UK GAAP amendments: The five-step model for revenue recognition
In March 2024, the Financial Reporting Council (FRC) confirmed the latest amendments to Generally Accepted Accounting Practice in the UK (UK GAAP).
This new model could cause adjustments to be made to the way your business reports revenue, and may require some packaged services to be unbundled so that revenue can be recognised accurately when a promise to the customer has been fulfilled.
The five-step model
- Identify and agree on the terms of a contract with a customer
- Identify the goods or services promised in the contract
- Determine the transaction price for delivering the goods or services
- Allocate the transaction price to the promises in the contract based on the individual selling price of each good or service
- Recognise revenue in your accounts as/when a good or service is provided to the customer
The key point of this standard is to consider what your business has promised to deliver to its customers and what it is providing them. The price for those individual elements can then be calculated and the revenue relating to them can be recognised accordingly.
Example in practice
Under current UK GAAP: If we buy a mobile phone contract, we could get a handset and a 24 month data plan paying £30 per month. Under current UK accounting, it's likely that the provider might recognise £30 per month for that contract and spread it equally over the 24 months.
Under the new five-step model: The five-step model requires the provider to consider that they are delivering two distinct items: the handset on day one, and access to data services over the following 24 months. As a result, the £30 monthly payment should be allocated between these two components.
For example, if the handset is valued at £200 and the data plan at £25 per month, the relative selling prices must be calculated and applied to the total consideration of £720 (£30 × 24 months). The allocation for the handset would be £200/(£200 + 24*£25) applied to the total consideration of £720 (£30 x 24), equalling £180.
This £180 would be recognised as revenue on day one, while the remaining £540 would be spread evenly over the 24-month period, resulting in £22.50 per month attributed to the data service.
We’re here to help
If you would like to further discuss how you can prepare for the introduction of the new five-step model, or would like some advice with your accounts, please get in touch with your usual Azets advisor or a member of our specialist team via the form below.
