For accounting periods beginning on or after 1 January 2026, micro entities recognise turnover under a revised Section 18 of FRS 105, a simplified version of the five step model used in FRS 102 and IFRS 15. Turnover is recognised when, or as, control of goods or services passes to the customer, at the amount the business expects to be entitled to. Contracts already in progress when the change is first applied keep the old policy.

What changed in the Periodic Review 2024?

Before the amendments, Section 18 of FRS 105 was a short section titled Revenue. It recognised revenue from the sale of goods when, among other conditions, the significant risks and rewards of ownership had passed to the buyer, and revenue from services by reference to the stage of completion. The Periodic Review 2024 replaced it with Section 18 Revenue from Contracts with Customers, which applies for accounting periods beginning on or after 1 January 2026 (paragraph 1.10), with early application allowed if all the amendments are adopted together.

The Basis for Conclusions (paragraphs 57 and 58) explains that the new section is a simplified version of Section 23 of FRS 102, itself a simplified version of IFRS 15, so all UK frameworks now share one five step model. Most respondents who commented opposed bringing the model into FRS 105 as disproportionate, but the FRC did not think it appropriate to keep an outdated model for the longer term. It responded by simplifying further: guidance for simple transactions, less common topics moved to an Additional guidance subsection, some requirements removed, the simplest option required wherever FRS 102 offers a choice, and no presentation of contract balances. The same review left lease accounting unchanged; see how micro entities account for leases.

What are the five steps?

Paragraph 18.3 sets out the model:

  1. Identify the contract with a customer. Paragraph 18.7 requires the parties to have approved it and be committed, rights and payment terms to be identifiable, commercial substance, and collection to be probable.
  2. Identify the performance obligations, meaning each promise to transfer a distinct good or service (paragraph 18.12). Set up and administrative tasks that transfer nothing to the customer are ignored (paragraph 18.14).
  3. Determine the transaction price, excluding amounts collected for third parties such as VAT (paragraph 18.20).
  4. Allocate the price to the performance obligations on a relative stand alone selling price basis (paragraphs 18.26 to 18.30).
  5. Recognise turnover when, or as, each performance obligation is satisfied, which happens when the customer obtains control (paragraph 18.34).

Does a micro entity have to work through all five steps every time?

No. Paragraph 18.6 recognises that the model is easier to apply to simple contracts and to contracts completed within one reporting period. If a contract is finished and paid for, step 1 is usually obviously met; if only the micro entity supplies the goods it is usually a principal; a fixed cash price makes step 3 straightforward; and step 4 is not needed where there is only one performance obligation, or all obligations are satisfied at the same time (paragraph 18.27). For a contract that starts and ends in the same period, the result is generally the same whatever the number of obligations or whether turnover is recognised over time or at a point in time. Step 3, determining the price, is always required.

Paragraph 18.5 also allows a portfolio approach for similar contracts where the result would not differ materially. For a café, a shop or a consultancy billing by the hour, the revised section rarely changes the figures.

When is turnover recognised over time?

Paragraph 18.37 says a performance obligation is satisfied over time if one of three tests is met:

  • the customer receives and consumes the benefit as the work is done, such as a cleaning service;
  • the work creates or enhances an asset the customer controls as it is built, such as a construction contract where the customer controls the work in progress;
  • the work creates an asset with no alternative use to the micro entity and there is an enforceable right to payment for work done to date.

Otherwise turnover is recognised at a point in time, judged by indicators of control in paragraph 18.39: a present right to payment, legal title, physical possession, the significant risks and rewards of ownership, and customer acceptance. Goods on consignment are not sold on delivery (paragraph 18.40). For over time obligations, progress is measured by an output or input method (paragraph 18.44); where the business can invoice an amount matching the value delivered, such as an hourly rate, it recognises what it has the right to invoice (paragraph 18.45). If progress cannot yet be measured but costs are expected to be recovered, turnover is recognised only to the extent of costs incurred (paragraph 18.46). The longer contract position is explained in contract revenue recognised over time.

How are discounts, refunds and late payment handled?

Variable amounts such as discounts, refunds, penalties and bonuses are included in the price only to the extent it is highly probable that the business will be entitled to the cumulative turnover recognised once the uncertainty is resolved, and the estimate is updated at each reporting date (paragraphs 18.22 to 18.24). A discount on a bundle is normally spread across all the obligations in proportion to stand alone selling prices (paragraph 18.33). If payment is deferred for more than 12 months and beyond normal credit terms, turnover is the cash price and the excess is interest (paragraph 18.25).

Is the business a principal or an agent?

Where another party is involved, the micro entity is a principal if it controls the good or service before it passes to the customer, and records the gross amount; if its job is to arrange supply by someone else it is an agent and records only its fee or commission (paragraphs 18.15 to 18.19). Indicators of a principal include primary responsibility for fulfilment, inventory risk and discretion over price. This is relevant for booking agents, marketplaces and anyone passing through third party costs; see principal or agent revenue.

Whatever the analysis, the figure appears as the Turnover line in the micro entity profit and loss format in paragraph 5.3. Section 474 of the Companies Act 2006 defines turnover as amounts derived from the provision of goods and services after deducting trade discounts, VAT and other taxes based on those amounts.

How does it work with numbers?

Illustration only. A web design micro entity with a 31 March year end sells a package for £5,400: building a website (normally sold for £4,800) and 12 months of hosting (normally £1,200). The stand alone prices total £6,000, so the £600 discount is spread in proportion: £4,320 to the build and £1,080 to the hosting. The site is accepted by the customer on 31 January and hosting runs from 1 February.

Element Allocated price Turnover to 31 March Deferred income
Website build (point in time, on acceptance) £4,320 £4,320 nil
Hosting (over time, 2 of 12 months) £1,080 £180 £900
Total £5,400 £4,500 £900

If the customer paid £5,400 up front, £900 is shown within accruals and deferred income at the year end.

How does the transition work?

Paragraph 1.11 makes an exception to retrospective application: the revised Section 18 applies prospectively to contracts that begin after the date the micro entity first applies the Periodic Review 2024 amendments. Contracts already in progress at that date continue under the previous policy. For a 31 December year end company, contracts signed on or after 1 January 2026 follow the new rules, while contracts running at that date are not restated.

What about contract costs, warranties and common mistakes?

Costs of obtaining a contract are expensed unless explicitly chargeable to the customer whether or not the contract is won (paragraph 18.47). Costs of fulfilling a contract are expensed unless another section applies, such as inventories, or they create a resource for future performance and are expected to be recovered (paragraph 18.48). A warranty is a provision under Section 16 unless the customer can buy it separately, in which case it is a separate performance obligation (paragraphs 18.51 and 18.52). Common mistakes include:

  • recognising a whole annual subscription or support fee when invoiced instead of over the service period;
  • including VAT or other amounts collected for third parties in turnover;
  • recording the gross value of sales made as an agent;
  • restating contracts that were already running at transition, which paragraph 1.11 does not require.

For the wider framework, see FRS 105 and micro entity accounts and revenue from subscriptions and licences.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.