Under the revised Section 23 of FRS 102, which applies to accounting periods beginning on or after 1 January 2026, subscription and membership income is normally spread over the period the customer has access, because the customer receives and uses the service as it is provided. A licence of intellectual property is recognised over time only if it gives a right to access IP that the supplier keeps changing or supporting; otherwise it is a right to use, recognised at the point the customer can first use it.

Which rules apply to subscription and licence income?

From accounting periods beginning on or after 1 January 2026, paragraph 1.37(b) of FRS 102 brings in the Periodic Review 2024 amendments, including a rewritten Section 23 Revenue from Contracts with Customers. It applies to all contracts with customers except leases, insurance contracts within FRS 103 and financial instruments (paragraph 23.1). The wider changes are covered in FRS 102 changes from January 2026.

Paragraph 23.4 sets out five steps: identify the contract, identify the performance obligations, determine the transaction price, allocate it to the performance obligations, and recognise revenue when or as each obligation is satisfied. For subscriptions and licences the judgement sits mainly in steps 2 and 5.

When is subscription income spread over the period?

Paragraph 23.81 says a performance obligation is satisfied over time if one of three criteria is met. The one that fits most subscriptions is paragraph 23.81(a): the customer simultaneously receives and consumes the benefits of the entity’s performance as it performs, the standard’s own example being a routine or recurring service such as cleaning. A gym membership, a professional body subscription, hosted software or a data feed all work this way.

Paragraph 23.17(b) lets a series of distinct services that are substantially the same, with the same pattern of transfer, be treated as a single performance obligation.

Progress is then measured under paragraphs 23.98 to 23.104. Paragraph 23.102(c) identifies an output method based on time elapsed as appropriate when control transfers evenly over time, which is the normal answer for an annual subscription: revenue is recognised on a straight line basis across the access period. Where billing tracks value delivered, such as a fixed charge per user per month, paragraph 23.103 allows revenue to be recognised at the amount the entity has a right to invoice.

How are licences of intellectual property treated?

Paragraph 23.105 describes a licence as establishing a customer’s rights to an entity’s intellectual property, giving software, technology, trademarks, patents, franchises, music and films as examples. The first question under paragraph 23.106 is whether the licence is distinct from anything else in the contract. If it is not, the licence and the other promises are accounted for together under the general over time and point in time tests.

If the licence is distinct, paragraph 23.107 asks which of two things the customer has been given:

  • A right to access the IP as it exists throughout the licence period. Under paragraph 23.108 this is the case if the licensor expects to carry out activities that will significantly affect the benefit by changing the substance of the IP, or that could significantly affect it by exposing the customer to their positive or negative effects. Paragraph 23.110 gives examples: development work that changes the content the customer has rights to, and ongoing activity that maintains the value of a brand. Revenue is recognised over time (paragraph 23.111).
  • A right to use the IP as it exists when the licence is granted. If neither condition in paragraph 23.108 is met, paragraph 23.112 treats the licence as transferring at a point in time, and revenue cannot be recognised before the start of the period in which the customer is able to use and benefit from it.

Paragraph 23.109 adds a trap. Activities that themselves transfer a separate good or service, such as delivering a distinct upgrade, are ignored when deciding whether the licence is a right to access. They are separate performance obligations. A franchise, where the licensor keeps promoting the brand, is the classic right to access; a perpetual licence to finished desktop software is usually a right to use.

What about software sold with set up, updates and support?

A typical software contract bundles a licence, installation, updates and a support desk. Under paragraph 23.21 each promise is distinct if the customer can benefit from it on its own or with readily available resources, and it is separate from the other promises. Paragraph 23.22 says a good or service that is regularly sold separately meets the first limb. Paragraph 23.24(b) gives the counter example: where the supplier provides existing software and customises it, and the customisation significantly modifies the software, the two are not distinct and form one performance obligation.

Where the promises are distinct, paragraphs 23.65 and 23.67 require the price to be allocated in proportion to stand alone selling prices, and paragraph 23.68 says the best evidence is the observable price when the item is sold separately to similar customers.

Hosted software is a different case. If the customer never takes possession of the code and simply logs in to the supplier’s platform, the supplier is usually providing a service rather than granting a licence, and the subscription approach above applies. Development costs are covered in website and software development costs.

How are joining fees, set up fees and renewal discounts handled?

Paragraph 23.29 names joining fees in health club memberships, set up fees in service contracts and initial fees in supply contracts as examples of non refundable upfront fees. Paragraph 23.30 says that even though the fee relates to an activity the entity must carry out at the start, that activity usually does not transfer anything to the customer. The fee is an advance payment for the future services and is recognised as they are provided.

Paragraph 23.30 also says the recognition period extends beyond the initial contract if the customer has a material right. Paragraphs 23.31 and 23.32 explain that an option to buy more goods or services at a discount, including a contract renewal option, is a separate performance obligation if it gives the customer a material right they would not get without the contract. A membership where existing members renew without paying the joining fee again is the common example: part of the fee relates to the cheaper renewals.

What about royalties based on sales or usage?

Paragraph 23.48 contains a specific exception. Where a royalty based on the customer’s sales or usage is paid for a licence of IP, and the licence is the sole or predominant item the royalty relates to, the usual rules on estimating variable consideration do not apply. Revenue is recognised at the later of the subsequent sale or usage taking place and the performance obligation being satisfied.

What does a worked example look like?

Illustration only. A company with a 31 December year end sells two products on 1 October.

Contract Terms Revenue to 31 December Contract liability at 31 December
A: hosted software £12,000 for 12 months, paid upfront, plus a £1,200 non refundable set up fee £3,000 subscription plus £300 of the set up fee £9,900
B: perpetual licence with support £5,400 paid upfront; licence sold alone for £5,000, a year’s support for £1,000 £4,500 licence plus £225 support £675

In contract A the set up work transfers nothing distinct, so the fee is spread over the same twelve months as the subscription: three months gives £300. In contract B the £5,400 is allocated in the ratio 5,000 to 1,000, giving £4,500 to the licence and £900 to support. The licence is a right to use, recognised on 1 October when the customer can use it; support is recognised over the year, so three months gives £225.

How does it show in the accounts and the tax computation?

Paragraph 23.125 requires a contract liability when the customer pays, or payment is due, before the goods or services are transferred. Prepaid credits that customers may never use are dealt with as breakage under paragraphs 23.129 and 23.130. This sits alongside ordinary accruals and prepayments.

On first applying the revised section, paragraph 1.61 allows either full retrospective application or applying it from the date of initial application with the cumulative effect taken to opening retained earnings. Under the second route, paragraph 1.62 says comparatives are not restated and only contracts not yet completed are adjusted.

For corporation tax, section 46 of the Corporation Tax Act 2009 requires trading profits to be calculated in accordance with generally accepted accounting practice, so the new revenue pattern generally flows into taxable profit. A change of accounting policy is a change of basis under section 180, and section 181 brings the resulting adjustment in as a receipt or deduction on the first day of the first period on the new basis. See corporation tax explained.

What mistakes come up most often?

  • Recognising annual subscriptions when invoiced rather than over the access period.
  • Taking set up or joining fees to revenue on day one.
  • Treating every software licence as a right to use without asking whether the supplier keeps changing the IP.
  • Allocating a bundle discount entirely to the licence instead of using relative stand alone selling prices.
  • Estimating future sales based royalties in advance, which paragraph 23.48 does not allow.

Where another party delivers the service to the end customer, first decide whether the company is principal or agent; see principal or agent for revenue. Contracts for bespoke work are covered in revenue recognised over time for contracts.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

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.