The financial reporting landscape in the UK is set to undergo significant changes with the introduction of the revised Financial Reporting Standard (FRS) 102, which is effective for periods commencing on or after 1 January 2026. This revision sees many key changes and a real step forward for the convergence with the International Financial Reporting Standard (“IFRS”).
Here’s a closer look at the key changes and their impact on charity accounting in the UK:
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Income Recognition
One of the most notable changes is the introduction of a new five-step model for income recognition, which is based on IFRS 15. This model will require charities to:
- Identify the contract(s) with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations.
- Recognise revenue as the performance obligations are satisfied.
For charities, this is likely to mean a shift in how and when income is recognised, particularly for income received under service contracts and potentially certain grants with performance conditions.
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Lease Accounting
The second key area is that the revised FRS 102 introduces a new model for lease accounting, which brings the UK requirements in line with IFRS 16. The previous distinction between operating and finance falls away, and charities must now recognise both finance and operating leases on the balance sheet. This involves recording a Right of Use (“ROU”) asset and a lease liability into the balance sheet. There is an exemption for small items, but on the whole, all leases will be capitalised.
Section 34 of the standard, which concerns public benefit entities, also provides some guidance on the treatment of leases where payments are below market rent, which is common in the charity sector. In these cases, the difference between the amounts paid and the expected market rent will be recognised as income from a non-exchange transaction.
This key change will increase the total assets and liabilities reported by many charities, impacting their financial statements and potentially their eligibility for audit.
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Specialised Activities
Revisions to Section 34 of FRS 102 address the recognition and measurement of specific types of income relevant to charities, including:
- Heritage assets, such as artworks or historical items.
- Donated goods, services, facilities, and legacies.
The new Charities Statement of Recommended Practice (SORP), which will align with these changes, will provide detailed guidance and practical examples on how to apply these revisions.
Timeline for the New SORP
The SORP is written to align with the full requirements of FRS 102 and may also layer on its own additional disclosure requirements. The development and implementation of the new Charities SORP is ongoing, and the expected timeline is as follows:
- March 2024: FRC approval of amendments to the draft SORP.
- January – March 2025: Public consultation on the draft SORP.
- June – July 2025: Review and update the SORP as necessary.
- October 2025: Final SORP issued.
- 1 January 2026: Effective date of the new SORP.
Preparing for the Changes
Charities need to start preparing for these changes now. Charities should review their current accounting practices, update their financial systems, and train their staff to ensure compliance with the new standards. They also need to work with the key stakeholders and ensure that there are no surprises within those key relationships due to changes in financial reporting, e.g. breached borrowing covenants and shock increases in funds held due to capitalisation of ROU assets.
The BHP teams will work closely with our clients to help them understand how the changes will impact them and to support them through this transition.
