Upcoming changes to the Charities SORP

The Charities Statement of Recommended Practice (SORP) is undergoing significant revisions to align with updates to FRS 102 and to enhance transparency and accountability in the sector.

The public consultation on the draft SORP has now closed. This consultation will be used by the SORP-making body to arrive at a final version in due course. The updated SORP is then expected to be published in autumn 2025 and will be effective for reporting periods beginning on or after 1 January 2026.

For a charity with the popular March year-end, therefore, the revisions will not therefore apply until the year ended 31 March 2027 – but with the need for comparative figures to follow the new rules it is not too soon to prepare for the changes!

Key Proposed Changes:

1. A Three-Tier Reporting Framework

This tiered approach will be based on income levels:

• Tier 1 applies to charities with income below £500,000.
• Tier 2 applies to those with income between £500,000 and £15 million.
• Tier 3 applies to the largest  Charities, being those with income over £15 million.

The intention of the new tiers is to have a more proportionate approach to the reporting requirements. The current regime places a heavy burden on those smaller charities who may have less resources for dealing with what is required of them, and often have simpler operations and structures. At the other end of the scale the aim is to ensure sufficient transparency and accountability for the biggest charities.

2. Revenue Recognition

The SORP will be revised to align with the new FRS 102 section 23, which is based on international reporting standards (IFRS). This involves the introduction of a new five-step income recognition model for income from exchange contracts. The five steps are as follows:

• Identify the contract(s) with a customer.
• Identify the performance obligations in the contract
• Determine the transaction price.
• Allocate the price to the performance obligations in the contract.
• Recognise revenue when (or as) the performance obligations are satisfied.

As a result of this change, charities will need to reassess how and when they recognise income, particularly that arising from contracts and grants.

3. Lease Accounting

Most operating leases will now need to be recognised on the balance sheet, reflecting both the asset and corresponding liability.

This aligns with the new FRS 102 (and IFRS 16) and represents a significant shift from previous off-balance-sheet treatments. Exemptions will apply for leases of less than 12 months and for “low value” leases – although the latter has not been quantified!

4. Enhanced Disclosures

The revised SORP will aim to improve narrative reporting in the following areas within the trustees’ annual report:

• Impact and outcomes of charitable activities.
• Reserves policies and going concern assessments.
• Volunteer contributions and Environmental, Social, and Governance (ESG) considerations.

These enhancements should be of benefit to charities, as they aim to provide stakeholders with a clearer understanding of a charity’s operations and stewardship. 

5. New Modules Introduced

The SORP will contain two new modules which aim to provide greater guidance to charities to assist them with applying the changes. Module 10A relates to Provisions, Contingent Liabilities, and Contingent Assets, and Module 10B covers Lease Accounting.

Action Points for Charities

As already noted, there is no time like the present to start preparing for the changes – while we are still working with a draft, the two major changes to how transactions are accounted for – i.e. income recognition and lease accounting – are simply aligning the SORP with rules that are already in place elsewhere, so are almost certain to be applied as per the draft.

Now is the time to:

• Review your current accounting policies and assess the impact of proposed changes.
• Prepare for the transition by updating systems and training relevant staff.
• If the changes are likely to significantly affect the “look” of your accounts – consider communicating with relevant stakeholders to avoid surprises later on

For more detailed information visit the official SORP website https://www.charitysorp.org/