New Charities SORP is on its way – are you ready?
When?
In March 2024, the FRC issued a revised FRS 102, the Financial Reporting Standard which underpins the Charities SORP. The effective date for most amendments is periods beginning on or after 1 January 2026. The new Charities SORP will be issued in the Autumn of 2025, after a proposed consultation period between March and June.
Accounting year ended…
Like FRS 102, the new SORP will require charities to apply the new rules for accounting periods starting 1 January 2026. So, the first full year accounts to be prepared under the new SORP and revised FRS102 will be 31 December 2026 year ends. For the first charities to report under the new standards, 1 January 2026 becomes what is known as the “date of initial application”. The SORP will not override or modify the requirements of FRS 102, although some sections of the revised standard already make specific provision for Public Benefit Entities.
What’s changing?
The change that is likely to affect most charities most significantly is the removal of the distinction between operating and finance leases for lessees.
In other words, major leased assets will appear on a charity’s balance sheet, offset by a liability (similar to extant finance lease accounting). Recognition exemptions permit short-term leases and leases of low-value assets – such as office equipment - to remain off balance sheet.
Any exemptions for charities?
The SORP-making body acknowledge that this will be a challenging area for charities to understand and to make the necessary changes.
In addition, it recognises that this will introduce additional cost for charities. In responding to the FRC’s consultation on updating FRS 102, the SORP-making body suggested simplification and exemption be provided to charities. However, the FRC concluded that all entities applying FRS 102 will be required to follow section 20 (Leases) of FRS 102 with some simplifications available. Charities must now consider how the changes impact them and apply the changes as necessary to all leases.
Long term contract income
Charities who receive long term contract income will also be affected. Income in future will be recognised on the basis of five steps, based on identifying the distinct goods or services promised to the customer and the amount of consideration to which the entity will be entitled in exchange.
Other minor changes include:
- Cash flow statement: new disclosure requirements about supplier finance arrangements
- Clarity over when a change of estimate is an error: changes in accounting estimates that result from new information or new developments are not corrections of errors, and
- Extension of related party transactions to include commitments to do something if a particular event occurs or does not occur in the future
Where to find further information
Finance teams may wish to consult the SORP microsite as well as a suite of Factsheets issued by the Financial Reporting Council to assist their planning, pending the finalisation of the SORP later this year:
- Factsheet 3 – Statement of cash flows
- Factsheet 4 – Financial instruments (includes Public Benefit Entity reference to concessionary loans)
- Factsheet 5 – Property: Fair value measurement
- Factsheet 6 – Business combinations
- Factsheet 7 – Transition to FRS 102
- Factsheet 9 – Initial application of the Periodic Review 2024 amendments
- Factsheet 10 – Revenue from Contracts with Customers (notes exemption for non-exchange transactions for PBEs)
- Factsheet 11 – Lease accounting for lessees (notes use of deposit rate for PBEs where implicit interest rate not ascertainable)
Enormous thanks for this article to Fiona Condron, National Head of Charities / Business Assurance at BDO [email protected].
What should charities be doing to prepare?
- Review and analyse lease commitments – speak to Andrea Newman [email protected]
- Review contracts and revenue streams – speak to Greg Gibson [email protected]
- Review financial reporting policies and procedures to ensure you are capturing the necessary data
- Take advice early where needed
- Get involve in the charities SORP consultation when it comes out
Our content explained
Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.