The five-step model is a new approach for UK GAAP reporters to determine how and when to recognise revenue for contracts with customers. Our new video outlines the five steps you need to know.
The five-step revenue recognition model is being introduced as part of the Periodic Review 2024 amendments to UK GAAP. It focuses on identifying the distinct goods or services promised to the customer in a contract, determining the amount of consideration that the entity will be entitled to in exchange and the pattern of fulfilment of those distinct elements.
Alongside most of the other Periodic Review 2024 amendments to UK GAAP, the new model for revenue recognition will be effective for accounting periods beginning on or after 1 January 2026.
The five-step revenue recognition model is applicable to entities applying FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (September 2024).
The same model, but with appropriate simplifications, is applicable to those preparing accounts in accordance with FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime (September 2024).
This video explains the five steps of the new model and why they will lead to higher quality, more reliable information.
How do entities transition to the five-step model?
For entities preparing accounts under FRS 102, the FRC has provided the two choices for transitioning to the five-step model:
- Entities can apply the requirements retrospectively, including restatement of comparatives.
- Alternatively, entities may apply the requirements retrospectively but without restating comparatives. Instead, the cumulative effect of initially applying the five-step model will be recognised as an adjustment to opening retained earnings (or other component of equity). Under this option, only contracts in progress at the date of initial application of the Periodic Review 2024 amendments need to be assessed and adjusted for under the five-step model.
Micro-entities preparing accounts under FRS 105 will apply the five-step model prospectively to contracts that begin after the date of initial application of the Periodic Review 2024 amendments. Entities will therefore not change their accounting policy for contracts in progress at that date.
