FRS 102: Key changes for charities ahead of the new SORP

The financial reporting landscape for charities is undergoing significant changes, with the long awaited new Charities SORP and the updated Financial Reporting Standard (FRS) 102 set to take effect from 1 January 2026. 

These revisions will bring important changes to how charities account for leases, recognise revenue, and report on certain specialised activities. And, as the upcoming Charities SORP will align with these changes, charities need to start preparing now, well ahead of the new SORP’s anticipated release in late 2025 (an initial consultation version will be published in early 2025). 

Lease Accounting 

The key change here will be that charities will need to recognise both finance and operating leases on the balance sheet. This means recording both a Right of Use (ROU) asset and a lease liability, eliminating the previous distinction between finance (on-balance sheet) and operating (off-balance sheet) leases. 

 Unfortunately, charities are not eligible for the same exemptions as micro-entities under FRS 105. This means that whilst some short-term leases and leases of low value assets will remain off the balance sheet, charities are likely to see changes to their balance sheets. These changes will be applied by adjusting opening reserves and not by restating comparatives. 

Revenue Recognition 

FRS 102 will also introduce a new five-step model for revenue recognition.Applicable to all contracts with customers,the model outlines the following steps: 

1. Identifying the contract(s) with a customer. 
2. Identifying the performance obligations (distinct goods or services) in the contract. 
3. Determining the transaction price (amount the entity expects to receive). 
4. Allocating the transaction price to each performance obligation. 
5. Recognising revenue as the performance obligations are satisfied. 

As a result, charities receiving income under contracts (and possibly under certain grants which have attached performance conditions)may see a shift in when revenue is recognised, potentially altering reported income levels and affecting whether or not the charity is subject to audit. These changes can be applied by restating comparatives or adjusting opening reserves. 

Revisions to Section 34 (Specialised Activities) 

Updates address the recognition and measurement of specific types of income relevant to charities, including: 

• Heritage assets, such as artworks or historical items. 
• Non-exchange transactions, including donated goods (e.g., items for charity shops), services, facilities, and legacies. 

The new Charities SORP will provide detailed guidance on how to apply these revisions, offering practical examples and criteria, but if you would like to discuss any of these changes, or have any other questions about financial reporting for charities, please contact Martin Bailey.