Changes to FRS 102 will apply to accounting periods beginning on or after 1 January 2026, with early adoption permitted where all amendments from the 2024 periodic review are adopted together.
For many solicitors’ practices, these changes may affect how and when fee income is recognised in the accounts. While the legal services provided to clients will not change, firms may need to revisit their revenue recognition policies and the way ongoing matters are assessed at the year end.
What is changing?
The revised Section 23 introduces a new five-step revenue recognition model, replacing the current approach which is largely based on the stage of completion of a matter. The updated requirements place greater emphasis on understanding what has been promised to the client, how fees are structured and when the service transfers to the client.
Practical considerations
As a result of the changes to FRS 102, firms will need to consider:
- Whether services provided to clients represent a single service or multiple performance obligations
- Whether engagement terms provide an enforceable right to payment for work completed to date
- Whether revenue should continue to be recognised as work is performed, or at a specific point in time when services are completed
- How fixed fee, contingent fee and success fee arrangements are treated
- The impact on work in progress and year-end revenue recognition
What is the impact of these changes?
While the extent of the impact will vary between firms, the revised requirements could affect the timing of revenue recognition and, in some cases, reported profits and work in progress balances. Firms may find that income is recognised earlier or later than under the current rules, depending on the nature of the services provided and the terms agreed with clients. This could have implications for financial reporting, key performance indicators, profit trends, taxation and year-end accounting processes.
What should firms do now?
Firms should review how they assess and recognise income across different types of work. For ongoing engagements, such as conveyancing or advisory services, this may involve introducing consistent methods to measure progress, whether based on time spent or clearly defined stages. Where services are distinct and separable, firms should consider recognising income individually as each piece of work is completed.
Arrangements involving uncertainty, such as success fees or conditional elements, should also be carefully evaluated to determine whether income recognition should be deferred until the outcome is known, unless there is sufficient evidence to justify earlier recognition.
How can PM+M help?
Our specialist legal sector team can help you understand how the revised requirements apply to your firm and identify any areas requiring further consideration.
For more information, please contact Claire Layton using the button below.
