Accountants & Business Advisers

Preparing for the new Charity SORP: What the FRS 102 revisions mean for your accounts

The UK charity sector is on the cusp of a significant shift in financial reporting. With the revised Charities Statement of Recommended Practice (SORP) still expected to be approved by the Financial Reporting Council (FRC) this month. The final version is planned for publication in October, and charities must prepare for the changes that will take effect from 1 January 2026.

These updates are driven by the periodic review of FRS 102, which aligns UK GAAP more closely with international standards such as IFRS 15 and IFRS 16. The implications for some charities will be substantial, particularly in two key areas of income recognition and lease accounting. There are also some sector-specific changes.

Income Recognition: A New Five-Step Model

The revised FRS 102 introduces a structured five-step model for recognising income, based on the existing internation standards (IFRS 15). The prescribed steps are:

  1. Identify the contract(s) with a customer
  2. Identify the performance obligations
  3. Determine the transaction price
  4. Allocate the transaction price
  5. Recognise revenue as obligations are satisfied

For charities, this will mean a shift in how income from service contracts, performance-based grants, and donations is recognised. Income will no longer be recorded upfront but instead spread over time as obligations are fulfilled.

Key implications

  • Timing matters - multi-year grants may need to be deferred
  • Restricted funds and conditional donations will require more nuanced treatment
  • Greater emphasis on documentation and contract analysis
  • Financial reports may look different, even if the charity’s actual cash position hasn’t changed
  • Trustees will need to understand the timing of income to make informed decisions about budgeting and reserves

Lease Accounting: Bringing Operating Leases onto the Balance Sheet

Under the revised FRS 102, the distinction between finance and operating leases is removed. With effect from 1 January 2026 charities will need to recognise most leases on the balance sheet by recording a Right of Use (ROU) asset and a lease liability. 

Exemptions apply for:

  • Short-term leases (12 months)
  • Low-value assets (e.g., laptops, office furniture)

Key implications

  • More transparency, but more complexity
  • Increased reported values of both assets and liabilities
  • Replacement of lease expenses with depreciation and interest charges
  • Potential impact on audit thresholds, covenants, and KPIs
  • Trustees should review lease agreements and ensure that long term commitments are fully understood

In addition, charities with peppercorn leases or below-market rent arrangements will need to recognise the difference as non-exchange income, adding complexity to calculation and reporting.Shape

Sector-Specific Adjustments and Disclosure Requirements

The new SORP will also introduce:

  • A three-tier reporting framework based on charity size
  • Enhanced guidance on heritage assets, donated goods, and legacy income
  • Expanded disclosure requirements, especially around lease commitments and income assumptions

Key implications

  • Additional reporting requirements may apply
  • The objective is greater transparency to build trust with funders and the public

What Should Charities Do Now?

To prepare for the 2026 implementation:

  • Review lease portfolios and assess which leases will be capitalised
  • Evaluate income recognition policies, especially for grants and contracts
  • Update financial systems and chart of accounts
  • Train finance teams and trustees on the new standards
  • Engage with advisors and auditors to assess impact and plan transition

Final Thoughts

While the changes represent an evolution rather than a revolution, they will reshape how charities present their financial position and performance. They are designed to improve transparency and consistency across the sector and while they may add complexity, they will also provide trustees with a clearer picture of their charity’s financial position and obligations. Proactive planning now will help avoid last-minute compliance challenges and ensure continued transparency and trust with stakeholders.

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