Changes to UK GAAP stemming from the Financial Reporting Council’s Periodic Review 2024 amendments fell under the microscope in this year’s ICAEW Corporate Reporting Conference, and two of the biggest topics examined were revenue recognition and leasing. 

To shed light on changes in revenue recognition, Danielle Stewart OBE, Financial Reporting Advisory Partner at RSM, took the stage to deliver the day’s first plenary session.

Stewart looked at Section 23 Revenue from Contracts with Customers from the September 2024 version of FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland. Her main points of focus beyond the introduction of the five-step model for revenue recognition to UK GAAP, were the complexities of applying the principal vs agent assessment, licensing, plus sales-based and usage-based royalties. 

Overall, Section 23’s primary shift is to identify and satisfy a performance obligation, rather than the supply of a good or service, as the unit of account. “That could produce very different revenue recognition for some,” Stewart noted. “For industries based around licensing, it potentially impacts the income statement quite a lot.”

Making distinctions

Section 23 states that when two parties provide goods or services to a customer, each must determine whether it is promising to: 

1. supply the good or service itself (principal); or
2. arrange for another party to supply the good or service (agent). 

An entity is principal if it controls the relevant good or service before its transfer to the customer. Section 23 includes a number of indicators that an entity has control of, including whether it has discretion in setting its price.

To distinguish between the two, Stewart cited the example of a wedding-planner website: as an agent, it will not supply dresses, cakes or car hire itself – but it will provide customers with a window to principals who do. 

A principal recognises revenue in terms of the gross amount of consideration, while an agent recognises the net amount of any commission earned when it has successfully arranged the supply of the specified good or service by a principal.

In the licensing arena, meanwhile, new requirements will typically impact any business in an industry based on intellectual property (IP), such as software, patents, music or film.

Section 23 tests whether a licensor’s promise to grant a license is distinct from other goods or services supplied. For example, a Microsoft Office licence included with a new laptop is part and parcel of the machine, and therefore not distinct. But a subsequent licence the owner purchases to run (eg, Xero) on that laptop is classed as a separate agreement.

If a licence is distinct, the licensor must determine the nature of its promise. If a licensor grants the licensee a right to access the IP and continued regular updates throughout an agreed term, it recognises revenue over time. However, if the customer is able only to use the IP as it exists at the moment the licence is granted, the licensor recognises revenue at a point in time.

In cases where the licence is not distinct, the licensor must work through the standard five-step recognition model to determine whether to recognise the revenue over time or at a point in time.

Turning to Section 23’s treatment of sales- or usage-based royalties, Stewart noted that where those sums stem from an IP licence, “you recognise the royalty income when the sale or usage occurs. You don’t do it on the variable consideration basis. That’s known as the royalties exception.”

In other words, a sales- or usage-based royalty provided in exchange for a licence of IP must be recognised only when (or as) the later of two events occur: 

• the subsequent sale or usage taking place; or 
• the full or partial satisfaction of the performance obligation to which some, or all, of the royalty is attached. 

The recipient should not estimate and record the royalty income in advance.

Stewart stressed: “Don’t forget – that exception applies only to royalties relating to IP. So, it doesn’t cover those arising from, say, land rights in the oil and gas or metals and minerals sectors, or product components.”

Complete rewrite

In the afternoon, delegates focused on leases as the spotlight turned to the revised Section 20 Leases. To provide an overview of the most critical changes, PwC Director of Corporate Reporting Services Kathryn Donkersley led the plenary talk ‘Periodic Review 2024: New Lease Accounting Requirements’, and the breakout session ‘Get Ready for Lease Accounting Changes’.

Donkersley stressed: “These changes are not small. For lessees, this is a complete rewrite of the accounting model. Operating and finance leases are no more. All leases are now the same and, with just two exceptions, must be recognised on balance sheets as both a right-of-use asset and lease liability.”

As such, Donkersley urged delegates to check all the contracts they oversee to assess whether they involve or contain leases. “If you’re wondering if something is a lease, 99.9% of the time it is,” she said.

To qualify as a lease, a contract must first specify an identified asset, such as machinery, or part of an asset, such as the floor of a building. It may also include substitution rights, whereby the owner agrees that if the asset develops a fault, they will replace it with one that fulfils the same function. Second, the contract must grant the lessee control of the asset. For example, a retailer in a unit of a shopping mall would be considered to have control of that unit, even if the mall shuts between 10pm and 8am, because they are deriving an economic benefit from the unit within the scope of their right of use.

Donkersley cited short-term and low-value leases as the two exceptions to balance sheet recognition. A lease of 12 months or less, she said, would typically be considered short term. However, one thing a lessee must not do is try to avoid recognition by entering into a short-term lease, then asking the lessor to modify its term to, say, 10 years as soon as the accounts close. 

In terms of how low-value leases are defined, Donkersley noted that FRS 102 is more generous than its international equivalent, IFRS 16 Leases. While IFRS 16 provides a list of assets that may be considered low value, FRS 102 lists those that are definitely not low value – thereby providing lessees with more flexibility in interpreting the exception.

Looking at Section 20’s measurement model for lease recognition, Donkersley noted that it consists of three steps: 

• determining the length of the lease term; 
• working out your payment each year for the duration of that term; and 
• applying a discount rate to those payments to align them with present value.

Some lessees will need to consider such points as how a termination option affects recognition. For example, in a 10-year contract with a five-year break clause and a £1m break penalty, an undecided lessee cannot just record the term as five years and ignore the price of exercising that option. Conversely, Donkersley explained: “If the lessee is committed to staying in because the asset is business critical, they’ll put 10 years of rentals on the balance sheet – but not the penalty.”

New indicators

To keep delegates aware of how the revised Standard impacts other areas, Irina Hughes, Financial Reporting Advisory Director at Johnston Carmichael, presented her afternoon breakout session, ‘There’s More to the Periodic Review 2024 Amendments Than Revenue and Leases’. She noted: “If you can demonstrate to your auditor that you know about other changes to FRS 102, then, in their eyes, that will be a big thumbs-up for your competence.”

Delving into three key areas selected in a live vote, Hughes first looked at fair value measurement (Appendix, Section 2 Concepts and Pervasive Principles). Crucially, she stressed, the definition of fair value has been redefined. Before the Periodic Review 2024 amendments, it was: “The amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s-length transaction.” It has now changed to: “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

“If you have an asset or liability on your balance sheet that is fair valued, you need to double-check that you are measuring it using market-based rather than entity-specific inputs and that you’re adjusting fair value liabilities for the entity’s credit risk,” she said.

Turning to business combinations, Hughes pointed out that under the new Section 19 Business Combinations and Goodwill , a company’s legal acquirer may not be considered the acquirer for accounting purposes. “It’s not necessarily the parent company that you’ll put at the top of your new group structure,” she said. If the entity providing the consideration in a business combination is the parent company and it pays cash, that could indicate the parent company is the acquirer. However, if a subsidiary issues equity instruments as consideration, it may suggest that the subsidiary is the acquirer. Hughes concluded that “there could be some interesting accounting happening here”.

Finally, Hughes looked at investments in associates and joint ventures. Primarily, the revisions provide additional indicators for gauging significant influence. “This change is retrospective,” Hughes noted. “My firm has clients with shareholdings in a entity that is less than 20% owned but will be considered associates, and others who own less than 50% of ventures, yet will be considered to have control – it’s no longer all about percentages. The extra indicators outline other factors that determine what significant influence, control and joint control look like.” She also noted that non-secured loans due from associates or joint ventures may now be included in the losses recognised under the equity method of accounting. 

Conclusion

The Periodic Review 2024 amendments to FRS 102 (and FRS 105 The Financial Reporting Standard applicable to the Micro‑entities Regime) introduce significant changes across revenue recognition, lease accounting and many other areas of financial statements. With the 1 January 2026 effective date fast approaching, the conference highlighted the importance of practitioners and finance teams prioritising technical training, policy updates, and system alignment to ensure a smooth and successful implementation.