In early 2024, the Financial Reporting Council (FRC) completed its Periodic Review of FRS 102, finalising amendments that will take effect from 1 January 2026. The September 2024 edition of FRS 102 incorporates all amendments introduced by the 2024 Periodic Review. These updates follow extensive consultation and bring significant changes to accounting standards.

As the Charities SORP is underpinned by FRS 102, the SORP-making body advised in their recent project update that charities and their professional advisers should refer to key changes of the 2024 periodic review of FRS 102 in advance of the new SORP being published. The consultation period for the new SORP is anticipated to open in early 2025, lasting three months, and the finalised SORP is expected to be published by Autumn 2025, with an effective date of 1 January 2026 (aligning with the changes to FRS 102).

• Lease accounting: the distinction between operating and finance leases will be removed for lessees. This means that more leases will be recognised on the balance sheet of lessees (asset and liability). If your charity currently holds operating leases, this is likely to impact your balance sheet values. While there are some exemptions that allow short-term leases and leases of low-value assets to remain off-balance sheet, the exemptions granted to micro-entities reporting under FRS 105 are (unfortunately) not available to charities. Implementation: these changes will not require a restatement of comparatives but will instead be reflected in an amendment to the opening reserves.
• Revenue recognition: a five-step revenue recognition model will be introduced for all contracts with customers. This requires organisations to identify the distinct goods or services promised to the customer (verbally or in writing) and the amount of consideration it will be entitled to in return. This may affect charities receiving income from contracts or certain performance-related grants. As a result, the timing of revenue recognition may change and could affect whether the charity’s total gross income in the reporting period crosses a threshold, e.g. the audit threshold. Implementation: these changes can be reflected by restating comparatives or by amending the opening reserves.

Revisions to section 34 of FRS 102 (‘Specialised Activities’) includes sections of interest to charities. These deal with areas such as heritage assets and income from non-exchange transactions, such as recognising income from goods donated to charity shops, donated services and facilities, and legacies. The new Charities SORP will provide more detail on the recognition considerations in these areas.

Below are practical tips for charities to start preparing for the upcoming changes.

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. Pay 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 organization 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, for example by reading our newsletters and registering for relevant training events and webinars. Being informed will help you anticipate specific requirements. If your charity has specific concerns or unique circumstances, please consider responding to the SORP consultation in due course. Input from the sector will be invaluable in shaping the final version of the SORP.

In November 2024, the FRC issued an updated suite of FRS 102 factsheets, intended to assist stakeholders by highlighting certain requirements arising from the changes to FRS 102 and include factsheets for lease accounting for lessees and revenue from contracts with customers. These will assist you in preparing for changes early.

If charities can spread the workload of these financial reporting changes over time, it will reduce pressure on finance teams closer to implementation, for example when the revised SORP is available and requires you to pay attention to other aspects, such as the narrative reporting in the Trustees’ Annual Report.

The upcoming changes to FRS 102 and the Charities SORP will likely introduce challenges, but they also present an opportunity to improve processes and aid transparency, for example regarding revenue contracts and lease agreements.

We will keep you updated on the SORP development and support you in the transition. ICAEW’s Corporate Reporting Faculty and the FRC already offer useful resources to help you plan ahead and assess the impact of the changes and I’ve added a few useful resources for further reading below.

• Five-step revenue recognition model: what you need to know
• Periodic Review 2024: leases
• Free CPD: FRS 102
• FRC Factsheets