The Financial Reporting Council (FRC) made some key changes to UK GAAP in March 2024 which mean that property companies are set to face significant changes in how they report their financial information.
Whilst the proposed changes don’t come in to effect until 1 January 2026, early adoption is allowed.
Whilst 1 January 2026 might seem quite far away, you may need to collect data, make accounting judgements and implement systems before this date so it’s important to understand the changes now.
In this article we look at the key changes surrounding revenue recognition, what the amendments mean for property businesses, and how you can prepare.
What are the key changes which Property & Construction Companies should be aware of?
The key changes are alignment with IFRS 15: Revenue from Contracts with Customers.
Although the amendments primarily focus on updating FRS 102 which is The Financial Reporting Standard applicable in the UK and Republic of Ireland, the changes affect the whole UK GAAP, including FRS 105, which is applicable to the micro‑entities regime.
Revenue recognition
The new revenue recognition model adopts a five-step approach model for revenue recognition. Whilst the steps are the same for all businesses, there are some important considerations for Property & Construction companies:
- Identify the contract with the customer: Construction businesses are likely to have contracts in place with their clients, so this first step should be straightforward. However, modifications to contracts will need to be carefully considered as specific changes are required to be treated as separate contracts.
- Identify the performance obligations in the contract: For construction contracts, services like site clearance, procurement and engineering, are often closely interconnected rather than existing independently, so most contracts will contain just ONE performance obligation. However, there may be cases where multiple obligations exist.
It will be necessary to identify how many distinct performance obligations there are in the contract. It’s more difficult to do this in this sector in contrast to others such as IT for example, where it is easier to separate goods and services.
- Determine the transaction price: This could prove to be a complex area for construction businesses, especially where variable consideration is involved. Businesses will need to estimate the total amount due if the considerations involve variable amounts. Consideration will also have given be given to any late penalties, which could reduce the overall transaction price.
- Allocate the transaction price to the performance obligations in the contract: For construction companies with single performance obligations, the allocation of transaction prices should be relatively straightforward. Where multiple obligations exist, this step could become more complicated.
- Recognise revenue when (or as) performance obligations are satisfied: For construction companies with multiple contacts in place at the same time, this could prove to be time-consuming. All contracts are required to undertake this assessment and there are not any practical exemptions.
It’s crucial to start planning now to adapt your financial reporting and strategies to meet the requirements regarding revenue recognition. Contact a member of our expert team if you need advice.
