The long-awaited exposure draft of the new charity statement of recommended practice (the Charity SORP) has finally been published and with it comes a proposal for some major changes in the way charities and independent schools prepare their financial statements.
Whilst only an exposure draft at this stage a number of the proposals are in line with changes that are already happening to both international and UK financial reporting so these will happen.
Over recent history a new SORP has been published roughly every 10 years. With the last SORP taking effect in 2015, an update was long overdue, and the exposure draft had been expected for some time. The consultation on the exposure draft closed on 20 June and it is expected that the new SORP will be published in the autumn to take effect from 1 January 2026.
The good news is that this is for financial periods beginning on or after 1 January 2026 so the first full years affected will be entities with a 31 December 2026 year end. A school with a traditional 31 August year end will not have to implement the new SORP until 31 August 2027. However, schools will want to consider the impact in advance of implementation date as the changes could affect anything from reserves policies to banking covenants.
The draft standard proposes a three tier approach to the financial reporting requirements as follows:
These new tier thresholds are designed to align more closely with the newer Companies Act reporting standards for small, medium and large companies that were updated for periods commencing after April 2025.
Whilst there are some financial reporting changes (for example smaller schools and charities will no longer be required to prepare a cash flow statement) the majority of the tiered requirements affect the Trustees Report module.
However, in addition there are a number of changes to the financial reporting requirements of the SORP which will affect all independent schools. Two key changes are income recognition and leases which are also two of the biggest amendments to UK accounting in recent years.
Income Recognition
The new income recognition rules primarily affect income earned in exchange for delivering services or products. Donations, legacies and grants won’t be affected by these rule changes.
Charities and schools will need to follow a ‘five-step model’ to determine when and how much revenue to recognise under the new accounting rules. This process includes identifying the services being provided, attributing income to each service, and choosing an appropriate point in time or period over which to recognise the income for each service. Given the nature of the income received by Independent Schools it is likely that they will not be significantly affected by this. However, Schools may have some sources of income that are affected and will need to go through the five-step process to work that out.
A school with a December year-end will need to start to apply the new income recognition rules for its 31 December 2026 year-end but could also choose to retrospectively adopt the accounting and change comparative periods.
Leases
The second major change concerns how schools account for leases. Currently, many leases are classified as "operating leases" and are held “off-balance-sheet,” with only the annual rental payments showing in the accounts. Once the new SORP is adopted most of these operating leases will need to be recognised on the balance sheet with:
For schools with significant leases, this new requirement will completely change the balance sheet as well as the amount charged in the income and expenditure account. Bank covenants could well be affected by the change.
A school with a December year-end will need to account for the leases for the first time in its December 2026 accounts and early adoption is not permitted However the school will need to go back to the opening date of the accounting period where the standard is adopted to get the correct starting point.
Schools as well as other charities will need to spend time identifying the leases that they hold, working out the correct accounting and the impact on the financial statements.
Whilst we are still to see the final standard the new Charities SORP could significantly affect the financial statements of independent schools and other charities. It is important that all entities consider the impact on their accounts.
If you would like advice and assistance in preparing for these changes, please get in touch with our Education team at James Cowper Kreston.
