Friday saw the release of the draft 2025 Charity SORP, which introduces several significant changes to financial reporting for charities and further aligns with International Accounting Standards. Among the most notable changes is the introduction of a three-tier reporting framework, which aims to make compliance more proportionate to the size and complexity of charities.
One major area of change is the new income recognition rules, which will impact charities that earn income through service delivery, contracts, or membership fees. These organizations will need to follow a five-step model to determine how and when income is recognized. For example, a charity providing social care services may now face more complexity in timing its income recognition based on the specific services provided over time. While donations and grants remain unaffected, charities must reassess their income streams to ensure compliance with these new rules.
Another significant change is the revised treatment of leases. Previously, many operating leases were kept off balance sheets, but under the new rules, they will now be recorded as liabilities. This will significantly affect the balance sheets of charities with long-term property leases, such as those operating charity shops, offices, or warehouses. The change may also influence financial ratios, reserves policies, and banking covenants, leading to concerns about its wider impact on charity finances. Smaller charities, in particular, may need to seek advice on how to navigate this shift.
A major structural change, however, that has been broadly welcomed is the introduction of a new three-tier framework for SORP application. This aims to create a more proportionate reporting approach based on charity size, with the largest charities facing additional disclosure requirements. The full implications of this structure are still being assessed, but it is designed to reduce the reporting burden for smaller charities while enhancing transparency across the sector.
This new structure tailors reporting requirements based on a charity’s size:
- Tier 1 – Smallest Charities (income below £500k): Required to provide basic financial and governance information. While they are encouraged to include additional details, they are not obligated to do so. This tier aims to reduce the reporting burden for smaller charities.
- Tier 2 – Mid-sized Charities (income between £500k and £15m): Must meet all Tier 1 requirements and provide extra details on objectives, achievements, financial performance, and governance. They must also explain how their activities contribute to strategic aims and may need to discuss social and environmental factors where relevant.
- Tier 3 – Largest Charities (income over £15m): Required to meet all Tier 1 and Tier 2 obligations while also disclosing detailed financial sustainability, risk management, reserves policies, and performance measures. Additional transparency is required on volunteer contributions, grant-making policies, and social investment strategies.
Sector organisations, such as the Charity Finance Group (CFG), have launched consultation sessions to gather feedback from charities. These sessions, taking place in May 2025, will allow charities to voice concerns and influence the final version of the SORP before it is implemented. BHP will be working with CFG to host the session on 19 May 2025. This is a really valuable opportunity for charities, especially those with complex financial arrangements, to directly shape the final guidelines.
The sector is still very much digesting the draft, but overall, the 2025 Charity SORP aims to increase transparency while reducing the reporting burden for smaller charities. However, charities with complex financial arrangements, such as those with long-term service contracts or intricate leasing structures, will need to carefully review the new rules to understand their obligations. The shift to align the SORP with the new FRS 102 and broader financial reporting standards brings additional complexity, but it also promises a more consistent and transparent approach to charity finances.
Charities are encouraged to participate in the consultation process which runs until 20th June 2025, you can do that here, and ensure your voices are heard as the sector works towards implementing these important changes. The revised SORP framework offers a promising future for the sector, balancing the need for transparency with the recognition of different charity sizes and financial complexity.
At BHP we will be working closely with our clients and delivering technical updates to support the sector through this change.
