A contract contains a financing element when the timing of payment gives either the customer or the seller a significant benefit of financing. Revenue is then measured at the cash selling price and the difference is recognised as interest. Under FRS 102 this is compulsory for credit beyond normal business terms but optional for advance payments, and under both FRS 102 and IFRS 15 no adjustment is needed where payment is expected within 12 months of transfer.

What is a financing component?

IFRS 15 paragraph 60 requires the promised consideration to be adjusted for the time value of money if the payment timing agreed by the parties, explicitly or implicitly, provides the customer or the entity with a significant benefit of financing. Paragraph 61 states the objective: revenue should reflect the price the customer would have paid in cash when the goods or services transferred. Relevant factors include the difference between the promised amount and the cash selling price, the expected time between transfer and payment, and prevailing interest rates.

A financing element can run either way. Interest free credit over two years means the seller is lending to the customer. A large payment years before delivery means the customer is lending to the seller.

How does FRS 102 approach it?

The revised Section 23, which applies for periods beginning on or after 1 January 2026, does not use the phrase significant financing component. Paragraph 23.58 says that if payment is deferred beyond normal business terms, or financed by the entity at a rate of interest that is not a market rate, the arrangement is a financing transaction under paragraphs 11.13 and 12.7. The promised consideration is adjusted for the time value of money, interest revenue is recognised under Section 11 or 12, and interest revenue is presented separately from revenue from contracts with customers.

Paragraph 11.13 measures the receivable at the present value of future payments discounted at a market rate of interest for a similar debt instrument. Its example of an item sold on two years’ interest free credit says the receivable is the present value at the prevailing market rate, and that in an arm’s length deal the cash price for immediate settlement would normally approximate that present value. The same logic applies to loans; see loans at below market interest rates.

Do advance payments need adjusting?

Under FRS 102, no. Paragraph 23.59 says that if payment is received in advance the entity may adjust the consideration and recognise interest expense. It is a choice.

Under IFRS 15, yes, if significant. Paragraph 60 applies to a benefit of financing for either party, so a significant prepayment requires interest expense to be accrued on the contract liability, which increases the revenue eventually recognised. Paragraph 65 says interest is recognised only to the extent a contract asset, receivable or contract liability is recognised.

When can the adjustment be ignored?

FRS 102 paragraph 23.60 says no adjustment is needed if, at contract inception, the business expects the period between transferring the good or service and the customer paying to be 12 months or less. Paragraph 11.13A(c) allows trade receivables and contract assets meeting that condition to be measured at transaction price. IFRS 15 paragraph 63 has the equivalent one year expedient. Paragraph 23.139 requires disclosure of the use of the paragraph 23.60 option.

IFRS 15 paragraph 62 also says there is no significant financing component where:

  • the customer paid in advance and chooses when the goods or services are transferred, such as prepaid credits;
  • a substantial part of the consideration is variable and depends on a future event outside both parties’ control, such as a sales based royalty; or
  • the difference from the cash price arises for reasons other than finance and is proportional to that reason, for example payment terms that protect one party against the other failing to complete its obligations.

The last point covers retentions in construction contracts, which exist to secure performance rather than to provide credit; see revenue recognised over time for contracts.

Which discount rate is used?

IFRS 15 paragraph 64 requires the rate that would apply in a separate financing transaction between the entity and its customer at contract inception, reflecting the credit characteristics of the party receiving finance and any security. It may be found as the rate that discounts the promised amount to the cash selling price. The rate is not updated later for interest rate or credit risk changes. FRS 102 paragraph 11.13 uses a market rate of interest for a similar debt instrument determined at initial recognition.

What does a worked example look like?

Illustration only. A machinery maker delivers a machine on 1 January 2026 for £100,000 payable on 31 December 2027, two years later. Its normal terms are 30 days and the market rate for similar credit is 5% a year.

Date Revenue Interest income Receivable
1 January 2026, delivery £90,703 £90,703
Year to 31 December 2026 £4,535 £95,238
Year to 31 December 2027 £4,762 £100,000

Revenue is the present value, £100,000 divided by 1.05 squared. The remaining £9,297 is interest income, presented separately from turnover. Had the same sale been on 90 day terms, no adjustment would be made because payment is expected within 12 months.

Why does it make a difference outside the accounts?

Moving part of the consideration from turnover to interest changes reported turnover and gross margin, which feed into company size thresholds, lender covenants and key performance indicators. Corporation tax starts from the accounts under section 46 of the Corporation Tax Act 2009, so the timing of income generally follows the split. For the wider measurement rules, see basic financial instruments under FRS 102 and deferred income.

What mistakes come up most often?

  • Recognising the full nominal price as revenue on extended interest free credit.
  • Applying the 12 month exemption by reference to the contract length rather than the gap between transfer and payment.
  • Assuming IFRS 15 ignores prepayments, as FRS 102 permits.
  • Updating the discount rate after inception.
  • Treating construction retentions as financing when they exist to secure performance.

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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.