Revenue recognition—when and how a business records income – is an important component of financial statements. In the United Kingdom, Financial Reporting Standard (FRS) 102, which is part of the country’s Generally Accepted Accounting Practice (GAAP), outlines the guidelines for revenue recognition. This rule helps businesses determine exactly when they should recognise revenue in their accounts.

Below, we’ll explain revenue recognition principles under FRS 102, how FRS 102 compares to other accounting standards, and how different industries interpret FRS 102.

What’s in this article?

• Revenue recognition principles under FRS 102
  
• FRS 102 vs. IFRS 15
  
• FRS 102 vs. ASC 606
  
• What it means for global companies to operate under multiple standards
  
• How different industries interpret FRS 102
  

Revenue recognition principles under FRS 102

Here are the key revenue recognition principles under FRS 102, both under the current model and under the upcoming changes.

Current FRS 102 revenue recognition principles

• Companies recognise revenue when control of goods or services is transferred to the customer.

• Businesses measure revenue at the fair value or the price knowledgeable buyers and sellers would agree to in current market conditions.

Specific transaction types

• Sale of goods: Recognition occurs when risks and rewards of ownership are transferred, economic benefits are probable, and revenue and costs are reliably measurable.

• Rendering of services: Recognition occurs when economic benefits are probable and revenue and costs are reliably measurable. For continuing services, recognition depends on the stage of completion.

• Construction contracts: When the outcome can be reliably measured, the percentage of completion determines when revenue and costs are recognized.

Upcoming changes (effective from 2026)

The upcoming changes to FRS 102 adopt a five-step model for revenue recognition, similar to International Financial Reporting Standard (IFRS) 15. These are the five steps:

• Identify the contract with the customer.

• Identify the performance obligations in the contract.

• Determine the transaction price.

• Allocate the transaction price to the performance obligations.

• Recognise revenue when (or as) the entity satisfies a performance obligation.

FRS 102 vs. IFRS 15

FRS 102 and IFRS 15 are important accounting standards that govern revenue recognition. They apply to different types of entities and contain key distinctions in their approaches and requirements.

FRS 102 applies to companies with simpler financial dealings. Smaller businesses in the UK and Ireland use it. IFRS 15 applies to businesses worldwide and addresses more complex scenarios of selling and earning. Companies with more complicated dealings such as large, public companies and those that operate across borders – use IFRS 15.

Here’s a closer look at how these standards differ.

Principles of revenue recognition

Revenue recognition under FRS 102 focuses on the transfer of significant risks and rewards of ownership, the completed delivery of goods or performance of services, the measurability of economic benefits, and the probability of receiving those benefits. It relies more on general principles and enables some interpretations based on the nature of the business and industry-specific practices.

IFRS 15 introduces a five-step model to revenue recognition, which was outlined earlier in this guide. This standard provides a more structured approach and includes specific guidance on issues such as variable considerations, financing components, non-monetary exchanges, and contract modifications. FRS 102 will more closely resemble IFRS 15 after the upcoming changes go into effect.

Implementation

FRS 102 is generally less prescriptive and detailed than IFRS 15. This reflects its users: smaller entities that do not operate in as many complex, multinational environments as those that use IFRS 15. FRS 102 is simpler to implement and requires less ongoing disclosure, which can benefit smaller entities with limited resources.

IFRS 15 is much more detailed. It includes extensive disclosure requirements that provide stakeholders with comprehensive information on the nature, amount, timing, and uncertainty of revenue and cash flows from contracts with customers. IFRS 15 requires substantial effort, especially from companies with complicated sales contracts or multiple performance obligations.

FRS 102 vs. ASC 606

FRS 102 and Accounting Standards Codification (ASC) 606 are two different standards for revenue recognition that are geared towards different audiences and regulatory environments. The choice of which one to use depends on where a company is located, its size, and the nature of its business transactions.

FRS 102 is part of the UK GAAP and is meant for smaller businesses, primarily those that operate domestically within the UK. It’s a go-to for many UK-based small and medium-sized enterprises (SMEs). ASC 606 is the standard used in the United States by companies reporting under the US GAAP. This standard applies to businesses of all sizes and is built to handle the wide range of American businesses.

Here’s a closer look at how these standards differ.

Principles of revenue recognition

FRS 102 takes a more traditional approach to revenue recognition. Companies record revenue when the major risks and rewards of ownership have transferred to the buyer and the revenue can be measured reliably. This often happens once they deliver goods or complete a service. The standard is broad and allows companies some flexibility in how to best apply these principles based on their specific circumstances.

ASC 606 uses the five-step model for revenue recognition outlined earlier in this guide. This model provides consistency and comparability across industries and markets by standardising how companies think about and report revenue.

Implementation

FRS 102 is simpler and less demanding. It suits UK SMEs that might not have the resources to manage the administrative burden of more detailed frameworks.

ASC 606 requires detailed documentation and careful consideration of how contracts are structured and how revenue is recognised over the life of those contracts. While ASC 606 is more complicated, it provides greater transparency and comparability for stakeholders (including investors and regulators), which can be particularly valuable for larger companies or those seeking to raise capital in competitive markets such as the US.

What it means for global companies to operate under multiple standards

Global companies often operate under multiple revenue recognition standards, presenting both challenges and opportunities. Convergence efforts, such as the upcoming changes to FRS 102, aim to reduce differences between standards. This can simplify accounting processes, reduce compliance costs, and create greater comparability and transparency for global companies.

Here’s a breakdown of what working with multiple standards looks like:

• Administrative burden: Accounting standards can vary in terminology, specific guidance, and presentation requirements. Companies must invest time and resources to understand each standard’s nuances and might need to use separate accounting systems to track and report financial information under different standards.

• Accuracy: Using multiple standards increases the risk of misinterpretation and misapplication in financial reporting. Companies might need to allocate substantial resources to compliance and reporting under multiple standards.

• Comparability: Investors and analysts might struggle to compare the financial performances of companies reporting under different accounting standards. This can potentially hinder investment decisions. Companies might need to provide additional disclosures or reconciliations to help users understand the impact of different accounting treatments.

• Audit needs: Auditors might need to perform additional procedures to ensure compliance with multiple standards. This can lead to increased audit fees and potential delays in financial reporting.

• Employee training: Businesses require personnel with specialised knowledge and expertise to train employees on multiple standards.

How different industries interpret FRS 102

The interpretation and application of FRS 102 can vary across industries, because each sector has different revenue-generating activities. Here’s how a few industries might apply FRS 102 in their financial reporting.

Manufacturing

In manufacturing, revenue recognition under FRS 102 typically occurs at the point of delivery. This industry often handles tangible products, so the key considerations relate to the timing of this transfer and any returns or warranties that might affect revenue recognition.

Retail

Retailers recognise revenue at the point of sale when a customer purchases goods, but they need to account for scenarios such as product returns and discounts. Retailers must be able to reliably estimate these factors to recognise revenue at the correct amount.

Construction

The construction industry often handles long-term contracts, which creates unique challenges in revenue recognition. Under FRS 102, recognition of revenue from such contracts depends on the percentage of completion, provided the outcome can be estimated reliably. This involves ongoing assessment of costs, progress, and expected contract revenues and profits.

Technology

For technology companies, especially those offering software or software-as-a-service (SaaS) products, revenue recognition can be complicated due to issues such as licensing, subscriptions, and updates. Businesses might recognise revenue up front or over the period of the contract, based on how the technology is provided to the customer and when the business fulfils its performance obligations.

Services

Service industries such as consulting and advertising recognise revenue as the service is rendered. Under FRS 102, this often means recognising revenue on a time-elapsed basis or as a project’s milestones are achieved. The important factor is whether the service has been provided and the client has received the benefits.

Real estate

In real estate, revenue recognition under FRS 102 depends on the nature of the transaction. For instance, during the sale of a property, revenue recognition usually occurs at the point of sale completion when legal title passes. But if the sale is part of a more extensive development project, recognition might occur over time as construction progresses.

Telecommunications

Telcos often bundle products and services (e.g., selling a mobile phone with a service plan). Under FRS 102, these companies need to allocate the transaction price to the bundle’s separate components and recognise revenue as each component is provided.

Healthcare

Healthcare providers might recognise revenue at different times depending on the service. For example, a hospital or clinic might recognise revenue at the point of service delivery. But if there are uncertainties about the amount that will be received (e.g., from insurance claims), those might delay recognition until they’re resolved.

Hospitality

At hotels and restaurants, recognition typically occurs at the point of service (e.g., hotel stay, meal). This means that for bookings paid in advance, businesses recognise revenue when the service is actually provided and not when the payment is received.