Most trustees and charity managers will be aware that a new SORP (Statement of Recommended Practice) has been published, applying to accounting periods starting on or after 1st January 2026. The document is designed to bring charity accounting up to date with changes in wider accounting standards, as well as making reporting clearer and more useful.
A technical but nevertheless significant change brought in by the new SORP is in the field of income recognition, measures which have been introduced chiefly to ensure consistency with FRS102.
The rules from the previous version of the SORP (entitlement, probable, measurement) remain valid but are packaged a little differently – and are considered through factors such as whether the charity has an enforceable right to the income or if there are performance conditions.
Now each type of income has its own reporting criteria. This means that transactions must be accounted for according to their substance and not just their legal form – which means that charities will need to assess conditions attached to donations, grants and contract income.
Under the new SORP, income is deemed to be from either an ‘Exchange Transaction’ (where the income the charity receives is in exchange for goods or services supplied under contract) or a ‘Non-Exchange Transaction’ (income received without directly providing equal value in exchange, such as donations, legacies and non-restricted grants).
The new SORP sets out a five-step model for Exchange Transactions based on that in FRS102, although some terminology has been changed to reflect the charities sector – for example, ‘revenue’ is referred to as ‘income’.
The five-step model works as follows:
Identify the contract(s) with the third party: this is an agreement which creates enforceable rights and obligations, and can be a formal documented contract, a verbal agreement or a simple sale of an item in a shop with agreed terms of sale.
Identify the performance obligations in the contract: i.e. the goods or services promised in the contract. Distinct goods and services should ‘unbundled’, or accounted for as separate deliverables.
Determine the transaction price: including whether there is any variable consideration, and how this should be measured and recognised.
Allocate the transaction price to the performance obligations: in other words, allocating the price determined in Step 3 to each obligation identified in Step 2. Where there are no observable standalone prices, these must be estimated.
Recognise income when (or as) the charity satisfies a performance obligation: This pinpoints when control of the good or service passes to the third party, with income recognised either at a specific point in time or over time (for example the delivery of a series of training sessions).
Charities can choose whether to deal with income crossing over the changeover date between the former and the new SORP, either by applying the five-step model; retrospectively, or by applying it at the changeover date.
Some common issues which are already emerging:
Legacies: income from legacies must be recognised when it is probable that the legacy will be received, and its value can be measured reliably.
Memberships and subscriptions: These can be both Exchange and non-Exchange Transactions, depending on whether they are a straight donation or whether the membership or subscription purchases the right to goods and services.
Goods donated for sale (for example in charity shops): There is no change from the existing SORP here. If it is impracticable to measure the fair value of goods (for example high volume, low value second-hand goods donated for resale), they should be recognised as income at the sales value, when they are sold.