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April 12th 2024

New revenue recognition regulations could impact your business

Amendments to accounting standards for UK SME’s will result in a new approach to ‘revenue recognition’ in companies’ profit & loss accounts. In most cases the amendments will be effective for accounting periods beginning on or after 1 January 2026. Early adoption is available provided all amendments are applied at the same time.

The intention is to align UK standards with the current global standards but will also push businesses towards more consistent, comparable, and transparent financial disclosure procedures.

Driven by the principles of International Financial Reporting Standard (IFRS) 15, the five-step model provides a clear, structured pathway for recognising revenue from customer contracts, which aims to enhance comparability and transparency across sectors.

The five-step model is as follows:

  1. Contract identification: Start by pinpointing contracts with your customers. A contract is valid when enforceable rights and obligations are in place, marking the foundation of this model.
  2. Identify the performance obligations: Identify the specific promises to transfer goods or services, acknowledging each as a unique performance obligation, essential for transparent dealings.
  3. Determine the transaction price: Determine the expected consideration for fulfilling these obligations, ensuring fair value exchange in every transaction.
  4. Allocate the transaction price: Equitably distribute the transaction price to each performance obligation, based on their standalone selling prices, ensuring fair revenue recognition.
  5. Revenue recognition: Recognise revenue as you fulfil each obligation, marking the culmination of your efforts, whether instantly or over time, reflecting the true essence of value transfer.

This model, however, does bring with it a set of challenges for SMEs.

The intricacy of the new model, for instance, may initially overwhelm your in-house finance team, especially where the legislation and the texts surrounding it get complex.

You may even find that you need to completely reconfigure your current revenue recognition practices in order to stay compliant.

The allocation of resources, both in terms of personnel and technology, is going to be vital in the weeks, months, and years to come.

You might even need to invest in training your staff to ensure they possess the requisite knowledge and skills to manage the new model of revenue recognition.

Most significantly, the adoption of the new revenue recognition standards could have a profound effect on how and when your revenue gets recognised, potentially altering the appearance of your company’s financial health and performance.

On top of this, there are also significant changes being made to the way businesses account for leases, which you can read about in a separate article, here. [insert link]

In short, the amendments to the accounting standards are going to pose a challenge for some SMEs who will need to carefully consider the potential impacts on financial reporting; and possibly on training and resourcing their in-house finance teams.

We’re already advising our clients on their new responsibilities and on adapting to the changes and we’d be happy to help you do the same.

If you’d like any further information or tailored guidance on the issue, please get in touch with our team.

Email: enquiries@scholesca.co.uk or call +44 (0) 1856 872983


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