Amendments to FRS 102: How will this impact the Construction Sector?

The Amendments to FRS 1021 bring in significant changes to the reporting standard for both revenue recognition and lease accounting (amongst other incremental changes), which will broadly align these accounting requirements to those of IFRS 15 ‘Revenue from contracts with customers’ (IFRS 15) and IFRS 16 ‘Leases’ (IFRS 16).

From our experience with implementing IFRS 15 and IFRS 16, both for our own business and for numerous clients, we understand the significant impact new accounting standards can have on businesses. Early assessment is crucial, as these changes often necessitate adjustments to internal controls, systems, processes, and the collation of extensive data.

These changes will have significant impacts on items such as earnings before interest, tax, depreciation, and amortisation (EBITDA), net debt, interest cover and other key performance metrics. Businesses will need to consider how these might impact areas such as debt covenant calculations, earn-outs and dividend payments.

This article shares insights from our work with construction businesses, focusing on key accounting challenges, the impact of FRS 102 amendments, and how to navigate them.

Revenue 

Under the revised FRS 102 Section 23, businesses must follow a five-step model aligned with IFRS 15 for revenue recognition:

1. Identify a contract with a customer 
2. Identify performance obligations (promises) within the contract 
3. Determine the transaction price 
4. Allocate the transaction price to the performance obligations 
5. Recognise revenue when or as the entity satisfies the performance obligation 

A major difference between existing accounting under current FRS 102 and the amendments is the emphasis on identifying performance obligations (aligned with IFRS 15) within customer contracts and allocating the transaction price to each obligation. Revenue must now be allocated to distinct performance obligations based on their standalone selling prices. This may cause significant changes in revenue recognition patterns and require additional systems and processes.

The focus has also shifted from transferring risks and rewards of ownership to the notion of ‘control’ of goods or services passing to the customer. The requirements are more customer-centric, focusing on what customers expect to receive under the contract. 

Key Challenges 

We have identified several significant challenges that we assisted our construction clients with during their IFRS 15 implementation. These challenges will likely also affect FRS 102 reporters upon adopting the Amendments:

Multiple-Element Arrangements:

Construction contracts often bundle services such as procurement, design, build, installation, and maintenance. Under the amended Section 23, these must now be unbundled into separate performance obligations (POs)—each with its own revenue recognition pattern and value.

While this concept existed under the previous FRS 102 framework, the amended framework provides more detailed guidance , necessitating greater judgement, documentation and a deeper understanding of how contract elements interact.  

Revenue recognition now hinges on a careful analysis of each contract, breaking it down into its components and assessing how they relate to one another.

Multiple contracts with the same customer:

In construction, it’s common to sign separate contracts with the same customer—especially for complex or phased projects. Under the Amendments, some of these may need to be combined and treated as a single contract.

If contracts are: 

• Negotiated as a package with a single commercial objective
• Interdependent in pricing or performance 
• Promise goods or services that form a single performance obligation

Then they must be accounted for together. This can significantly affect how revenue is recognised—so contract structuring and timing now matter more than ever.

Stage of completion:

Construction entities commonly recognise revenue based on the stage of completion—reflecting the percentage of work performed at the reporting date. While this approach remains valid under the Amendments, the criteria for recognising revenue over time are now more clearly defined and require a more rigorous assessment of contract terms.

To recognise revenue over time, one of the following conditions must be met:

• The customer simultaneously receives and consumes the benefits as the work is performed 
• The entity’s performance creates or enhances an asset that the customer controls 
• The asset being created has no alternative use, and the entity has an enforceable right to payment for work completed to date, including a reasonable profit margin, not just cost recovery 

If none of these criteria are met, revenue must be recognised at a point in time.

It’s important that right to payment must include a reasonable profit margin, not just cost recovery. The Amendments clarify that the entity must be entitled to an amount that approximates the selling price of the work done if the contract is terminated for reasons other than the entity’s failure to perform.

Entities must select a method that best reflects the transfer of control to the customer:

• Output methods: e.g. milestones achieved, surveys of work performed, or time elapsed 
• Input methods: e.g. costs incurred, labour hours, or resources consumed 

The chosen method should be applied consistently and supported by appropriate documentation.

Variable Consideration

Construction contracts often include variable elements—such as price adjustments, performance incentives, penalties for delay, or volume discounts. Under the Amendments to Section 23, these must be carefully estimated and included in the transaction price only when it is highly probable that the revenue will not reverse once the uncertainty is resolved.

Variable consideration should be estimated using one of the following methods:

• The expected value (a probability-weighted average), or
• The most likely amount (the single most likely outcome)

This mirrors the “constraint” concept from IFRS 15, even if the terminology differs. The key principle remains: only recognise variable revenue when it’s highly probable you’ll be entitled to it.

Any incentive payments should be included in the transaction price when it is both probable that the specified performance standards will be met or exceeded, and the amount of the incentive payment can be measured reliably.

Example 

A contract worth £20 million includes a £1 million penalty for late completion. If there’s a 75% chance of missing the deadline, the most likely outcome is incurring the penalty. Therefore, the contract value is reduced to £19 million.

Contract modifications:

In construction, variations to scope and pricing are common as projects evolve. Under the Amendments, these are referred to as contract modifications—defined as approved changes to the scope, price, or both of a contract. A modification may either create new enforceable rights and obligations, or alter existing ones.

A modification must be treated as a separate contract if both of the following apply: 

• The additional goods or services are distinct from those in the original contract 
• The price increase reflects the stand-alone selling price, adjusted for the specific circumstances

If these conditions aren’t met, the modification must be accounted for as either:

• A termination and replacement of the original contract, or
• A revised estimate of the existing contract, depending on how the change affects scope and pricing 

Example 

A construction company agrees to upgrade the flooring specification across a building under construction. While the scope is agreed, the additional compensation is still under negotiation. The original contract was a single performance obligation with revenue recognised over time.

Since the upgraded flooring is not distinct from the original work, the company updates its measure of progress and applies it to the revised transaction price. Revenue is adjusted on a cumulative catch-up basis. If the contract also includes liquidated damages for delay, these must be factored into the revised price using the variable consideration constraint.

Warranties:

Construction companies often offer warranties—but not all are treated the same. The key is determining whether the warranty is: 

• A service-type warranty (sold separately or covering defects beyond standard terms) → Accounted for as a separate performance obligation 
• An assurance-type warranty (guarantees the work meets agreed specs) → Treated as a provision for rectification costs 

This distinction requires judgement, and it directly impacts how revenue and costs are recognised. Getting it wrong could misstate both. 

Incremental costs of obtaining a contract and costs to fulfil a contract:

The Amendments bring FRS 102 in line with IFRS 15 by introducing rules on capitalising contract-related costs—including: 

• Incremental costs to obtain a contract (e.g. sales commissions) 
• Costs to fulfil a contract (e.g. direct delivery or setup costs not covered by another standard) 

For costs to obtain a contract, there's now an accounting policy choice under the Amendments: capitalise or expense. This introduces new judgement calls—what qualifies, when to capitalise, and how to amortise (over the contract term or customer relationship). 

This results in more complexity, more documentation, and a greater need for robust systems to track and manage these costs. 

Loss-making contracts:

The Amendments to Section 23 do not address loss-making (onerous) contracts directly. Instead, these fall under Section 21 – Provisions and Contingencies.

If the unavoidable costs of fulfilling a contract exceed the expected economic benefits, a provision must be recognised. This ensures losses are reflected as soon as they become unavoidable, not when they are incurred.

Leases  

The Amendments are likely to impact any business that is a lessee, i.e. most businesses. Similar to IFRS 16 the distinction for lessees between operating and finance leases will no longer apply, and the majority of leases will be brought on to balance sheet as a right of use (ROU) asset and corresponding lease liability. As with IFRS 16, there are some exemptions, with short-term leases (less than 12 months) and low-value leases (such as mobile phones, computers, and small furniture items) being excluded from the new leasing model. These leasing costs should continue to be expensed as incurred. 

Other considerations

Fair Value Measurement 

Another significant change is the alignment of fair value measurement requirements for investment properties with IFRS 13. While this is unlikely to impact external property valuations, companies with any investment property will need to update their accounting policies to reflect the new fair value measurement principles.

Disclosure requirements

Across the Amendments, there are additional disclosure requirements, which businesses will need to ensure they can accurately capture at the reporting date, to comply with these Amendments.

How can we help?

To tackle the amendments to FRS 102, start with a clear, actionable timetable. Prioritise key steps: complete an impact assessment, allocate resources, upskill your team, engage stakeholders, gather data, and calculate adjustments—so you stay ahead of reporting deadlines.

We're here to assist you at every stage, from planning and implementation to integrating changes into your routine operations and financial reports.

Technical details and further information about the FRS 102 amendments can be found here [ 4944 kb ]. 

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