Changes to UK GAAP FRS 102 are effective from 1 January 2026, with early application permitted. These changes have significant implications for software companies.

Revenue accounting for software products will become more complicated and changes to lease accounting will impact EBITDA. CFOs and founders of software companies should plan early, especially when focusing on investment or exit strategies."

Software companies in Tech using FRS 102 must prepare, as revenue recognition aligns with IFRS and US GAAP.

The UK revenue standard has been completely replaced. Key areas for software reporters will be identifying performance obligations, allocating revenue across complex contracts and keeping principal vs agent considerations under review. Here’s what you need to know:

Performance obligations and multiple element arrangements

Software contracts and licenses can include multiple services to customers. Tech companies will need to assess where these services meet the definition of performance obligations - distinct promises within a revenue contract. These performance obligations can often only be identified with a careful review of the contract, relevant side agreements and terms of use. Commonly seen separate performance obligations may include the provision of licenses (Saas or otherwise), adjacent hardware, implementation, maintenance, or post-contract customer support. All of these components may need to be accounted for separately, at different points in time, across all contracts and revenue streams. This will be a significant project for finance teams.

Complexity in allocation of the contract price

Contract revenue needs to be apportioned across each performance obligation, with reference to the relative market price of each component. The pricing agreed in a contract does not automatically reflect the amount you will recognise in the income statement – especially where contracts include bundled services. The transaction price for each of these elements will need to be determined. This can be difficult when taking into account variable consideration, milestone payments, service level guarantees and estimates of performance bonuses.

Transition challenges

From January 2026, many software companies will need to approach the recording and recognition of their revenue streams in a fundamentally different way which could cause fluctuation in profitability and forward-looking revenue models. This will increase the burden on finance teams and may mean existing systems need to be updated or overhauled to handle the new reporting requirements.

How the updates to FRS 102 will impact leases?

The updates to FRS 102 also bring a substantial shift in how leases are reported and aligns lease accounting in UK GAAP with IFRS 16. It removes the concept of operating and finance leases and brings almost all leases onto the balance sheet by recognising a lease liability and a right of use asset. Those who monitor EBITDA closely will see big changes.

EBITDA will increase as costs such as rent are removed from operating expenses and instead are reflected through a depreciation charge on the asset and a finance cost on the lease liability. Businesses with covenants based on gearing may need to move quickly to consider the impact.

Management teams will need to identify and analyse all lease contracts across the business. As they do so, they should look for embedded leases, commonly seen in agreements such as server hosting contracts. Software companies in co-working spaces should carefully assess these leases as minimum lease terms and rolling clauses can impact how these costs are reported on the balance sheet.

What do the changes to FRS 102 mean for software companies?

The changes to FRS 102 will have significant implications for software companies, including:

• Key KPIs will be impacted by changes to revenue and leasing – a timely review allows finance teams to plan for the impact and prepare for conversations with investors, lenders and other stakeholders.
• It may be time to overhaul accounting processes and systems. Scaling software companies commonly record revenue contracts and fixed asset registers in spreadsheets alongside a simple but effective accounting package. Updates to the revenue and lease accounting model may be the catalyst to bring forward investment in a more sophisticated ERP system.
• Larger software companies will likely have a greater number of contracts and agreements. A comprehensive exercise to assess transition may be required now to plan ahead for the changes effective from 1 Jan 26.
• The good news is that these changes do further align UK reporting with IFRS and US GAAP reporting. For global businesses this may lead, over time, to a simplification in conversations around group reporting or mergers and acquisitions as software companies across the sector and global will approach reporting under comparable frameworks.

How RSM can help

We have a team of accounting and financial reporting experts experienced in UK GAAP and IFRS. We can help you understand the impact of updates to FRS 102 on your business, provide practical guidance on implementing change, and help with communication planning and ensuring compliance with new requirements. If you would like to discuss these changes further, please get in touch with Ben Bilsland or your usual RSM contact.