FRS 102 Revenue Recognition

The key changes to UK Generally Accepted Accounting Principles (GAAP) with the introduction of Financial Reporting Standard 102 (FRS 102).

Background

For accounting periods commencing on or after 1 January 2015, current UK GAAP has been replaced by a single standard. The transition requires all UK company’s financial information to be prepared in accordance with FRS 102. The only exceptions will be those applying International Financial Reporting Standards (IFRS) or Financial Reporting Standard for Smaller Entities (FRSSE).

This is the first true revenue recognition standard provided in UK GAAP; the previous standard was part of the application guidance to FRS 5. Income is now classified within four categories, each with their own recognition criteria:

  • sale of goods
  • rendering of services
  • construction contracts
  • interest, royalties and dividends

Sale of goods

Revenue is recognised for the sale of goods when the vendor has transferred the significant risks and rewards of ownership. It is probable that the economic benefit will flow to the entity and the revenue and associated costs can be reliably measured.

Rendering of services

Revenue for provision of services is recognised when it is probable that an economic benefit will flow to the entity and the revenue and costs can be reliably measured. For continuing services, revenue is recognised when the stage of completion can be reliably measured using a percentage of completion method.

Construction contracts

When the outcome of a contract can be measured reliably, the entity will recognise both income and costs by reference to the percentage of completion of the contract. If the outcome cannot be reliably measured, all costs are expensed and revenue is only recognised to the extent that it is probable that costs are recoverable.

When it is probable that a loss will occur on a contract, this is recognised in full immediately as an onerous contract provision. Interest, royalties and dividends interest income is recognised on an effective interest method and is adjusted for fees and finance charges.

Royalties are recognised on an accruals basis.

Dividends are recognised when the right to receive payment is recognised.

Implications

Consideration of revenue recognition should be simplified by a simple and coherent set of recognition criteria. For most entities, application of these criteria should make no difference to existing revenue recognition. It could be argued that the general application of recognising revenue when it is probable (i.e. more likely than not) and that an economic benefit will flow to the entity, may mean that revenue is recognised at an earlier stage than previously.

Entities with transactions involving reservation of title, or contingent fee arrangements, may need to review their recognition policies in light of the revised guidance.

Accounting for revenue for construction contracts is unlikely to be affected. More importantly, revenue is now defined as the fair value of consideration receivable and the standard requires deferred consideration to be recognised at a present value based on the time value of money. For some entities this may require adjustment to revenue recognition.

Disclosure

The disclosure requirements on revenue will be extended.

An entity will be required to disclose the revenue recognised in the period, split between sales of goods, services etc. This may affect entities such as software companies that sell goods with a service component.

The policies on revenue recognition including specifically the methods used to determine the stage of completion for the rendering of services.

Similarly, for construction contracts as well as the contract revenue recognised, the methods used to determine contract revenue and the stage of completion of contracts, will be required.