Charities need to start preparing now for new accounting rules coming next year

29.01.2025
Rebecca Frost
Charities
Rebbeca Frost

Although the new Statement of Recommended Practice (SORP) doesn’t come into effect until next year, charities should be getting ready for it now.

Rebbeca Frost

For those responsible for preparing charity accounts, the Statement of Recommended Practice (SORP) is a key document: it provides recommendations and requirements setting out how to prepare ‘true and fair’ accounts in accordance with UK accounting standard.

The SORP is not set in stone, and it is updated from time to time to reflect changes to both accounting standards and charity law.  Such an update is about to happen – and although the new SORP won’t come into effect until January 2026, charities would do well to start preparing for the change sooner rather than later.

In 2024 the Financial Reporting Council finalised its amendments to the Financial Reporting Standards (FRS 102), and as these underpin the Charities SORP, we can expect these changes to be included in the new statement.  Consultation on the updated document is about to open, and we expect to see it published in the autumn and come into effect on 1st January 2026, which is when the updated FRS 102 is also implemented.

There are two key changes arising from the revised FRS 102, around lease accounting and revenue recognition.

Within lease accounting the distinction between operating and finance leases will be removed for lessees, which will result in more leases being recognised on the balance sheet.  If your charity holds operating leases, this will possibly affect your balance sheet value.

Meanwhile, a five-step revenue recognition model will be introduced for all contracts with customers, requiring organisations to identify the goods and/or services promised, and the amount of consideration it will be entitled to in return.  Charities receiving income from contracts or performance-related grants may be affected, and the timing for revenue recognition may change, which could, for example, take a charity over the audit threshold in a particular reporting period.

Although these changes are almost a year away from coming into effect, it makes sense to spread the workload of preparing for the new rules across the year, rather than waiting for the new SORP to be published in the autumn.  We may not know the exact details yet, but the direction of travel is clear from the revised FRS 102 guidance.

Five Practical Steps

The Institute of Chartered Accountants in England and Wales (ICAEW) has suggested five practical steps which charities can take now to prepare for the new SORP:

  1. Analyse lease commitments: create a comprehensive inventory of all current leases, categorising them as operating or finance leases under the current framework and listing the terms and conditions of the lease agreement.  Estimate how the new lease accounting standards might affect your balance sheet and Statement of Financial Activities (e.g. increased depreciation, reduced rental costs).  Also, consider the impact of the changing recognition, for example for bank covenants, or on whether the charity breaches the asset-related audit threshold.

  2. Assess revenue streams and contracts: conduct a detailed review of your charity’s income streams to identify those with performance conditions, paying particular attention to agreements that span multiple accounting periods.  For each revenue stream, document any performance obligations and their associated transaction values per the contract. This will help in determining when income should be recognised under the new rules.

  3. Strengthen financial reporting processes: ensure that your organisation is collecting the necessary data, such as detailed lease terms, and performance metrics for contractual income.  Provide training for finance staff and trustees to understand the upcoming changes and their implications.

  4. Engage early with professional advisors: consult with your auditors and advisors early to understand how the changes may affect your charity's specific circumstances, for example by modelling potential scenarios to ascertain how asset and liability values might be impacted by the changes and understand potential knock-on effects.

  5. Stay informed and participate in the consultation: regularly check for updates on the Charities SORP consultation; being informed will help you anticipate specific requirements. If your charity has specific concerns or unique circumstances, consider responding to the SORP consultation when it opens; input from the sector will be invaluable in shaping the final version of the SORP.

Need further guidance?

Get in touch

Wide-ranging tax planning and compliance services for individuals seeking advice and guidance from our team of experienced and highly qualified professionals.

Friendly and coherent advice and guidance on accounting and tax matters for small business owners including those starting out for the first time.

Established businesses requiring accounting and tax compliance services, forward thinking tax planning advice and the support to help your business succeed.

Our full range of enhanced corporate services aimed at large companies and those requiring audit, assurance, corporate tax advisory and diverse tax planning services.

Glossary

Test

This is a test definition

more