Make sure that you get your revenue right before your next Fundraise or Exit
Introduction for CEOs and Founders
From 1 January 2026, a revised version of FRS 102 came into force, introducing a fundamentally new approach to revenue recognition for UK companies. While this may sound like a technical accounting change, it has very real commercial implications, including for technology-focused SMEs.
The updated FRS 102 accounting standard aligns more closely with international accounting rules, introducing a five-step revenue recognition model based on the transfer of control of goods or services to customers, rather than the transfer of risks and rewards. This shift will affect when revenue is recognised, even if cash receipts and contracted values remain unchanged.
For tech companies—especially those offering SaaS products, software licences, subscriptions, implementation services, and bundled contracts – this change may result in:
- Revenue being recognised later than before
- Greater use of deferred revenue
- Increased complexity in contract analysis
- Short-term fluctuations in reported revenue and retained earnings on adoption
Why should you care?
- If you prepare monthly or quarterly management accounts, these rules will affect your reported performance from day one.
- If you are raising investment, planning an exit, or undergoing due diligence, compliance with FRS 102 will be expected.
- If you are audited, auditors will scrutinise revenue recognition more closely, potentially increasing audit time and cost.
- Even non-audited SMEs are expected to comply with FRS 102, and non-compliance can undermine credibility with investors, buyers, and lenders.
Below, we explain the new legislation and highlight two areas where tech companies are most commonly affected: set-up/implementation fees and software licence revenue.
Revenue Recognition – Overview of the Updated Legislation
Section 23 of FRS 102 has been updated to introduce a five-step model for revenue recognition for contracts with customers. This model focuses on identifying the distinct goods or services promised to the customer and the amount of consideration to which the entity expects to be entitled in exchange.
Under the new rules, revenue is recognised when control of goods or services is transferred to the customer, rather than simply when risks and rewards pass.
This change will have a significant impact on how technology companies recognise revenue.
The Five-Step Revenue Recognition Model
1. Identify the Contract
An entity must first identify the contract with a customer. Revenue can only be recognised when all of the following criteria are met:
a) The parties to the contract have approved the contract and are committed to performing their respective obligations
b) The entity can identify each party’s rights regarding the goods or services to be transferred
c) The entity can identify the payment terms for the goods or services to be transferred
d) The contract has commercial substance
e) It is probable that the customer has the ability and intention to pay the consideration when it is due
2. Identify the Performance Obligations
A performance obligation is a promise to transfer a good or service to a customer.
A single contract may contain multiple performance obligations, so at contract inception, the entity must identify all distinct promised goods or services.
This assessment does not necessarily need to be performed contract-by-contract if contracts are largely homogeneous or can be grouped by type.
3. Determine the Transaction Price
In most cases, the transaction price will be clearly stated in the contract. However, complications arise when variable consideration is involved, such as:
- Performance bonuses or penalties
- Retrospective volume discounts
- Usage-based pricing
Variable consideration should only be recognised if it is highly likely that it will be received. If so, it must be estimated using one of the following methods:
- Expected value (appropriate where there are multiple possible outcomes)
- Most likely amount (appropriate where there are one or two possible outcomes)
The method chosen should be the one that best predicts the consideration to which the entity will be entitled and must be applied consistently throughout the contract.
Royalties payable in exchange for a licence of intellectual property (e.g. based on sales or usage) are not treated as variable consideration under this model. Instead, they are recognised as revenue in the period in which the underlying sales or usage occur.
4. Allocate the Transaction Price to Performance Obligations
Where a contract contains multiple performance obligations, the transaction price must be allocated based on the relative stand-alone selling prices of each obligation.
If a stand-alone selling price is not directly observable, it must be estimated using one of the following approaches:
- Adjusted market assessment
- Expected cost-plus margin
- Residual approach
If a bundled contract includes a discount, the allocation must reflect that discount appropriately.
5. Recognise Revenue as Performance Obligations Are Satisfied
Revenue is recognised when (or as) the entity transfers control of a promised good or service to the customer.
Performance obligations are satisfied over time if one of the following conditions is met:
- The customer simultaneously receives and consumes the benefits (e.g. recurring services such as cloud hosting)
- The entity’s performance creates or enhances an asset that the customer controls as it is created
- The entity’s performance does not create an asset with alternative use, and the entity has an enforceable right to payment for work completed to date
Where revenue is recognised over time, an appropriate method must be used to measure progress, such as:
- Output methods (e.g. surveys of work performed)
- Input methods (e.g. time elapsed or costs incurred)
If a performance obligation is not satisfied over time, it is satisfied at a point in time. Indicators of control transfer include:
- A present right to payment
- Legal title passing to the customer
- Physical possession
- Transfer of significant risks and rewards
- Customer acceptance
Under the new rules, revenue is recognised when control transfers—this may accelerate upfront revenue for certain software licences that qualify for point-in-time recognition.
Impact on Tech Companies: Key Areas of Change
Revenue Recognition for Set-Up and Implementation Fees
Set-up fees are common in the tech industry. These fees are only considered distinct performance obligations if:
- The customer can benefit from them on their own, and
- They are separable from the ongoing service
Typical examples include account configuration, data migration, training, and platform customisation. In most cases, these services do not provide standalone value and therefore must be recognised over the contract term, alongside the ongoing service.
Whether the set-up fee is refundable or non-refundable does not affect the revenue recognition analysis.
A set-up fee may only be recognised upfront if it provides a stand-alone output that the customer can benefit from independently of the ongoing service.
If a contract is extended or renewed, any remaining deferred set-up revenue must be spread over the extended contract period, not just the original term.
Revenue Recognition for Software Licence Fees
Software licences fall into two main categories:
Right-to-Use Intellectual Property (Point-in-Time Recognition)
This applies where the software has static characteristics and is not significantly updated. Revenue can be recognised when control transfers, typically when an access key or download is provided.
Examples include:
- Downloadable software
- Perpetual licences without significant updates
Right-to-Access Intellectual Property (Over-Time Recognition)
This applies where the customer receives access to evolving IP.
Examples include:
- SaaS licences
- Cloud-based platforms
- Licences with ongoing updates and upgrades
Term licences (excluding SaaS) that expire after a fixed period—such as locally installed cybersecurity software—are typically recognised over the licence term.
Where licences are bundled with updates, upgrades, support, or maintenance, it may be theoretically possible to separate the licence from the services. However, in practice this is often difficult, and such arrangements are commonly treated as a single performance obligation recognised over time.
Licences bundled with clearly distinct support or maintenance services must be separated, with revenue allocated based on stand-alone selling prices.
What This Means for Your Company and Its Accounting
You will need to assess how the updated FRS 102 legislation affects your revenue streams and update your revenue recognition policies accordingly.
If you prepare monthly or quarterly management accounts, these changes should be implemented from the start of the financial year to avoid retrospective adjustments.
On adoption (for accounting periods starting on or after 1 January 2026), the modified retrospective approach will apply. This means:
- Comparative figures will not be restated
- Opening retained earnings will be adjusted to reflect revenue that would have been recognised under the new rules as at 1 January 2026
As a result, reported revenue in the first year of adoption may be lower, even if contracted or “booked” revenue remains unchanged.
Even smaller, non-audited tech companies should not dismiss these changes. Compliance will be expected in:
- Investment rounds
- M&A transactions
- Financial due diligence
For audited companies, the new rules are likely to result in additional audit work, and therefore potentially higher audit fees.
