FRS 102 Revenue Recognition: The New Five-Step Model Explained

If you prepare or audit accounts under UK and Irish GAAP, Section 23 of FRS 102 is about to change how you think about revenue. Following the FRC's Periodic Review 2024, the old "risks and rewards" test is being replaced with a five-step model lifted almost directly from IFRS 15. For accounting periods beginning on or after 1 January 2026, this is not a light-touch tidy-up — it's a genuinely different way of working out when, and how much, revenue you can recognise. Here's what's actually changing, what it means in practice, and how to get ahead of it before your first affected year-end lands.

Why Section 23 needed an overhaul

The previous version of Section 23 asked a fairly blunt question: have the significant risks and rewards of ownership transferred to the customer? That worked reasonably well for straightforward goods sales, but it strained badly against the way modern businesses actually sell — bundled services, software with ongoing support, construction and consultancy contracts with multiple deliverables, subscriptions, loyalty schemes, and contracts with performance-linked bonuses or penalties.

The FRC's answer, confirmed as part of the wider Periodic Review 2024, is to swap the risks-and-rewards test for a control-transfer test, built around a five-step model. As BDO puts it, this is a shift from asking who bears the risk to asking who has control of the goods or service — a much closer question to the one IFRS 15 preparers have been answering for years. ACCA and other commentators are clear that this brings FRS 102 much closer into line with full IFRS, even though FRS 102 itself remains a simplified, UK/Ireland-specific standard.

One important carve-out: FRS 105, the micro-entities standard, is not affected by these revenue changes. If you act for micro-entities reporting under FRS 105, this particular overhaul passes them by.

The five-step model, in plain English

The new Section 23 asks entities to work through five steps for each contract with a customer:

• Identify the contract with the customer.
• Identify the performance obligations — the distinct promises to transfer goods or services within that contract.
• Determine the transaction price — the amount of consideration the entity expects to be entitled to.
• Allocate the transaction price to each performance obligation, usually based on relative standalone selling prices.
• Recognise revenue as (or when) each performance obligation is satisfied — that is, when control passes to the customer.

It looks simple written out as a list. The work is in step two and step three — and that's where most entities will feel the change.

Where this bites in practice

A few areas are already generating the most practitioner questions, based on commentary from firms working through client contracts ahead of the effective date.

Multiple performance obligations. Many entities have historically treated a contract as a single revenue stream by default — one invoice, one recognition point. Under the new Section 23, you have to actively assess whether a contract actually contains several distinct promises (say, a software licence plus implementation plus ongoing support) that need to be separated out and recognised on their own timelines, as flagged by Grant Thornton and PEM.

Variable consideration. Discounts, rebates, performance bonuses, penalties, refunds and loyalty schemes all now need to be estimated and constrained — recognised only to the extent it's highly probable there won't be a significant reversal later. That's a real change in discipline for entities that previously waited until variable amounts were confirmed before recognising anything.

Contract modifications. A change in scope or price partway through a contract now needs a judgement call: does it create a new, separate performance obligation, or does it adjust the existing one? That judgement affects the timing of everything that follows.

Construction and long-term contracts. Over-time recognition is still available — but it now needs to be explicitly justified by reference to customer control, benefit consumption, and an enforceable right to payment for work done, rather than simply assumed because a contract runs over more than one accounting period.

Grant Thornton's FRS 102 countdown work with clients through 2026 has surfaced a consistent set of practical concerns: mapping existing revenue streams against the five steps, closing documentation and reconciliation gaps between legacy recognition practices and the new model, training needs that span finance, commercial and operations teams (not just the finance function), and building recognition checkpoints directly into contract review and billing workflows rather than treating this as a year-end exercise.

Transition: two routes, one condition

Entities have a choice of transition approach for revenue specifically, as set out by PKF Littlejohn:

• Modified retrospective — apply the new model from the date of initial application, with a cumulative catch-up adjustment taken straight to opening retained earnings. Comparatives aren't restated, but you must disclose the effect of the change on the current period's profit or loss.
• Full retrospective — restate comparatives back to the earliest period practicable, as if the new Section 23 had always applied.

Early adoption is permitted, but there's a catch worth flagging to clients: you cannot cherry-pick and early-adopt the revenue changes on their own. Early adoption is only available if all of the Periodic Review 2024 amendments are adopted together, including the changes to FRS 102 lease accounting. Leases moved from an off-balance-sheet operating/finance split to a model much closer to IFRS 16, which is a separate conversation in its own right — but the two changes travel as a package if you're adopting early.

Don't confuse this with the "adapted formats" amendment

One more thing worth flagging to avoid a mix-up we're already seeing in client queries: in early 2026 the FRC issued a separate amendment to FRS 102 and FRS 105 dealing with "adapted formats" of the primary financial statements, aligning presentation with IFRS 18. That change is about how the primary statements are laid out and structured — it has nothing to do with revenue recognition — and it applies to accounting periods beginning on or after 1 January 2027, a full year after the revenue changes take effect. Keep the two workstreams separate in your planning; conflating them tends to cause confusion about deadlines.

The latest guidance

The FRC has been building out its factsheet suite to support implementation, including Factsheet 9: Initial Application of the Periodic Review 2024 Amendments, dated 21 May 2026 — useful reading precisely because it landed close to the effective date and reflects some of the practical questions raised during 2025 and early 2026. It's worth a read alongside your existing Section 23 working papers before you finalise your transition approach.

Getting your team ready

The recurring theme in practitioner feedback through 2026 isn't that the five-step model is conceptually difficult — most finance teams with any exposure to group IFRS reporting will recognise it. The friction is operational: revenue streams that have never been formally mapped against a five-step framework, contract templates that don't clearly separate performance obligations, and billing systems built around the old single-stream assumption. None of that gets fixed by reading the standard once.

If you're an accountant in practice, an FC, or part of a finance team working through this now, structured CPD is the fastest way to get comfortable with the mechanics before your first affected year-end. Learnsignal's CPD courses cover the FRS 102 amendments in detail, and if you're studying towards a professional qualification, revenue recognition under the new model is increasingly showing up in ACCA financial reporting papers too, so it's worth building familiarity now rather than at exam time. For the full picture of what's changing across FRS 102 — including the lease accounting overhaul and the broader disclosure requirements — treat this as one piece of a wider transition project, not an isolated year-end adjustment.