In September 2024, the Financial Reporting Council (FRC) published a new edition of FRS102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS102 revised) which takes effect for accounting periods commencing on or after 1 January 2026. The revised standard introduces two significant accounting changes, which bring FRS102 into closer alignment with International Financial Reporting Standard (IFRS), and this insight is concerned with the changes to revenue recognition that will affect membership bodies.
The changes to revenue recognition considered below concern only revenue receivable under contracts with customers, and they do not apply to revenue streams such as investment income or royalty income.
The five step revenue recognition model
FRS102 revised sets out the following steps which must be followed in determining how and when to recognise revenue from contracts with customers:
- Identify the contract with a customer
This should be straightforward for all of a membership body’s revenue streams, albeit that contracts may be formal, such as a membership agreement or a sponsorship agreement, or informal, such as a member registering to attend an event. Management will therefore need to take care to ensure that they have identified all of the contractual income that the organisation earns.
- Identify the performance obligations in the contract
This is likely to require the greatest investment of time by management because different contracts may contain multiple different obligations. In particular, the annual membership fee may entitle a member to receive a range of different benefits, which will need to be separately identified and which may result in different patterns of revenue recognition.
Performance obligations are defined as a “promise to transfer to the customer a distinct good or service, or a distinct bundle of goods and services”. Activity that does not transfer goods or services to a customer does not constitute a performance obligation, even if that activity is necessary for the performance of the contract.
- Determine the transaction price
Again, this should not be a complex exercise for most organisations. We would only expect complexity to arise here if the price is unknown at the inception of the contract and has to be estimated, which would be a very rare occurrence for most membership bodies.
- Allocate the transaction price to the performance obligations
FRS102 requires the transaction price to be allocated based on the standalone price for providing each distinct good or service, or bundle of goods and services.
Where a contract includes a combination of goods and services of which some are available separately but others only as part of the particular contract, you will need to estimate the value that should be attributed to each individual performance obligation. For example, the annual membership fee might entitle a member to receive a publication which could be purchased separately by a non-member in addition to services that are only available to members as part of their annual membership.
- Recognise revenue as you satisfy each performance obligation
The key judgment here is in determine whether performance obligations are satisfied over time or at a point in time.
Sales of goods or income relating to specific events would be recognised at a point in time – either the time of the sale or the time of the event, as appropriate.
More general membership services would be recognised over time, in a similar way to the current standard, because the customer receives the benefit continuously over the period of their membership.
Applying the model to joining fees
A joining fee is a one-off, upfront fee which is usually non-refundable, and is payable by a prospective member. It entitles an individual to become and remain a member of the organisation but does not confer any of the other benefits of membership.
Such fees are explicitly addressed in sections 23.29 and 23.30 of FRS102 revised, which explain that the fee does not relate to a specific transfer of goods or services, but rather to the future transfer of goods or services, namely those to which the individual is entitled to receive as a member.
Because the joining fee confers the right to continued renewal on a member, the obligation is satisfied over time, with the recognition period being the period of time for which the member continues to renew their membership. The obligation will only be completely satisfied when the individual ceases to be a member.
Practical implications – membership income
For membership services where the membership year is aligned with the financial year, the change to the five-step recognition model is unlikely to have a significant impact the organisation’s reported revenue, although management will still need to review the various income streams in line with the new model in order to confirm this.
Where the membership year is not aligned with the financial year and there are performance obligations that are satisfied as a point in time, along with obligations that are satisfied over time, then this is likely to result in a substantial change in revenue recognition in comparison with the existing standard. This is because the membership year spans two accounting periods so revenue relating to the obligations that are satisfied at a point in time will be recognised in one or other of those accounting periods, whereas revenue relating to “over time” obligations will be apportioned between the two accounting periods. Under the current standard, the whole of the membership fee income is recognised over time and would be apportioned between the two accounting periods.
Joining fees are typically recognised on receipt under the current standard, because they satisfy the existing recognition criteria: entitlement; probability; and measurement. Under FRS102 revised, they will need to be recognised over time as explained above. This will require membership organisations to develop an estimate of the period of time over which the member receives the benefit of the joining fee, i.e. the period of time over which the organisation satisfies the performance obligation.
Clearly it would be impractical to make this estimate on an individual member-by-member basis, so we would expect that they should instead apply an average period to all joining fees which should be revisited periodically to ensure that it remains a reasonable estimate.
Auditors of membership organisations will want to see data to support this key estimate, so it is important for you to start to gather the information that you will need sooner rather than later ahead of implementation. It would also be advisable for you to liaise with your auditors to determine their likely information needs and to confirm that your proposed basis for making the estimate is acceptable to them.
Adopting the new model for joining fees will result in revenue being deferred to future accounting periods under the revised standard that would have been recognised in full under the existing standard, which will reduce the organisation’s retained earnings and could have an impact on compliance with covenant clauses in loan agreements.
In addition to any changes to reported revenue, you will need to revise, and most likely expand, your accounting policy note in respect of revenue to reflect the application of the five-step model to each of your relevant material income streams.
Practical implications – other income from contracts
The impact of implementing the new model on other contractual income will vary between organisations depending on the specific nature of their contracts and the combinations of goods and services that are delivered.
For single-service contracts where income is already recognised over time, such as sponsorship agreements, it is likely that the impact of adopting the five-step model will be minimal.
Where contractual terms are more complex and involve the delivery of a combination of goods and services that represent distinct performance obligations, some of which are satisfied over time and others are satisfied at a point in time, it is more likely that there will be a material change in the timing of recognition of revenue where the contractual term spans more than one reporting period.
First time adoption
FRS102 revised includes two options for first time adoption of the new revenue recognition requirements:
- Full retrospective application, with restatement of comparative amounts and opening reserves balances in the current and comparative period; or
- Modified retrospective application, with an adjustment to the opening reserves in the current period but no restatement of comparatives.
Full retrospective application has the benefit that the current and prior period amounts presented in the financial statements will be comparable, because they are presented on the same basis, but modified retrospective application will be simpler to apply in practice, especially where membership benefits include elements that are to be recognised at a point in time as well as those recognised over time.
There are several practical expedients set out in the revised standard to simplify the first-time adoption process, the most relevant of which is that there is no need to reconsider or restate revenue in respect of contracts that commenced and completed in the same accounting period, or which were completed at the beginning of the comparative period. This will be most applicable for organisations where the membership year is aligned with the accounting period, because this is an example of a contract that commenced and completed in the same period.
As noted above, the first-year implementation of the new standard for organisations with one-off joining fees is likely to result in a substantial deferral of income which had previously been recognised on receipt under the existing standard. Whether the full retrospective or modified retrospective approach is applied for the first reporting period under the new standard, this will require an adjustment to reduce the organisation’s opening reserves.
However, if the average membership period and annual churn of members are reasonably consistent, the difference between the old and new approaches to recognising revenue from membership will be much lower. This may be a consideration in favour of adopting the full retrospective approach in the first year, although organisations will need to consider the impact on all of their revenue streams in deciding which approach to adopt.
