REVENUE RECOGNITION might sound like accounting jargon, but it impacts every business. Whether you're a startup, a growing SME or a larger business, understanding how and when you can recognize revenue is crucial for cash flow, financial reporting, and investor confidence.

This change will affect most UK businesses and the requirement to have a clear understanding and a plan to implement the change throughout the organisation is crucial. This is WHY? 

WHO IS IT FOR?

The New Rules is for Organisations that apply UK accounting standards FRS 102 & FRS 105

Therefore most SMEs as well as charities, universities, housing associations and credit unions

WHY IT MATTERS

• It impacts the reported performance of your organisation Revenue and Profit
• It can affects incentives and the valuation of your business
• It can Influence investors, lenders, strategic partners

WHAT DO WE MEAN BY REVENUE RECOGNITION?

Revenue Recognition is an accounting principle that dictates how (method) and when (timing) your revenue should be recognised in your profit and loss and reported. More than ever, going beyond the numbers to actively support your business growth is essential.

WHAT IS CHANGING:

It will now be following a five-step model as follows

1.Identify all contract(s) with customers (verbal or written) 

2.Identify the goods or services Distinct, Bundle, Series

3.Determine the transaction price for each 

4.Allocate the transaction price to the goods and services

5. Recognise revenue when (or as) the entity satisfies its performance obligations.

A FEW EXAMPLES:

Example 1:

January 2024 ABC ltd enter a 3 years contract for its software product £12,000. The contract includes Licences, Training, software update and technical support.

We can say that ABC Limited has 4 performance obligations

1. Licences
2. Training
3. Software Update
4. Technical support

The business will then need to identify a transaction price for each obligation. 

Example 2:

January 2024 ABC Ltd Invoiced  £12,000 for annual payroll service

The work is performed on a monthly basis and therefore the £12,000 should be spread over 12 months (12,000 / 12) for both the customer and the supplier ABC Ltd .

WHAT YOU SHOULD DO NOW?

1. Review policies
2. Perform an Impact Assessment
3. Communicate Impact
4. Update Systems and processes
5. Update Planning Models
6. Update staff training materials 

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