October 24, 2024
FRS 102 and FRS 105: New Revenue Recognition Rules
Overview: The Financial Reporting Council (FRC) has issued final amendments to UK and Ireland accounting standards, effective for accounting periods starting on or after 1 January 2026, with early adoption allowed. These amendments include new revenue recognition rules for FRS 102 and FRS 105.
Key Changes:
New Revenue Recognition Model:
Both FRS 102 and FRS 105 now include a five-step model for recognizing revenue:
Identify the contract(s) with a customer.
Identify the performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to the performance obligations.
Recognize revenue when (or as) the performance obligation is satisfied.
Five-Step Model Explained:
Step 1: A contract must meet specific criteria to be accounted for, such as approval by all parties and identifiable payment terms.
Step 2: Performance obligations are promises to transfer distinct goods or services to the customer.
Step 3: The transaction price is the amount of consideration expected in exchange for fulfilling the performance obligations.
Step 4: The transaction price is allocated to each performance obligation based on their standalone selling prices.
Step 5: Revenue is recognized when the performance obligation is satisfied, either over time or at a point in time.
Examples:
IT Services Provider: An oral contract to scan a server for viruses meets the criteria for revenue recognition under FRS 102.
Bookkeeping Software Developer: A contract with multiple performance obligations, such as software updates and technical support, requires separate revenue recognition for each obligation.
Chemical Supplier: Variable consideration, such as returns, must be estimated and included in the transaction price.
Cutting Machine Seller: Discounts on bundled goods and services must be allocated proportionally to each performance obligation.
Payroll Services Provider: Revenue from ongoing services is recognized over time as the customer benefits from the service.
Construction Contract: Revenue is recognized based on progress towards completion, excluding uncertain bonuses.
Conclusion: The new revenue recognition requirements in FRS 102 and FRS 105 introduce significant changes that may result in different revenue profiles compared to previous standards. Entities must carefully consider the new prescriptive requirements for various transactions, including non-refundable upfront fees and income from licensing and royalties.
October 24, 2024