FRS 102 amendments 2026 impact on construction contract profit recognition

The revised FRS 102 introduces a new revenue recognition model that will significantly affect how construction contract profit is recognised from accounting periods beginning on or after 1 January 2026.

Some revenue arrangements require the recognition of revenue over time. Changes to FRS 102 may impact the accounting for such arrangements when measuring progress based on an output method, specifically the profile of profit recognised over the life of the contract. 

The profit margin for individual contracts in each accounting period may become more volatile, with profits recognised earlier or later for contracts compared to current practice. Whilst the overall margin and profit for the contract could remain unchanged, the effect on profit, and related metrics and ratios, may be more impactful in each period. 

Metrics affected could include pre-tax income, operating profit and EBITDA, as well as related key performance indicators, adjusted earnings measures and measures used to determine variable remuneration. 

Changes in the profile of profit may also impact availability of distributable reserves and dividend strategies. 

Impacts on loan covenants that are derived from these profit-based measures may follow where not tied to current accounting policies and practices (i.e., not on a ‘frozen GAAP’ basis). Entities that have loan agreements that do include frozen GAAP clauses must consider how the relevant information will be maintained once reporting under the revised FRS 102 is required. 

Changes in profitability may result in additional questions from stakeholders as to the performance of the business and entities are encouraged to engage early to explain the impact of the changes to manage expectations and understanding of the financial statements. 

The January 2022 edition of FRS 102 (‘2022 FRS 102’) defines construction contracts, providing specific guidance on their accounting. Revised FRS 102, however, no longer separately addresses construction contracts. 

Instead, accounting for such arrangements follows the new five-step model and revenue for the identified performance obligation is recognised over time when the entity transfers control of a good or service over time, measured by the entity’s progress towards complete satisfaction of the performance obligation. 

Whilst there are different approaches that could be applied when measuring progress on an output basis, a single method is selected which faithfully depicts the entity’s performance in transferring control to the customer, that is, the satisfaction of the performance obligation.  

This is considered at the level of performance obligations (rather than contract), and the method is to be applied consistently to similar performance obligations and in similar circumstances. 

What was a single contract under 2022 FRS 102 may be one or more performance obligations under revised FRS 102, although the results of the application of revised FRS 102 may result in traditional construction contracts being assessed as a single performance obligation. Different performance obligations may differ in the timing of revenue recognition. 

2022 FRS 102 specifies the recognition of both revenue and cost by reference to the percentage of completion, which can often result in a consistent profit margin recognised over the life of the contract (subject to changes to estimates of total forecast revenue and cost). 

Revised FRS 102 focuses on how revenue is recognised. Costs are recognised in profit and loss as incurred, except where they can be capitalised and revised FRS 102 provides specific guidance for costs to obtain a contract and costs to fulfil a contract. 

The amendments drive the potential changes to the profile of profit recognised over the life of the contract that are described above. 

The example below illustrates the potential impact.

Example

• 4-year contract with a single performance obligation 
• Progress measured by surveys of work completed 

Assume revenue recognised is assessed to be the same under both versions of FRS 102 

• Total contract value – £10m 
• Total forecast cost – £6.8m 

Incurred: Year 1 – £0.6m; Year 2 – £3.6m; Year 3 – £1.7m; Year 4 – £0.9m and assume none are eligible to be capitalised 

• Total contract profit – £3.2m (margin – 32%) 

Revised FRS 102

2022 FRS 102

Revised FRS 102 impact on profit (£m)

If you have any questions regarding the FRS 102 revenue recognition changes and their impact on construction contract profitability, please get in touch with our team.