Changes to accounting standards

The upcoming changes to financial reporting will introduce some significant developments for trusts, particularly in the areas of income recognition and lease accounting. These updates aim to improve transparency and consistency in financial statements but will also require a more detailed understanding of contracts, obligations and lease arrangements.

Key changes - income recognition

Under the updated requirements, income will need to be recognised when performance obligations are satisfied, rather than when risks and rewards are transferred.

This represents a shift towards a more principles-based approach, requiring trusts to:

• Carefully review contractual arrangements
• Identify the specific performance obligations within each contract
• Recognise income as those obligations are fulfilled, rather than at a single point in time

In practice, this means trusts will need a clearer understanding of when services are delivered, as this will drive the timing of income recognition.

Lease accounting

Lease accounting will also change significantly, with most leases now being brought onto the balance sheet.

Trusts will recognise:

• A right-of-use asset, representing their ability to use the leased asset; and
• A corresponding lease liability, representing the obligation to make lease payments

This will:

• Increase both assets and liabilities on the balance sheet
• Change how lease costs are recognised in the Statement of Financial Activities (SOFA), typically shifting from a single expense to depreciation and finance costs
• Impact key metrics such as reserves and financial ratios

What to do now?

Although these changes will apply from the 2026/27 financial year, it is important that trusts begin preparing early.

This includes carrying out a full review of existing lease arrangements, covering not only property but also equipment, furniture and fittings, to understand the potential impact on the balance sheet.

Trusts should also review all income contracts currently in place, assessing the existing accounting treatment and identifying the associated performance obligations within each arrangement. This will help ensure that income can be recognised consistently and in line with the new requirements when services are delivered.

Additional guidance from the Department for Education is expected and will be included in the Academies Direction 2027.

If you wish to discuss this in further detail, please get in touch with one of our education experts here.