The updated Statement of Recommended Practice: Accounting and Reporting by Charities (SORP) has been revised to reflect recent changes to FRS 102 introduced by the Financial Reporting Council, bringing important updates to how charities account for income and leases.
For many charities, the most significant impact is likely to be the new approach to income recognition, with organisations encouraged to review existing funding arrangements and accounting policies.
The changes outlined will be applicable to accounting periods beginning on or after 1 January 2026.
Specific changes
To align with the updated FRS 102 requirements (Section 23), the SORP now provides clearer guidance on different types of income and introduces a revised structure, dividing them into two categories:
- Exchange transactions; and
- Non-exchange transactions.
The previous overarching rules on entitlement, probability, and measurement have been removed. Instead, recognition now depends on specific criteria that vary depending on the type of income.
Rather than focusing on legal form alone, charities are now required to account for transactions based on their substance. This means carefully considering the underlying terms of any arrangement – particularly conditions attached to grants, donations, or contracts – to determine the correct accounting treatment.
Charities may therefore need to review their existing income streams to ensure they are aligned with the new approach.
In practice, charities should consider:
- Whether receipt of income depends on performance-related conditions; and
- Whether the arrangement is an exchange or non-exchange transaction.
Exchange and non-exchange transactions
Exchange transactions occur where a charity provides goods or services in return for payment or other consideration. In effect, the charity is earning income through delivering something. For example, a local authority may pay a charity to provide residential care services under a contract.
Non-exchange transactions arise where a charity receives funding or support without providing something of equal value in return. This typically includes donations from individuals or general grants where no direct exchange takes place.
The five steps of income recognition for exchange transactions
Different criteria apply to recognising income from exchange transactions to those that apply for non-exchange transactions.
The SORP introduces a formal five-step income recognition model for income from exchange transactions.
- Identify the presence of a contract with a third party.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognise income when or as the charity satisfies a performance obligation.
Key takeaway
Charities may need to review and update their revenue recognition policies to ensure they comply with the revised requirements. This includes applying a consistent method for measuring progress against performance obligations across similar income streams.
What this means for non-exchange transactions
The SORP does not materially change how non-exchange income is recognised, but it does provide clearer rules and a more structured approach – particularly for grants and funding arrangements with conditions attached.
In practice, charities will need to consider whether funding can be recognised immediately or only once certain conditions have been met.
- Where no specific conditions apply, income is usually recognised when it is received or formally agreed; and
- Where funding depends on the charity delivering particular activities or outcomes, the income can only be recognised once those conditions have been satisfied.
The SORP also confirms that all grants must follow a consistent performance-based model, reinforcing the need for charities to assess funding agreements carefully to determine the correct timing of income recognition.
Recognising income from legacies
In the latest version of FRS 102, specific legacy guidance has been removed, with further detail instead set out in the SORP.
Despite this revised structure, the updated SORP does not fundamentally alter the recognition criteria for legacy income, which continues to be based on probability and reliable measurement.
The underlying principle of what constitutes “probable” for legacy recognition also remains consistent, although the SORP provides more detailed guidance and practical indicators to support judgement in applying this test.
This includes:
- Clearer indicators of when receipt is considered probable;
- Greater emphasis on available estate information and research tools; and
- More structured guidance on portfolio approaches and estimation techniques.
The SORP also clarifies the treatment of discounting and confirms that any subsequent changes in estimates should be reflected in legacy income rather than expenditure.
How M+A Partners can help
The changes introduced by the updated SORP place greater emphasis on judgement, particularly in how charities assess the substance of income arrangements, apply performance conditions, and determine the timing of recognition.
While the underlying principles remain familiar, the increased level of detail and structure means many charities will need to review their existing approaches to ensure they continue to apply the requirements consistently and appropriately.
Our experienced team can help charities understand what the changes mean in practice, assess the potential impact on their financial reporting, and support them in preparing for a smooth transition to the revised requirements.
For further information or to discuss how these changes may affect your organisation, please get in touch with your usual M+A Partners’ contact or a member of our team using the details below.
