As auditors, we should be preparing the audited entities and ourselves for these changes (HAT have covered the changes in our Quarter 2 2025 technical update Quarterly Update for Accounting Firms: Key Trends & Changes and there’s an ICAEW helpsheet on implementing FRS 102 revenue recognition amendments for instance).
Key points re the 5 step model:-
Step 1: Identifying contract(s) with the customer –
- How does the audited entity contract with its customers?
- Do those contracts fall withing the scope of Section 23 of FRS 102?
- Is there a history of multiple contracts but with interdependencies or a single performance obligation?
- How are contract modifications handled?
Step 2: Identifying performance obligation
- How many elements are there to the performance obligation?
- Is it one deliverable, a series of deliverables bundled together, or a series of deliverables that are distinct from each other?
- Are warranties included?
- What is the policy on refunds or additional sales?
Step 3: Determining the transaction price
- Is there a variable element to the transaction price?
- If so, what is it based on?
Step 4: Allocating the transaction price to the performance obligations in the contract
- How does the audited entity link the transaction price to the performance obligations?
Step 5: Recognising revenue when (or as) the entity satisfies a performance obligation
- Is the performance obligation satisfied at a single point in time or over time?
- Does the entity’s historical practice align with the criteria in revised FRS 102?
Transitioning
- Which choice of method will be used – the standard provides two choices for transitioning fully retrospectively including restating comparatives, or prospectively from the date of transition (cumulative catch up) without restating comparatives.
Auditing issues
All auditors should by now be familiar with the requirements of ISA 540 to use one of three approaches when auditing an estimate:
- using evidence obtained from after the end of the accounting period;
- testing how management made the estimate; or
- developing an auditor’s point estimate or range.
But each technique can provide different challenges.
- Is sufficient post year-end information going to be available to provide evidence?
- Is the nature of the calculation model used by management complex, will we have sufficient understanding of it?
- Do we understand enough about the revenue model to be able to construct our own estimate or range?
- What impact tariffs are having / going to have or cancellation clauses in contracts etc.
- Going concern – impact of the timing of the revenue and cash flows under the revised model.
Therefore preparing now could be key!
