control to the customer as the asset is being built, rather than the stage of progress.

Interest, Royalties, and Dividends

FRS 102 provides specific guidance for revenue from the use of entity assets by others. Interest income is recognized using the effective interest method. Royalties are recognized on an accruals basis in accordance with the substance of the relevant agreement, which often means as they are earned based on sales or usage. Dividends are recognized when the shareholder’s right to receive payment is established.

Disclosure Requirements

FRS 102 mandates specific disclosures in financial statements to ensure transparency. The primary requirement is to disclose the accounting policy adopted for recognizing revenue. Under the new rules, this will include explaining the judgments made in determining the satisfaction of performance obligations.

Entities must also disclose the total amount of revenue recognized during the period, disaggregated into significant categories. The standard provides flexibility to present this information in the most meaningful way for the business. A company might break down its revenue by geographical markets, major business segments, or by type, such as separating revenue from different types of contracts.