FRED 82 and its impact on the UK Technology sector

The changes will become effective for periods commencing on or after 1 January 2026, which is not as far away as it sounds. The original proposed date of 1 January 2025 has recently been extended by a year, reflecting the significance of the changes and the time required for businesses to prepare accordingly.

As businesses across various industries gear up for the impending changes, the Technology sector is set to experience a notable impact, particularly in the realm of revenue recognition.

Changes are based on the five-step model of revenue recognition that is within IFRS 15 Revenue from Contracts with Customers:

1. Identify the contract(s) with a customer
2.  Identify the promises in the contract
3. Determine the transaction price
4. Allocate the transaction price to the promises in the contract
5. Recognise revenue when (or as) the entity satisfies a promise

What are the key impacts to revenue recognition in the technology sector?

1. Clarification of Performance Obligations:

• FRED 82 brings a heightened focus on identifying distinct performance obligations in contracts, requiring technology companies to reassess how they bundle and unbundle services.
• The delineation of performance obligations may require companies to recognise revenue at different points in time or over distinct periods.

2. Variable Consideration and Constraining Estimates:

• The new standard introduces more stringent guidelines on handling variable consideration, such as discounts, rebates, or penalties, requiring technology firms to carefully estimate and constrain these elements.
• Companies will need to reassess their revenue recognition policies to ensure compliance with FRED 82’s more conservative approach to variable consideration.

3. Time Value of Money:

• FRED 82 introduces considerations for the time value of money in certain contracts, impacting the determination of transaction prices.
• Technology companies engaging in long-term contracts may need to adjust their revenue recognition policies to account for the present value of future cash flows.

Are there any other key impacts for companies in the technology space to consider?

Contract Costs: FRED 82 introduces changes in the recognition and measurement of contract costs, impacting how technology firms account for costs incurred in obtaining and fulfilling contracts.
Disclosures: Enhanced disclosure requirements under FRED 82 require technology companies to provide more comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
Transition and Implementation: Companies in the technology sector must allocate resources for the transition to FRED 82, including training teams, updating systems, and ensuring compliance with the new standards.
Leases: Changes to leases are based on the on-balance sheet accounting model that is within IFRS 16 Leases. Along with revenue recognition, this is one of the major changes to be introduced by FRED 82.

Currently, FRS 102 splits out the recognition of leases by two categories – finance leases and operating leases. Whether a lease is an operating or finance lease depends upon the economic substance of the transaction.

IFRS 16, however, has no differentiation between finance or operating leases.

Contracts which meet the definition of a lease will recognise a right of use asset and a lease liability.

What you can do now

As businesses in the technology sector prepare for the implementation of FRED 82, it’s essential to take proactive steps as early as possible to navigate the changes effectively. There are several steps you can take now to minimise any future impact:

1. Conduct a Comprehensive Impact Assessment: Assess the specific impact of FRED 82 on your technology company’s revenue recognition policies and financial statements
2. Update Systems and Processes: Implement necessary changes to accounting systems and processes to align with the requirements of FRED 82
3. Provide Training and Awareness: Ensure that relevant teams within the organisation are well-informed about the changes and receive adequate training to comply with the new standards
4.  Regularly Monitor and Review: Establish a framework for ongoing monitoring and review of revenue recognition policies to adapt to any emerging challenges or changes in business practices

How we can help

If you would like to discuss the impact of FRED 82, please get in touch with your usual Blick Rothenberg contact or with Nick using the details on this page.