Revenue Recognition Changes (From 2026)

UK accounting rules on when and how you recognise revenue are changing. The changes come from the Financial Reporting Council's periodic review of FRS 102, and they bring UK GAAP much closer to the international five-step revenue model that's already used under IFRS 15.

If you run a SaaS business, sell software licences, or bill for development work in stages, this affects how (and when) revenue lands in your accounts.

For many businesses, the total revenue recognised over the life of a contract won't change. However, the timing of when that revenue is recognised may change, particularly where contracts include multiple products or services, implementation work or variable pricing.

This guide explains what's changing, what it means for technology businesses, and what you should be doing before the new rules take effect.

📋 At a glance

Who does this affect?

Businesses preparing accounts under FRS 102 or FRS 105, particularly software, SaaS and technology companies with more complex customer contracts.

When does it apply?

Accounting periods starting on or after 1 January 2026.

What's changing?

Revenue must be recognised using a new five-step model that focuses on identifying performance obligations and recognising revenue as those obligations are satisfied.

What should I do now?

Review your customer contracts, particularly where they include multiple services, variable pricing or sales commission arrangements.

📅 When does this apply?

• Mandatory for accounting periods starting on or after 1 January 2026.
• Early adoption is allowed, but only if you adopt all the periodic review changes (including the new lease accounting rules) at the same time, not just the revenue ones.
• If your year end is, say, 31 December, your first affected year is the one starting 1 January 2026 (so year end 31 December 2026).

💻 Impact on tech companies

The old FRS 102 revenue rules were principles-based and fairly light touch.

The new rules require you to break contracts down into separate performance obligations and work out exactly when each one is delivered.

For a business selling one product for one upfront fee, this barely changes anything.

For a typical tech startup, it can change quite a lot, because your contracts often bundle several things together:

• a software licence
• onboarding or setup
• ongoing support
• future updates
• usage-based or success fees

Each of those can now need to be looked at separately, and some businesses may find revenue gets recognised later, or more gradually, than it currently does.

🧩 The five-step model, in plain terms

Every customer contract is assessed using the same five-step model.

1. Identify the contract. Is there a real agreement, with agreed terms and a customer who's likely to actually pay? Verbal and email agreements count, not just signed contracts.
2. Identify what you're actually promising. A single contract can contain several distinct promises (the "performance obligations"). A software licence with onboarding, updates and support is typically four separate promises, not one.
3. Work out the total price. Including anything variable, like usage-based fees, bonuses, or amounts that might be refunded or written off.
4. Split that price across each promise. Based on what each part would sell for on its own, not arbitrarily.
5. Recognise revenue as each promise is delivered. Either at a single point in time (eg a one-off software sale) or spread over time (eg a 12-month support contract).

Although the model is conceptually straightforward, applying it to real customer contracts often requires judgement. For many SaaS businesses, the most challenging areas are identifying separate performance obligations, allocating the transaction price correctly and deciding whether revenue should be recognised at a point in time or over time.

💡 Worked example

A SaaS company sells a three-year licence with software updates and technical support included, for one combined fee.

Under the new rules, this is four separate promises: the licence itself, installation, ongoing updates, and support.

Each one is priced individually based on what it would sell for standalone, and revenue is recognised against each as it's delivered, not simply spread evenly across the contract term as might have happened before.

🎯 Areas most likely to affect you

🧩 Multi-element SaaS and software contracts

If you sell a bundle (licence plus support plus onboarding plus updates) for one combined price, you'll need to identify each separate element and allocate the price across them based on standalone selling prices.

If there's no observable price for one element, you'll need to estimate it. In practice, a cost-plus-margin approach is usually more defensible than a residual "whatever's left over" approach.

This is likely to be one of the biggest practical changes for businesses selling enterprise software or bespoke customer solutions.

💻 Software and IP licences

Whether a licence is recognised upfront or spread over the contract term now depends on whether you have an ongoing obligation to change or maintain the underlying product.

As a broad guide:

• A static product (eg a one-off copy of software with no obligation to update it) is generally recognised at a point in time.
• A licence where you're expected to keep developing, maintaining or supporting the IP throughout the term (eg a brand, or actively maintained software) is generally recognised over time.

The contractual wording is important, so software licence agreements are well worth reviewing before the new rules take effect.

💼 Sales commissions and other costs to win a contract

Commission paid to a salesperson for closing a deal can now be capitalised and spread over the life of the contract, rather than expensed immediately, provided it's incremental (ie it wouldn't have been paid if the deal hadn't closed) and recoverable.

Costs incurred just trying to win a contract, such as pitch decks or due diligence costs, still get expensed as incurred.

For businesses with dedicated sales teams, this may change how contract acquisition costs are reflected in the financial statements.

📈 Variable and success-based fees

If part of your fee depends on a future outcome (a bonus for early delivery, a usage-based royalty, or a success fee), you can only include it in revenue now if it's highly probable you'll actually be entitled to it. This is a high bar, higher than just "more likely than not".

Royalties tied to a licence of intellectual property are treated slightly differently, recognised only once both the usage has happened and the related performance obligation has been satisfied.

This is particularly relevant for businesses using consumption-based pricing or contracts with performance incentives.

💷 Refunds and free trials with a right to cancel

Where customers can get money back or cancel within a window, you'll need to hold back a refund liability for the amount you don't expect to keep, rather than recognising it all as revenue upfront.

This helps ensure that revenue reflects the amount you're genuinely entitled to retain.

✅ What you should do now

Although the new rules don't take effect until accounting periods beginning on or after 1 January 2026, it's worth reviewing your contracts well before then.

A good place to start is to:

• pull together a list of your standard customer contracts and pricing structures, particularly any bundled offerings
• flag any contracts with variable, success-based, or usage-based fees
• note any sales commission structures tied to closing deals
• review software licence agreements and implementation services
• consider whether your current revenue recognition policy will still be appropriate

If you're VC-backed and reporting to investors on revenue metrics like ARR, be aware that statutory revenue recognition and the metrics you report to investors may diverge further under the new rules. It's worth flagging this to your board early so it doesn't come as a surprise later.

💬 How we can help

We'll be reviewing year ends approaching 1 January 2026 individually with affected clients, but it's never too early to start preparing.

We can help you:

• review your customer contracts
• identify separate performance obligations
• assess software licence arrangements
• review commission structures
• advise on variable pricing models
• prepare for the transition to the new revenue recognition rules

If you'd like to get ahead of the changes, get in touch and we'll map your specific contracts against the new requirements.