Major Changes Ahead: What Charities Need to Know About the Revised SORP
As charities prepare for the most significant update to the Statement of Recommended Practice (SORP) in years, understanding the implications is crucial. This externally authored article by Mike Bath at James Cowper Kreston accountants and business advisors, provides expert insight into what the revised SORP means for charity accounting, reporting and governance.
Understanding the Revised SORP: What’s changing and why it matters
The Statement of Recommended Practice (“SORP”) applicable to UK charities has been significantly revised. The revised SORP will apply to all charities that prepare accruals accounts for accounting periods beginning on or after 1 January 2026.
The SORP makes some changes to charity accounting which are driven by changes to the underlying UK accounting framework, FRS 102. These changes affect revenue from contracts with customers (broadly exchange contracts) and also accounting for leases where the charity is the lessee. For some charities either or both of these areas will introduce significant additional complexity and the resulting accounts will look very different to how they do now.
The SORP also makes major changes to elements of the Trustees’ report and other narrative statements. The key change is to introduce the concept of ‘tiering’ where the requirements for narrative disclosure vary from one tier to another.
Accounting changes
The changes to financial accounting are driven by changes to UK financial reporting standards, meaning that the SORP Committee had no choice but to adopt these, and also has no authority to adapt the underlying requirements. It is for that reason that accounting for legacy income, perhaps the most unpopular element of the 2015 SORP, has not changed as the underlying accounting framework has not changed.
Income from contracts with customers
The SORP introduces a new methodology for the recognition of income from contracts with customers, which will generally be the same as an exchange contract.
The five key steps are:
- Identify the contract with a customer
- Identify the performance obligations
- Determine the transaction price
- Allocate the price to the obligations
- Recognise revenue when the obligations are fulfilled
For simple exchange contract income such as a charity shop sale there will be no change to the current recognition point, but more complex contracts such as long-term service delivery or bundled services will become a good deal more complex. In most cases where the accounting changes it is likely that revenue will be recognised later than under the current framework.
What should charities be doing now?
Charities should be looking at their current sources of income and assessing, in conjunction with their accountants, whether changes to the current recognition points will be needed. As soon as the position is clear, charity finance teams should adopt the new recognition model as soon as possible for their management accounts to avoid the potential of having to make significant adjustment to figures when statutory accounts are prepared.
Lessee accounting
Perhaps the biggest change in conceptual terms is that the new SORP abolishes the distinction between operating leases and finance leases that the UK has maintained for decades, in favour of a model where all but a few leases will be recognised ‘on balance sheet’ with a Right Of Use Asset included within Fixed Assets and a Lease Obligation liability split between current and long-term liabilities.
For charities with leases that are currently treated as operating leases, the main change is that moving to the new requirements will produce higher accounting surpluses as the large bulk of most lease payments will now be treated as capital repayments rather than items of expenditure. At the same time, assets and liabilities will both increase: this might mean that a charity breaches the audit threshold for the fist time by virtue of its gross assets, or that any bank covenants that include debt or liquidity measures will change significantly.
The calculations to move what are currently operating leases on to the new model are complex, including a calculation that discounts future lease payments to their present value at an appropriate rate of interest. These calculations will be time consuming, especially where there are a large number of leases involved – those charities that have a large number of shops, or vehicles on lease agreements will have a lot of work on their hands.
What should charities be doing now?
Charities should be compiling a register of all of their current lease arrangements and start the process of reworking the accounting under the new model. As with the revenue changes, the sooner this is brought into the normal management accounting process, the better and this should not be left until the year end. Where the lease accounting changes will have an impact upon any covenants, charities should engage with their lenders now to ensure that both parties are clear on how covenants drawn up under the old rules will be applied under the new.
Trustees’ Reports
The most significant conceptual change to the SORP comes in the Trustees’ Report (“TR”), where the concept of different reporting requirements for different tiers is introduced.
The tiers set out in the SORP are:
- Tier 1 Total income below £500,000
- Tier 2 Total income £500,000 to £15,000,000
- Tier 3 Total income more than £15,000,000
Unlike company reporting the tiers apply in the first year that a threshold is breached: there is no equivalent of the ‘two year rule’ from Companies Act size limits. For that reason, charities which are close to the next tier up, especially those where income levels are unpredictable, need to be mindful of the requirements of the higher tier so that additional disclosures can be made in the first year necessary.
The SORP requires more detail across most captions than previously, and more explicit linking to the financial statements when discussing issues such as the assessment of going concern and the basis of reserve policies. There is generally more emphasis on explaining the ‘why’ rather than the ‘what’ especially in the areas of ESG policies and the impact of charitable activities.
Environmental, Social & Governance
Charities in Tier 3 must, and those in tiers 1 & 2 are encouraged to report on how the charity is responding to and managing environmental, social & governance matters for the first time.
The SORP leaves charities to choose what to talk about, but gives examples including performance against targets used to manage carbon emissions, employee & board diversity and wellbeing, work in the local community, ethical policies, cyber security and data security.
Charities which meet the thresholds of the Streamlined Energy & Carbon disclosure regulations will still have to disclose this data in addition to other ESG matters.
What should charities be doing now?
Charities should be considering what their key ESG policies and KPIs are and putting in place robust systems to capture performance against these objectives. This is likely to be especially important for charities with major contracts with public sector organisations, where ESG scoring is an increasing element of tender assessments.
Impact reporting
All tiers are now required to report on the achievements of the charity, and specifically the questions:
- In what way has the charity’s work made a difference to the circumstances of its beneficiaries?
- Has the charity’s work provided any wider benefits to society as a whole?
Tiers 2 and 3 are also required to report the impact the charity is making, considering the long-term impact of its activities on both its beneficiaries and society as a whole, including the measures or indicators to assess charitable impact.
What should charities be doing now?
It is important to remember that outputs are not outcomes: measuring activities and/or expenditure are not the same as measuring impact. Key questions for Boards are to be clear on what their KPIs are for charitable impact and how performance against those KPIs is monitored and assessed. Charitable impact is often not easy to measure and effective impact may only be apparent over very long periods, so the exercise to define and measure impact KPIs may be complex and time-consuming, perhaps involving Trustees, staff throughout the charity, beneficiaries and even other public organisations.
Summary
There are a number of areas where the new SORP will lead to significant changes in charities’ annual reports and accounts and in many cases the changes will be complex and time-consuming to deal with. The charities that adapt best to the new reporting landscape will be the ones that undertake impact assessments well ahead of their first reporting period under the new SORP to make sure that existing systems are in place to adapt to the new rules and disclosure requirements, and that there are no nasty surprises or last-minute headaches when preparing and finalising statutory reports.
