FRS 102 and SaaS: Why recurring revenue isn’t as simple as it looks

Recurring billing feels stable, money lands every month, contracts renew, forecasting looks straightforward. But under the updated FRS 102, that steady subscription line can hide a more complicated picture.

If your contracts bundle licence, onboarding, implementation and support into one fee, the new revenue recognition rules may require you to split that fee apart and recognise each piece at a different time. Get it wrong, and your reported revenue in any given period can look very different from the cash you’ve actually taken.

This is the risk hiding inside many SaaS and technology contracts right now, and it’s easy to miss if you’re recognising revenue the same way you always have.

FRS 102 and SaaS – why recurring revenue isn’t as simple as it looks

What is FRS 102, and why does it matter for SaaS businesses?

FRS 102 is the financial reporting standard most UK SaaS and technology companies use to prepare their accounts. In March 2024, the Financial Reporting Council issued major amendments bringing it closer to international standards, effective for accounting periods beginning on or after 1 January 2026.

For SaaS businesses specifically, the headline change is a new five-step model for revenue recognition, and subscription and licensing businesses tend to feel this more than most, because their contracts are rarely just “one thing.”

What are the latest FRS 102 changes affecting SaaS businesses?

The core change is the adoption of a five-step revenue recognition model, aligned with IFRS 15. In short, it requires you to:

1. Identify the contract with the customer.
2. Identify each distinct performance obligation within it.
3. Determine the transaction price.
4. Allocate that price across each obligation.
5. Recognise revenue as each obligation is satisfied.

For a business selling one product for one upfront payment, this changes little. For a SaaS business selling a licence plus onboarding plus ongoing support plus maybe a customisation project, step two, identifying each distinct obligation, is where the real work starts.

How does FRS 102 affect SaaS revenue recognition?

Under the old approach, many SaaS businesses recognised revenue in a way that broadly matched invoicing or contract length. The new model asks a sharper question for every contract: what are you actually promising to deliver, and when does the customer receive the benefit of each part?

Some elements are delivered at a point in time, a licence key, a one-off setup. Others are delivered over time, ongoing hosting, support, or maintenance. Under the five-step model, each has to be assessed and recognised on its own timeline, not lumped together just because they’re on the same invoice.

So how do you know whether something is delivered over time?

The standard gives three tests, and an obligation only needs to pass one of them. First, does the customer receive and consume the benefit as you perform, the way each month of hosting or support is used up as it’s delivered? Second, does your work create or enhance something the customer already controls, such as configuring a platform that sits in their own environment? Third, if neither applies, does the work create something that has no alternative use to you, and do you have an enforceable right to be paid for what you’ve done to date, even if the customer walked away tomorrow?

That last test is usually what brings a bespoke software build into over-time recognition. If an element passes none of the three, it’s recognised at a point in time, when control passes to the customer.

What does FRS 102 mean for SaaS contracts and performance obligations?

This is where bundled contracts create risk. Take a real example: a £180,000 contract combining installation and three years of support.

• Installation is a distinct performance obligation, satisfied at a point in time, so that portion of the fee is recognised upfront, once the installation is complete.
• Support is delivered continuously over the contract term, so that portion is recognised evenly over the three years, not upfront.

Treat the whole £180,000 as one lump sum recognised on invoicing, or spread evenly regardless of what’s actually been delivered, and your revenue recognition won’t reflect the standard,  even if the cash flow looks identical either way.

Not every contract needs splitting, though. Some SaaS and technology contracts are genuinely a single performance obligation,  for example, a bespoke software build where the components are so integrated that the customer isn’t really getting separate, distinct benefits along the way.

A £2.4 million bespoke software project might be treated as one obligation, with revenue recognised based on percentage of completion. If that project is 40% complete at the reporting date, £960,000 of revenue would be recognised for the period, not the amount invoiced, and not an even split across the contract length, but a measure of progress against the whole.

The two examples sit at opposite ends of the same question: is this one obligation, or several? Getting that judgement right is the difference between revenue that reflects reality and revenue that just reflects your invoicing schedule.

How could the FRS 102 changes affect SaaS financial statements?

Because revenue timing changes, so does everything downstream of it:

• Reported revenue and profit may no longer track cash collected or invoiced in a given period.
• Deferred revenue balances may shift materially if support and service elements are now recognised more slowly than before.
• Metrics investors and lenders watch ARR, MRR, gross margin, may need re-explaining if the accounting treatment no longer maps neatly onto the commercial metrics you report internally.

If your business is preparing for investment, a fundraise, or a sale, this matters even more: buyers and investors will expect revenue recognition that holds up to the five-step model, not one that simply mirrors billing.

What should SaaS businesses do to prepare?

A few practical steps make the transition manageable:

• Map your contract types. Group them by what’s actually bundled- licence only, licence plus onboarding, licence plus support, bespoke build, rather than by product name.
• Identify distinct performance obligations within each contract type, and agree how each should be measured and timed.
• Ensure you meet the requirements for over time revenue recognition.
• Check your billing and finance systems can actually recognise revenue on a different schedule than invoicing, if they currently can’t.
• Revisit investor and lender reporting to explain any gap between accounting revenue and commercial metrics like ARR.

What are the limitations of applying FRS 102 to SaaS businesses?

The five-step model requires judgement, and SaaS contracts don’t always give clean answers. Deciding whether onboarding is “distinct” from the core licence, or how much of a bundled discount to allocate to each element, isn’t always obvious, and different reasonable people can land on different answers.

The standard also doesn’t map perfectly onto every commercial model; usage-based pricing, tiered contracts and multi-year enterprise deals can all raise questions the standard doesn’t answer directly. This is exactly the kind of area where getting an early second opinion from your auditor is worth more than guessing and hoping it holds up at year-end.

How AAB supports SaaS businesses with FRS 102

Working through which elements of your contracts are distinct, how to allocate transaction price, and how to evidence your judgements is easier with support from people who see this across multiple technology businesses. If you’d like to talk through what these changes mean for your contracts, please don’t hesitate to get in contact with Ian Chapman, Andy Stephen, or your usual AAB contact.