Comprehensive changes to the Financial Reporting Standard applicable in the UK and Ireland (“FRS 102”) were announced by the Financial Reporting Council (“FRC”) in March 2024.  Here we assess the changes which will impact revenue recognition which preparers of financial statements for Irish middle market businesses need to know about. 

What do the changes to FRS 102 mean for Irish middle market businesses?

The 2024 periodic review of FRS 102 will align revenue recognition requirements for middle market businesses with IFRS 15’s comprehensive five-step model, with some simplifications. Changes may impact the timing and amount of revenue entities recognise, to varying degrees, depending on the nature and terms of customer contracts and current revenue recognition policies.  While the revisions to FRS 102 are effective for periods commencing on or after 1 January 2026, we recommend using the intervening time to prepare and understand the impact on your financials, and any contracts which currently exist or are under consideration, that refer to financial information or KPIs.
 

Revenue recognition model

The aim of the five-model is for a company to recognise revenue in a manner that reports the transfer of promised goods or services to customers while reflecting the consideration the company expects to receive in return. 

To implement this model, a company should follow these steps:

1. identify customer contract(s) with a customer. 
2. identify the performance obligations in the contract.
3. determine the transaction price (that is, the consideration you are entitled to in exchange for goods or services).
4. allocate the transaction price to the performance obligations in the contract. 
5. recognise revenue when (or as) the entity satisfies a performance obligation.
    

Initially, this process may seem relatively familiar. Steps 1 to 4 allocate the transaction price to goods or services in the contract, and we currently do that in practice under FRS 102. Step 5 uses a single approach instead of the current distinction to consider when significant risks and rewards of ownership are transferred for goods, and the stage of completion for services. However, a deeper analysis of customer contracts and how they recognise income when following the five-step model may identify significant adjustments to reported revenue.
 

Essentially, this will arise where the current FRS lacked guidance in some of the more complex areas to which the revised FRS will be addressed.  For example, the new guidance includes new prescriptive requirements for:
 

• identifying the performance obligations in a contract.
• licensing and royalties.
• non-refundable up-front fees.
• consideration that is variable including refunds to customers. 
• warranties, rights of return and customer acceptance clauses, and options.
   

Revenue may also be impacted by a change in the contract scope, price, or both, and how the related costs incurred to fulfil a contract are accounted for.
 

Enhanced disclosure requirements about classes of revenues, how and when revenue has been recognised, and unsatisfied performance obligations may lead to more meaningful disclosures under the revisions. Where significant judgements have been made in recognising revenue, these will also require disclosure. 
 

Entities can choose to either amend their comparatives and apply the new model to all customer contracts or apply the model to incomplete contracts at the start of the current financial period and adjust equity for the cumulative effect at that date.
 

What should the finance team be doing first?

While your first financial reports that apply the new revenue recognition model may be over two years away, we recommend using this time to review your existing customer contracts to understand terms that could impact the pattern of revenue recognition. As a practical starting point, you may wish to identify the different types of contracts you currently have in place, and whether planned or potential changes to future revenue streams will introduce new contractual terms or remove existing ones.
 

What impact will the new FRS 102 revenue model have on management information systems?

Karl Mc Laughlin, Consulting Partner with RSM Ireland commented: ‘The impact of the changes introduced in the revised FRS may not be obvious at first, so we strongly recommend finance teams and preparers of financial statements to initiate a project to quantify the impact the changes will have on revenue.  It is then equally important that these forecasted changes are communicated within the organisations to management teams and decision-makers.  It is crucial that finance teams take a pro-active approach and, if necessary, implement a clear plan to adapt their revenue accounting process to reflect the change in requirements.’ 

What are the wider considerations for implementation of the new FRS 102 revenue model?

Ronan Gilmartin, Audit Partner with RSM Ireland, said: ‘One cannot overstate the critical importance of the Revenue figure to users of financial statements, both as a standalone figure and in how it influences profitability. The adoption of the five-step model under the revised FRS may impact various financial aspects, including tax liabilities, distributable earnings, and vital metrics that underpin numerous commercial contracts, such as loan agreements, contingent consideration arrangements, and incentive compensation. Early recognition of these potential effects on financial data will provide an opportunity for corrective measures, if necessary, and ensure that key parties are engaged with adequate and prompt information.’

If you would like to discuss how the amendments to revenue recognition under FRS 102 might impact your business, please get in touch with Karl Mc Laughlin, Ronan Gilmartin, or your usual RSM contact.