New FRS 102: FAQs on transition to amended Section 23 Revenue from Contracts with Customers

If you would like to discuss how the FRS 102 amendments might impact your business and how we can support your business through the transition to the new standard, please get in touch with Frederic Larquetoux, Financial Reporting Advisory Partner, or your usual BDO contact.
 

What transition options are available under amended section 23?

Entities have two transition methods to choose from: retrospective and modified retrospective. When deciding which method to follow, entities should consider the needs of investors and other users of the financial statements as well as group reporting requirements.
 

Full Retrospective Application (FRS 102.1.61(a))

This method involves applying the amendments to each prior reporting period presented, in line with paragraph 10.12 of FRS 102. In other words, the comparative period numbers affected by the change to Section 23 Revenue are changed as if the amended requirements had always applied.

An entity applying this approach is required to disclose:

• The nature of the change in accounting policy
• To the extent practicable, the amount of the adjustment to each financial line item for the immediately preceding period presented
• The amount of the adjustment relating to periods before those presented to the extent practicable
• An explanation if it is impracticable to determine the amount to be disclosed in (b) or (c) above
• If an entity applies any of the practical expedients, disclose that fact

 

Modified Retrospective Approach (FRS 102.1.61(b))

This simpler method does not require restating prior periods. Instead, the entity recognises the cumulative effect of applying the amendments as an adjustment to the opening balance of retained earnings, or another component of equity, at the date of initial application. While simpler, this approach does still require additional disclosure requirements in the year of adoption.

• For the current period, to the extent practicable, the adjustment amount to revenue and to profit or loss compared to how revenue would have been recognised under the previous standard
• An explanation of the reasons for significant changes
• An explanation if it is impracticable to determine the amounts to be disclosed in accordance with the above
• If an entity applies any of the practical expedients, disclose that fact

 

What practical expedients are available if an entity applies the full retrospective approach?

An entity may use one or more of the following practical expedients when applying the full retrospective approach:

Completed contracts (FRS 102.1.65(a))

An entity need not restate the contracts that:

• Are completed at the beginning of the earliest period presented
• Begin and complete within the same annual reporting period

 

Variable consideration (FRS 102.1.65(b))

For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed instead of estimating variable consideration amounts in the comparative reporting periods.
 

Contract modifications (FRS 102.1.65(c))

For contracts modified before the date of initial application, an entity need not retrospectively restate the contract for those modifications. Instead, an entity may reflect the aggregate effect of all modifications that occurred before the beginning of the earliest period presented or before the date of initial application when:

• Identifying the satisfied and unsatisfied performance obligations
• Determining the transaction price
• Allocating the transaction price to the satisfied and unsatisfied performance obligations

 

Disclosure (FRS 102.1.65(d))

For prior periods presented, an entity need not disclose the information required by paragraph 23.137. This paragraph requires quantitative or qualitative information about unsatisfied performance obligations and when they are expected to be satisfied.

• Any expedient used by an entity should be applied consistently to all contracts and periods presented.
• A completed contract is a contract for which the entity has transferred all the goods or services identified in accordance with previous requirements for accounting for revenue from contracts with customers, which the amended Section 23 replaced.
• The date of initial application is the beginning of the reporting period. For entities applying the amended FRS 102 for the first time with year ends on 31 December 2026, the date of initial application is 1 January 2026.

 

What practical expedients are available if an entity applies the modified retrospective approach?

An entity applying the modified retrospective approach should:

• not restate comparative information
• apply the amended Section 23 to only those contracts that are not completed contracts at the date of initial application

An entity may also use one or more of the following practical expedients when applying the modified retrospective approach:

Variable consideration (FRS 102.1.65(b))

For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed instead of estimating variable consideration amounts in the comparative reporting periods.
 

Contract modifications (FRS 102.1.65(c))

For contracts modified before the date of initial application, an entity need not retrospectively restate the contract for those modifications. Instead, an entity may reflect the aggregate effect of all modifications that occurred before the beginning of the earliest period presented or before the date of initial application when:

• Identifying the satisfied and unsatisfied performance obligations
• Determining the transaction price
• Allocating the transaction price to the satisfied and unsatisfied performance obligations

These expedients are optional but once used must be applied consistently to all contracts.
 

Can the entity report transition adjustments as non-underlying or exceptional items?

No, transition adjustments are not expected to be reported as exceptional or non-underlying items. Non-underlying items are typically those not part of the entity's regular operations, while exceptional items are significant and unusual in nature. Upon transition to amended Section 23, the adjustments will be taken to equity and profit or loss accounts as appropriate. They are not considered exceptional adjustments.
 

Can an entity that is part of a group reporting under IFRS use the group reporting numbers when applying the amended Section 23?

Yes, an entity within a group reporting under IFRS can utilise the group reporting numbers when applying the amended Section 23. If the entity's accounting policies for revenue recognition from contracts with customers comply with IFRS 15, these will generally be acceptable under Section 23. However, amended Section 23 offers additional accounting policy choices not available under IFRS 15, which may lead to diversity in practice. As a result, the IFRS 15-compliant policy will not be the only acceptable option. Additionally, it is important to consider any necessary adjustments to accurately reflect the entity's individual financial position and performance.