If your company signs contracts that bundle a product with installation, or takes a year's payment upfront for a service, the point at which you record that income is about to change. The FRS 102 revenue recognition rules have been rewritten, and 2026 year-ends are the first accounts to feel it.
TL;DR: FRS 102 revenue recognition changes for accounting periods beginning on or after 1 January 2026. A new five-step model, based on IFRS 15, replaces the old risks-and-rewards test with a focus on when control passes to the customer. Businesses with bundled sales, upfront payments, or long contracts are most affected. You transition either by restating comparatives or by a single adjustment to opening reserves.
What Is Changing in FRS 102 Revenue Recognition?
Section 23 of FRS 102 has been rewritten. The old test - recognise revenue once the significant risks and rewards of ownership pass to the buyer - is gone. From 2026, you recognise revenue as you meet the performance obligations in a contract, by transferring control of goods or services to the customer.
The Financial Reporting Council issued the amendments on 27 March 2024, following its second periodic review of UK accounting standards (FRC, 2024). The revised model draws on IFRS 15, the international standard, with simplifications for smaller entities (ACCA, 2025). The FRC estimates the wider review touches 3.4 million businesses (BDO, 2024).
When Do the New Rules Take Effect?
The rules apply to accounting periods beginning on or after 1 January 2026. A company with a 31 December year-end reports under the new model for the whole of its 2026 financial year. A 31 March year-end picks it up from 1 April 2026.
Early adoption is allowed, but only if you apply every periodic-review amendment together, including the lease changes we set out in our FRS 102 lease accounting guide. So you can't cherry-pick the revenue rules and leave the rest. Most companies will apply the whole package at their first 2026 period rather than accelerate it.
Inside the Five-Step Model
The model works through five steps for each contract with a customer:
- Identify the contract with the customer.
- Identify the performance obligations - the distinct goods or services you have promised.
- Determine the transaction price, including discounts, rebates, and other variable amounts.
- Allocate that price across the performance obligations.
- Recognise revenue as each obligation is satisfied, either over time or at a single point in time.
The shift in thinking sits in steps two and five. You break a contract into its separate promises, then record income against each one as you deliver it (ICAEW, 2026).
Which Businesses Feel This Most?
If you sell a single product and get paid on delivery, little changes for you. The businesses that need to look hardest are those with bundled contracts, such as equipment sold with installation and ongoing support, and those paid in advance for a subscription or membership.
Long-term and staged contracts also warrant a review, along with any pricing that moves with volume discounts, rebates, or performance bonuses. What we see most often is a software or services firm that has been booking an annual fee on invoice, when the new rules spread that income across the twelve months of service. The total revenue is the same, but the timing is not.
How Should You Transition to the New Model?
You have two routes. Full retrospective restates last year's figures as though the new model had always applied. Modified retrospective makes a single cumulative adjustment to opening retained earnings at the transition date, and leaves comparatives untouched (PKF Littlejohn, 2025).
The FRC points most smaller companies towards the modified approach, because it avoids reworking a full prior year. In our experience, the modified route is far less work at year-end, but it does create a one-off jump in reserves that directors should understand before it lands. Whichever you pick, the choice needs documenting in your accounting policies.
Steps to Take Before Your 2026 Year-End
Start with your standard customer contracts. Read them as a list of separate promises, not one lump sum, and mark where a customer pays before you have done the work. Those are the two places the new model bites hardest.
One question clients always ask is whether this is just an accounting technicality. It is not, because the timing of revenue feeds your distributable reserves, any bank covenants tied to profit, and the period your corporation tax falls in. Reviewing this alongside your year-end accounts checklist gives you time to model the effect before the numbers are locked. It also protects your cash flow planning, since reported profit and cash received can now sit further apart.
Frequently Asked Questions
Does this apply to micro-entities under FRS 105?
Yes. Unlike the new lease rules, which micro-entities are largely exempt from, the revenue changes reach FRS 105 as well, with some simplifications (ICAEW, 2026). If you file micro-entity accounts and enter contracts with customers, the five-step logic still applies to you.
Will the changes affect my corporation tax bill?
Usually the timing rather than the total. Trading profits are taxed broadly as they appear in accounts drawn up under UK GAAP, so moving revenue into a different period can move the tax with it. Over the life of a contract the tax evens out, but a single year can look higher or lower than before.
What is a contract liability?
When a customer pays before you have delivered, you hold a contract liability until you satisfy the obligation. It works much like deferred income: cash is in the bank, but the revenue waits on your balance sheet until you have earned it.
Do I need to restate last year's figures?
Only if you choose the full retrospective route. The modified approach adjusts your opening reserves at the transition date instead, so your comparative year stays as previously reported. Most SMEs take the modified route for that reason.
Should I early-adopt for a period before 2026?
You can, but you have to bring in all the periodic-review amendments at once, including the lease and other changes. For most companies there is no strong reason to move early, so applying the full set at the first 2026 period is the simpler path.
Not sure how the new revenue rules land on your contracts? Talk to our team - we'll read through your standard agreements, map out your performance obligations, and set the transition route that fits your 2026 year-end.