Construction sector and long-term contracts: impact of FRS 102 accounting changes
The construction sector operates on long-term contracts, where timing is everything. With this year’s introduction of new FRS 102 requirements for revenue recognition, businesses face a fundamental shift in how they report profit, potentially reshaping their financial performance and strategic decision-making.
How the revenue recognition changes work
Under the changes to the UK’s FRS 102 accounting standards, effective for periods starting on or after 1 January 2026, revenue will now be recognised using a five-step model based on the underlying contract with customers.
These five steps cover creation of the customer contract, commitments to performance and price and how these are linked, before revenue recognition as a fifth step when performance obligations are satisfied.
This means that revenue and costs are no longer directly linked and profits are no longer “smoothed” over the life of the contract and you can expect to see greater fluctuations in the timings of the profit recognised over the life of the project.
Effects on your accounting
Revenue will now be determined based on the underlying contracts
If not all contracts are then each will need to be considered separately to determine when revenue should be recognised.
Be prepared for more variation in profitability
It’s now based on when your company has the right to receive the revenue, rather than on the overall profitability of the long-term contract.
The transition will require a one-off adjustment
On adoption of the new accounting standards, there will be a one-off adjustment as the new revenue recognition policy is bought into effect. This will lead to a restatement of prior year figures.
Tax impact
The tax treatment will follow the accounting treatment, so the variation in profit will lead to a corresponding impact on tax payable.
On the initial adoption, any impact on prior years’ profit will be dealt with in the year of adoption, whether that’s additional profit subject to tax or losses to be offset.
How we can help
The mandatory FRS 102 accounting changes could have major consequences for your turnover, profit and tax to pay. Regardless of when your next accounting period starts, we recommend considering the impact as early as possible, with structured guidance from experienced advisers.
Our specialists in technical accounting and construction businesses can assist you every step of the way, from examining your contracts and explaining the implications for your accounts in plain English, to producing the journal entries and new disclosures that are required in the accounts – giving you more freedom to focus on your projects and business growth.
For a chat about how we can help your business to transition to the new revenue recognition requirements, please speak to you usual BKL contact or Nick Bishop using the form below.
You can also learn more through the articles, video guides and webinar replays on our FRS 102 hub.
Contact Nick
Frequently asked questions: FRS 102 and long-term construction contracts
What’s changing under FRS 102?
From accounting periods starting on or after 1 January 2026, FRS 102 introduces a new way of recognising revenue.
Instead of spreading profit evenly over a contract using percentage of completion, revenue is now recognised based on what the contract actually says you’re entitled to, and when.
Why does this matter for construction businesses?
Construction often involves long-term contracts, staged payments, and variations.
The new rules can change when profit shows up in your accounts, which may affect reported results, tax bills, bank covenants, and how performance looks to stakeholders.
Does this mean I’ll stop using percentage of completion?
In many cases, yes. The focus moves away from how much work has been done and towards when you have a contractual right to the income. That means revenue and costs may no longer move in line with each other.
Will this affect my profits?
It can affect the timing of profits rather than the total profit over the life of a contract.
- If your contracts allow you to bill and be paid early, profits may appear sooner
- If revenue is only earned at later stages, profits may appear later
This can lead to more ups and downs in reported profitability from year to year.
Do all my contracts need to be reviewed?
If your contracts aren’t all the same, then yes.
Each contract may need to be looked at individually to understand when revenue should be recognised under the new rules.
Is there a one-off impact when the rules change?
Yes. When you first adopt the new FRS 102 rules, there will be a one-off adjustment. This involves restating prior year figures to reflect the new approach, which could increase or reduce opening reserves.
How does this affect tax?
Tax generally follows the accounting treatment. So if profits move between years under the new rules, tax payable may also move.
Any adjustment relating to earlier years is dealt with in the year you adopt the new standard, either as additional taxable profit or as losses that may be available for relief.
When should I start thinking about this?
As early as possible. Even if your next year-end feels distant, the contract review and modelling can take time.
Early planning helps you avoid surprises around profit volatility, tax, or financing arrangements.
