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Amendments to FRS 102: Impacts for the TMT industry

24 Oct 20258 min read

The Amendments to FRS 102 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’ and IFRS 16 ‘Leases’.

Contents

From our experience with implementing IFRS 15 and IFRS 16, both for our own operations 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 businesses in the technology, media and telecoms (TMT) sector, 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:

Identify a contract with a customer
Identify performance obligations within the contract
Determine the transaction price
Allocate the transaction price to the performance obligations
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 TMT clients with during their IFRS 15 implementation. These challenges will likely also affect FRS 102 reporters upon adopting the Amendments:

Licensing and Intellectual Property

Software companies frequently license their IP. Under the Amendments, the approach to revenue recognition depends on the nature of the licence:

A 'right to use' licence (static IP) → Revenue is recognised at a point in time
A 'right to access' licence (dynamic IP, eg, software that’s updated or maintained) → Revenue is recognised over the duration of the licence.

In practice, a significant number of software licences will now fall into the 'over time’ category—particularly when vendors continue to update, maintain, or enhance the software, affecting the customer’s benefit throughout the term of the licence.

Red flag: revenue v cash flow timing

Changes in revenue recognition patterns may result in timing discrepancies between recognised revenue and actual cash flows. Such differences can also lead to tax timing issues, so it is advisable for finance teams to assess potential impacts proactively.

Multiple-element arrangements

TMT businesses often bundle hardware, software, upgrades, installation, and maintenance in a single contract. Under the Amendments to Section 23, these elements are now required to be separated into distinct 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 judgment, documentation, and often system modifications to achieve compliance.

Example – mobile contracts: A mobile phone contract that includes both a handset and airtime must now allocate the total contract value between the two. Typically, handset revenue is recognised upfront, while airtime is spread over the contract term. This shift led many telcos under IFRS 15 to revamp systems and restructure contracts to align with the new revenue model.

Stage of completion

Some TMT businesses recognise revenue based on stage of completion—ie, the percentage of work completed at the reporting date. While this remains possible under the Amendments, the criteria for over-time recognition are now more prescriptive.

To recognise revenue over time, one of the following must apply:

The customer receives and consumes the benefit as the service is performed (eg, ongoing IT support)
The work creates or enhances an asset the customer controls (eg, custom system development)
The work has no alternative use, and the entity has an enforceable right to payment for work completed to date.

Important

The right to payment must include a reasonable profit margin, not just recovery of costs. 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.

Variable Consideration

Media contracts often include royalties, usage-based fees, and volume discounts—all forms of variable consideration. These can make revenue recognition complex, especially in industries like music. Royalty income and upfront artist payments (which are capitalised) could also trigger impairment reviews, if there are lower than expected sales or streams, early termination or contract disputes, or shifts in consumer trends, for example.

The Amendments to Section 23 adopt the IFRS 15 principle of constraining variable revenue:

Revenue should only be recognised when it’s highly probable that it won’t reverse once the uncertainty is resolved.

This requires judgement—estimating what to include and when, based on the likelihood of entitlement. Even though the terminology differs slightly from IFRS 15, the core concept is the same.

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 (eg, direct delivery or setup costs not covered by another accounting 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.

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. This section outlines some of the significant challenges encountered by TMT clients during their IFRS 16 implementation, which will likely affect FRS 102 reporters due to the Amendments:

Identifying leases/leased assets

Under the amended Section 20, businesses must carefully assess whether contracts contain a lease—and for TMT companies, this can be complex. Telcos with leased towers or tech firms with server arrangements will need to gather detailed lease data to calculate adjustments accurately.

The focus is on whether the contract involves a physically distinct asset, even if not explicitly stated. In the TMT sector, this gets tricky—especially with assets like network towers, fibre cables, or “dark fibre”. You’ll need to assess whether you're leasing a specific asset or just capacity, and whether you control that asset.

Substitution rights

If the supplier can practically substitute the asset and benefit economically from doing so, it’s not a lease. For example, hot-switchable servers in data centres often fail the lease test due to the supplier’s substitution rights.

Incremental Borrowing Rate (IBR) or Obtainable Borrowing Rate (OBR)

While the Amendments simplify the discount rate approach compared to IFRS 16, management must still document judgements around the Incremental Borrowing Rate (IBR) or Obtainable Borrowing Rate (OBR) used to measure lease liabilities.

Systems, software implementation and management reporting

The updated lease accounting standards may require companies to update or modify their accounting systems and software to accurately capture and report lease information. Due to the time and cost involved, businesses should address this early. These changes can also impact EBITDA, affecting management reporting, KPIs, bonus targets, and debt covenants.

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.

Read our article to learn more

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

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^{[1] On 27 March 2024, the Financial Reporting Council (FRC) released “The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review 2024” which implemented amendments to FRS 102 (the Amendments to FRS 102). These are effective for periods beginning on or after 1 January 2026, with early adoption permitted.}

Amendments to FRS 102: Impacts for the TMT industry