Revenue recognised over time for contracts

Under the revised Section 23 of FRS 102, which applies to accounting periods beginning on or after 1 January 2026, a construction or service contract earns revenue over time only if one of three tests in paragraph 23.81 is met. Where a test is met, revenue is recognised by measuring progress towards completing each performance obligation; where none is met, revenue waits until control passes to the customer at a single point in time.

What changed for contract revenue from 2026?

Before the Periodic Review 2024 amendments, Section 23 of FRS 102 was based on IAS 11 Construction Contracts and IAS 18 Revenue. The FRC has replaced that section entirely with Section 23 Revenue from Contracts with Customers, a five step model based on IFRS 15 (Basis for Conclusions paragraph B23.1). Paragraph 1.37(b) makes the amendments mandatory for accounting periods beginning on or after 1 January 2026, with early application permitted only if all the amendments are applied together.

Paragraph 23.4 sets out the five steps: identify the contract, identify the performance obligations, determine the transaction price, allocate the price to the obligations, and recognise revenue when (or as) each obligation is satisfied. This page covers the last step for contracts running across a year end. For the wider changes, see the FRS 102 amendments from 2026.

When is a performance obligation satisfied over time?

Paragraph 23.79 requires the business to decide at contract inception whether each performance obligation is satisfied over time or at a point in time. Under paragraph 23.81, an obligation is satisfied over time if any one of these criteria is met:

1. The customer receives and consumes the benefit as the work is done. The standard gives a cleaning service as an example. Where this is unclear, the test is whether another supplier taking over would need to substantially redo the work completed so far, as in a freight logistics contract.
2. The work creates or enhances an asset the customer controls as it is built. The standard’s own example is a construction contract in which the customer controls the work in progress, such as building on the client’s own site.
3. The work creates an asset with no alternative use to the supplier, and the supplier has an enforceable right to payment for performance completed to date.

An asset has no alternative use if the supplier is contractually restricted from redirecting it while it is being made, or would suffer significant economic losses redirecting the finished item (paragraph 23.82). That assessment is made at inception and revisited only if a modification substantially changes the obligation (paragraph 23.83).

The right to payment test in paragraph 23.84 is strict. At all times during the contract the supplier must be entitled, if the customer terminates for reasons other than the supplier’s failure, to an amount that at least compensates for work done to date. The standard describes this as an amount approximating the selling price of the work so far, for example cost plus a reasonable profit margin. The right can come from the contract terms or from the law that governs the contract.

How do the tests apply to construction and service businesses?

A contractor building an extension on a homeowner’s property will usually meet the second test, because the customer controls the structure as it goes up. A joinery firm making bespoke units in its own workshop does not hand over an asset the customer controls during production, so it must look at the third test: the units have no alternative use if they are made to measure, but revenue is only recognised over time if the contract gives a right to payment for work done to date. Without that right, revenue is recognised on delivery or installation, using the indicators of control in paragraph 23.85 such as legal title, physical possession and acceptance.

Recurring services such as bookkeeping, payroll or maintenance usually meet the first test. A one off advisory report often turns on whether the engagement letter gives an enforceable right to be paid for work done if the client cancels.

How is progress measured?

For each obligation satisfied over time, revenue is recognised by measuring progress towards complete satisfaction (paragraph 23.98). The method must depict the transfer of control to the customer, and a single method is applied to each obligation and used consistently for similar ones (paragraph 23.99). Paragraph 23.101 distinguishes output methods, based on value transferred to the customer, from input methods, based on the supplier’s efforts. Paragraph 23.102 lists common methods and when they suit:

• surveys of work completed, where they give an objective measure of performance;
• units delivered, where each unit transfers equal value and part finished items are not significant;
• time elapsed, where control or effort is spread evenly over the period;
• costs incurred, but only costs that reflect performance and contribute to progress;
• labour hours, where hours relate to the transfer of control.

Progress is remeasured at each reporting date, and changes are treated as a change in accounting estimate under paragraphs 10.14D to 10.18, so they go through the current period rather than being restated (paragraph 23.100). If the amount the business can invoice corresponds directly to the value of work to date, such as a fixed hourly rate, revenue may be recognised at the amount it has a right to invoice (paragraph 23.103). And if progress cannot yet be measured reliably, typically early in a contract, but costs are expected to be recovered, revenue is recognised only to the extent of costs incurred, giving nil profit until the outcome is clearer (paragraph 23.104).

How are variations, claims and bonuses handled?

A variation agreed by both parties is a contract modification (paragraph 23.13). If the scope change is approved but the price has not yet been agreed, the change in price is estimated using the variable consideration rules (paragraph 23.14). A modification adding distinct work at its standalone selling price is treated as a separate contract (paragraph 23.15); otherwise it adjusts the existing contract.

Bonuses, penalties and disputed claims are variable consideration. Paragraph 23.44 requires an estimate using either the expected value or the most likely amount, whichever better predicts the outcome; the most likely amount suits a bonus that is either earned or not. Paragraph 23.46 then limits the amount included to what is highly probable not to reverse when the uncertainty is resolved, and paragraph 23.47 requires the estimate to be updated at each reporting date.

What does a worked example look like?

Illustration only. A builder agrees a fixed price of £500,000 to extend a client’s premises on the client’s own site, so the second test in paragraph 23.81 is met. Expected total costs are £400,000. At the year end the builder has incurred £160,000 of costs that reflect work performed, and has invoiced £150,000.

Item	Amount
Progress (£160,000 of £400,000 costs)	40%
Revenue recognised (40% of £500,000)	£200,000
Cost of sales	£160,000
Profit recognised	£40,000
Contract asset (£200,000 earned less £150,000 invoiced)	£50,000

Materials delivered but not yet installed would usually be left out of the progress calculation, because paragraph 23.102(e) allows only costs that reflect performance. Had the builder invoiced more than it earned, the excess would be a contract liability.

How are contract balances and costs shown in the accounts?

Where the business has performed before being paid, it shows a contract asset, unless the right to payment is unconditional, in which case it is a trade receivable (paragraphs 23.126 and 23.127). Where the customer has paid or payment is due before performance, it shows a contract liability (paragraph 23.125). Other descriptions may be used, provided readers can tell trade receivables from contract assets (paragraph 23.128).

Costs of fulfilling a contract that are not covered by another section, such as inventories, are capitalised only if they relate directly to an identified contract, generate resources used to satisfy future obligations and are expected to be recovered (paragraph 23.117). Costs that relate to work already performed are expensed (paragraph 23.118). Incremental costs of obtaining a contract, such as a sales commission, may be capitalised as a policy choice, and costs that would be amortised over one year or less may be expensed (paragraphs 23.113 and 23.114). A contract expected to make a loss is an onerous contract and a provision is recognised under paragraph 21.11A.

What must be disclosed, and what goes wrong?

For obligations satisfied over time, paragraph 23.136 requires disclosure of the input or output methods used and how they are applied, and paragraph 23.137 requires an explanation of unsatisfied obligations, with an exemption for contracts with an original expected duration of one year or less. A small entity using Section 1A must give the descriptions in paragraphs 23.135(a) to (c): when it typically satisfies its obligations, its significant payment terms and the nature of what it has promised (paragraph 1AC.32B). See Section 1A for small entities.

Common mistakes include:

• assuming every long contract is recognised over time without checking the right to payment;
• including uninstalled materials or wasted costs in a cost based measure;
• ignoring the transition choice in paragraph 1.61, which allows the cumulative effect to be taken to opening retained earnings without restating comparatives, applied only to contracts not completed at the date of initial application (paragraph 1.62).

The accounting result also feeds tax. Under section 46 of the Corporation Tax Act 2009, trading profits are calculated in accordance with generally accepted accounting practice, subject to adjustments required or authorised by law, so the revenue recognised under Section 23 normally drives the taxable profit on the contract. See also accruals and prepayments.

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Related Accountapedia entries

• The five step revenue model in FRS 102
• Turnover recognition under FRS 105
• Work in progress for service businesses
• Revenue recognition for subscriptions and licences
• IFRS 15 revenue from contracts with customers
• Contingent assets: when can they be recognised

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• legislation.gov.uk: Act 2009 c. 4, section 46

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.