New FRS 102 standards on revenue recognition: What businesses need to know

Recent changes to FRS 102 introduce a new framework for revenue recognition that aligns more closely with IFRS 15. The revised framework, which came into effect for periods commencing on or after 1 January 2026, is designed to improve consistency and transparency across financial reporting.

One of the biggest changes is that businesses will now need to adopt a five-step model for recognising revenue from contracts or services with customers. For businesses that receive contract income, multi-year, or performance-based funding, an urgent review of policies will be required.

Bitesize briefing

• Revenue is now recognised when performance obligations under contracts with customers are satisfied, not upon transfer of risks and rewards under the previous Section 23.
• Businesses with complex contracts, bundled arrangements, variable pricing arrangements, or long-term project work might see a shift in the timing of revenue recognition. They may need to unbundle contracts that feature multiple goods and services.
• Businesses will need to review existing revenue streams and contracts to assess the impact on revenue timing and measurement.
• The updated requirements call for fuller reporting on revenue sources, contract balances, and how performance obligations are satisfied.

The new five-step process

1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognise revenue when (or as) the entity satisfies a performance obligation

Businesses should reassess the accounting treatment of their contracts, particularly those that are bundled or with variable consideration.

Spotlight on each step

Step 1: Identify the contract

Businesses will need to assess whether the arrangement they have with a customer meets the definition of a contract. For a contract with a customer to be in place, the following criteria must be met.

• The parties to the contract have approved the contract and are committed to performing their respective obligations
• The business can identify each party’s rights regarding the goods or services to be transferred
• The business can identify the payment terms for the goods or services to be transferred
• The contract has commercial substance (i.e. the risk, timing or amount of the business’s future cash flows is expected to change as a result of the contract)
• It is probable that the third party will have the ability and intention to pay the consideration to which the business will be entitled when it is due

Businesses may need to bundle separate contracts if, for example, they form a single performance obligation, or disaggregate others if a change in scope or price requires a separate contract.

Step 2: Identify performance obligations

Businesses must assess the goods and services promised to the third party in return for payment, paying attention to whether obligations are a distinct good or service, or a series of goods or services. Any warranties, non-refundable upfront fees, and options for additional goods/services must also be noted. 

How to decide

Where multiple goods or services are promised, the following questions can help determine whether they are separate performance obligations:

Managing complex contracts

Under the updated guidance, businesses should watch out for contract complexity in scenarios such as:

• Warranties, returns and the right to refunds
• Customer options for upgrades, add-ons, and bundled maintenance
• Non-refundable set-up fees, membership subscriptions etc.
• Significant financing when payment is deferred

This requirement has significant implications for sectors where bundled products are common, since allocating revenue to distinct components using market value pricing now applies: Examples included:

• Software providers who bundle the licence + support
• Machinery manufacturers who sell equipment + installation + maintenance.
• Car dealers who offer roadside assistance or free annual services as part of their package
• Retailers who encourage customers to accumulate loyalty points for perks on future purchases

In all these scenarios, standalone values must replace the combined promotional price.

Step 3: Determine the total transaction price

The transaction price is the amount of consideration to which the business expects to be entitled in exchange for transferring the goods or services promised to a third party, taking into account any variable consideration amounts that apply (e.g. discounts, rebates, penalties).

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) to establish the standalone selling price.

Where a directly observable price does not exist, businesses may estimate it using:

• Market assessment: what customers in the market would typically pay
• Cost plus margin: expected costs plus a reasonable profit margin
• Residual approach: total price minus known standalone values of other items (used only where prices are highly variable, a common scenario in software & tech, construction, and digital content, among others).

The second and third method above can only be used in certain specific circumstances. 

The aim is to ensure that consideration is allocated in proportion to the economic value of each obligation.

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.

Establishing a point in time vs over time

Transition arrangements

Businesses can choose between two transition approaches when adopting the new revenue recognition requirements:

1. Modified retrospective approach

Opening reserves are adjusted upon transition and prior year comparatives not restated. Practical expedients may be used to simplify implementation, and businesses should consider the potential tax effects where revenue is recognised directly in opening reserves rather than in the profit and loss account.

2. Full retrospective approach

Under this model, previous reporting periods are fully restated to provide comparability across years, although this may be more resource-intensive.

Practical considerations for businesses

Application of the five-step model should streamline the revenue recognition process for businesses, but a proactive strategy is required.

In particular, businesses should have completed, or have imminent plans to complete, the following checklist:

1. Clarify which revenue streams are contracts with customers, and document the basis for that judgement.
2. Review all existing contracts and identify where obligations need to be unbundled or combined into a single obligation. The wider impact is that all entities entering contracts with customers are affected by the new requirements, including micro entities under FRS 105.
3. Establish whether each obligation is transferred over time or at a point in time. One of the key changes under the updated FRS 102 is that revenue is now recognised as and when performance obligations are satisfied, rather than simply when risks and rewards transfer. This timing will impact revenue recognition and, therefore, overall profit or loss.
4. Update the methods for measuring the progress of overtime obligations.
5. Review how variable consideration is managed, using estimates.
6. Train finance teams on new reporting requirements.

Enhanced disclosure requirements under Section 23 mean that businesses must furnish an even more sophisticated picture of their revenue recognition across these key areas:

• Breakdown of revenue by category, region, or timing
• Information about contract assets and liabilities, including movements during the period
• Description of performance obligations and associated payment terms
• Explanation of the methods used to measure progress for obligations satisfied over time
• Details of remaining performance obligations

Businesses should ensure that accounting policies, contract review processes, and financial statement templates are updated to reflect the enhanced disclosure requirements.

Further changes to consider

A number of other updates under FRS 102 may affect reporting and should not be overlooked:

• Fair value measurement: clearer guidance on valuation techniques for assets measured at fair value
• Uncertain tax positions: provisions and disclosures may be required where outcomes are uncertain
• Going concern: strengthened expectation that businesses assess and disclose any material uncertainties

These amendments may affect measurement, disclosures and underlying judgements in financial statements, and businesses should evaluate whether they apply.

How Crowe can help

With limited time remaining to prepare for changes, businesses should focus on last-minute reviews of existing contracts and the finance team's familiarity with the five-step model. Experienced professional support reaps dividends, and with over 80 years of experience in advisory and accounting services in Ireland, Crowe is uniquely positioned to support you. Engage now with our professional advisors to complete any last-minute preparations for the new requirements. Contact us today to make sure you and your business are fully prepared.