RSM recently held a webinar, alongside CFG’s Head of Policy, Richard Sagar, covering changes in the new SORP. As you might imagine, there were lots of questions from attendees about what the new SORP means in practice, from income recognition and tiered reporting to new requirements about leases. This two-part article includes RSM’s detailed responses to those questions, and offers practical insight to help your organisation get ready for the changes.
Operational readiness and implementation
Am I right in thinking the SORP does not apply to charities with income of less than £250,000 per annum?
Only charities that prepare their accounts on an accruals basis are required to apply the Charity SORP. Charities are required to prepare their accounts on an accruals basis, and therefore apply the Charity SORP, if the charity is in the UK and has income for the year exceeding £250,000, the charity is registered with Companies House, or the charity’s governing document requires the charity to prepare accounts on the accruals basis.
What should charities be doing right now to prepare for implementation, even though the effective date is 2026?
There is a lot for charities to consider, even if the changes have little or no impact on the charities’ annual accounts. It is easier to break this down into smaller, bitesize projects. For example, the recommended place to start is to gather information – identify your income streams and lease contracts. Then read contracts and analyse the arrangements to ensure you fully understand them and have all the information you need to make an assessment. You may need to liaise with the sales or grants teams within the charity to get a deeper understanding of income streams and contracts, for example. Undertake a high level of assessment of the impact for the changes most significant to your charity and start conversations with key stakeholders, such as trustees and lenders. Charities should also determine their tiering as this will dictate the minimum level of information the charity will need to disclose.
Which internal stakeholders need to be involved early - finance only, or should fundraising and operations be engaged too?
Trustees, bring them on the journey with you. Trustees make strategic and operational decisions, so they need to understand how the financial information presented to them will be impacted by these changes, particularly if management information provided in the first year of the changes do not reflect the adjustments that will be made by year-end. Trustees may also offer moral and practical support.
One of the most common misconceptions when accounting standards change is that it’s just a problem for the finance team. The finance team may need to lean on other internal teams to provide further detail on income contracts or grant agreements that they cannot ascertain or interpret from the documents themselves. Some of these other teams may already have information collated on a spreadsheet so tell these teams what you need and why before undertaking unnecessary work. It is also important to alert teams that enter lease or services contracts or make grant applications, to the changes, so that these additional considerations can be made for new arrangements.
Are there any quick win readiness activities that charities can complete before year end?
The changes to the SORP can impact your management reporting, tier level, audit requirements, or system changes, so we do not see this as a year-end exercise. The time to look at this is now. However, here are four quick win readiness activities:
1. Determine the charity’s tiering and identify the requirements from the SORP for that tier; also considering whether there are additional requirements from company or charity law that continue to apply.
2. Identify your current performance measurements and how these can be used to assess your impact on service delivery and strategy, and identify any additional measurements that should be considered in your reporting.
3. Identify your income streams and gather your service contracts and grant agreements.
4. Identify your lease arrangements and gather your lease contracts.
Do you recommend pilot testing the new income model against a few contracts or grants before full implementation?
Yes, a pilot testing approach may be useful, particularly where there are similarities between contracts and can have many benefits, for example:
- Focusing on a small number of contracts as the finance team learn how to apply the five-step model may increase the efficiency of their assessment for other contracts.
- Breaking this assessment into bitesize projects makes preparation feel more manageable.
- An assessment on a sample of contracts may be sufficient in the finance team providing an early assessment of the impact on income recognition to trustees.
For organisations with limited finance capacity, what’s the most efficient place to start?
Fact finding! Changes to income recognition and lease accounting may have a significant impact on some but not all. The areas that will need greatest resource will vary from charity to charity. To assess where this resource should be directed, consider:
- If you have leases – if you do have leases, start by gathering your lease contracts. Do you have the information you need to determine the lease term, remaining lease payments or the discount rate to be applied?
- Identify your income streams – gather contracts and agreements for those that may be more complex, for example, those that may have multiple performance obligations or grants that may be service contracts. Do you have enough information to determine the performance obligations in the contract? Who do you need to speak to for more information?
- Completing a high-level check of all the changes – this can help determine areas of focus and can also be provided to the auditor to show ‘completeness’.
Once the scale of the work is known you can determine where you have capacity gaps and where external support may be required. Reach out to your accountants or auditor for support and guidance. We offer flexibility so you can use us how and when you need to, from ad-hoc support on the phone through to preparation of accounting papers for audit, our high-level comparison and completeness tool or a secondment. Please get in touch with your usual RSM contact or one of the team for more information.
Income recognition (five-step model)
We rely heavily on multi-year grant funding. Under the new five step model, how should we approach identifying performance obligations where the grant agreement isn’t very detailed?
The first thing to do is to establish if the funding is from grants or whether they are in substance contracts. If they are genuine grants then they are non-exchange transactions and as such the five-step model does not apply. A lack of detail in the agreement could be an indicator that it is a grant not a contract but you would need to review each one to be sure. If they are grants, then the treatment remains unchanged from the previous SORP and you would recognise the income when performance related conditions are satisfied, when the income is received or receivable where terms are administrative only and/or when there is reasonable assurance that any other terms will be met.
How will the new SORP affect charities that receive large restricted grants - will income be recognised later than before?
The recognition of grants (both restricted and unrestricted) remains largely unchanged from the previous SORP so we would not expect your income to be recognised any differently. As non-exchange transactions, income from grants are excluded from the five-step model. Do however take care to consider whether the grant is a revenue contract requiring more detailed analysis.
Legacy income is a big part of our organisation’s funding. Under the revised SORP, when will we now be able to recognise entitlement?
The new SORP has not significantly changed the recognition of income from legacies however references to entitlement have been removed. Income from legacies must be recognised when it is probable that the legacy will be received and its value can be measured reliably. The SORP includes indicators of when receipt is likely to be probable including grant of probate, confirmation that there are sufficient assets in the estate and any conditions attached have either been met or are under the charity’s control.
In practice, the recognition of some legacies could be delayed where estates are being challenged or the charity has any doubt over obtaining control of the funds, the concept of control is more flexible than the perhaps more clear-cut entitlement criteria in the previous SORP.
Will smaller charities need to make significant changes to their existing income recognition policies, or will the effect be minimal?
Module 5 of the SORP which covers income recognition applies equally to charities in all three tiers so there are no exemptions for smaller charities, unless they are exempt from applying the SORP. However, in practice most smaller charities will likely have a smaller number of, and less complex, income streams so the impact will likely be less significant. A charity in receipt of donations and investment income only, will likely see no change. However, a small charity in receipt of contract income will need to apply the five-step model.
What are the most common judgment areas you’re already seeing clients struggle with when mapping income streams to the new model?
Based on discussions so far, the biggest struggle we see charities face is understanding the distinct performance obligations in their contracts – what the charity is actually delivering and whether they are separately identifiable. For example, a training course may be delivered over time with the course package including a textbook and a touch point meeting. The training course and textbook are separate performance obligations with the former delivered over time and the latter delivered at a point in time. The touch point meeting may be a third performance obligation, or form part of the performance obligation to deliver the training course, depending on the type of service being provided. This assessment is more difficult when the detail is not in the contract therefore teams will need to find other ways of identifying what the performance conditions are. Where there is a matter of significant judgement, this should be disclosed in the financial statements.
Some clients we have spoken to are also concerned that the initial determination of whether a funding agreement is a contract or a grant will be difficult and require significant judgement.
Does this only relate to training we have charged for, i.e. if we deliver training for free as part of our work does that need to be reported from an accounting perspective or just in our usual impact reporting process?
If this training is provided for free as part of your charitable services and is a non-exchange transaction, then the five-step model does not apply. On the other hand, if the training is included as part of a wider service delivery and is deemed ‘free’ because it has not been allocated a price, then the model shall apply.
For long term contracts is it reasonable to align performance obligations with client payments for recognition purposes?
Charities must identify the performance obligations in a contract, whether these are distinct or combined, and how those obligations are fulfilled (i.e. at a point in time or over time) without reference to the client payments. When performance obligations are satisfied over a long-term contract, the charity is required to develop a method of measuring progress in fulfilling the performance obligations. The method used to calculate client payments may be aligned with the performance of the performance obligation, but that is not necessarily the case. Advance payments received by the charity are recognised as a liability and recognised to income as the performance obligations are satisfied.
Is the income recognition the same as in IFRS 15 then?
Income recognition from exchange transactions in Module 5 of the new Charity SORP is aligned to the five-step model in FRS 102 (which is based on the key features of the five-step model in IFRS 15) and adapted to the charity sector.
I am the trustee of a grant giving charity. We withdraw a fixed amount from the investment portfolio and spend it "as income" even though technically part of it is a withdrawal of capital. Will the full withdrawal be treated as income for the Independent Examination threshold?
The Charities Commission in its Independent Examination of Charity Accounts: directions and guidance for examiners’ (September 2017)) has clarified that income for the Independent Examination threshold for accruals accounts, includes total income as shown in the SOFA prepared in accordance with the applicable SORP but excludes endowments received or receivable. Gains on investments is not included within income in the SOFA (SORP 4.63 and 20.10) so income from investments will only include dividends and interest received on an investment portfolio. The recognition of investment income has not changed as a result of the new SORP and therefore the new SORP will not change the impact this scenario has on the Independent Examination threshold.
Are grants related to research excluded from the five-step model? We can't determine specific performance obligations for these and so currently recognise income upon incurring expenditure?
If the agreement is determined to be a grant, and therefore a non-exchange transaction, the five-step model does not apply. The five-step model only applies to exchange transactions. An agreement would only be accounted for as a contract with a third party, and therefore an exchange transaction, if it meets certain criteria:
- The parties to the contract have approved the contract and are committed to perform their respective obligations.
- The entity can identify each party’s rights regarding the goods or services to be transferred.
- The entity can identify the payment terms for the goods or services to be transferred.
- The contract has commercial substance.
- It is probable that the customer will have the ability and intention to pay the consideration to which the entity will be entitled when it is due.
Is RSM of the view that possible disagreements between charities and their auditors over aspects of the five-step model will lead to longer audits and delays in charities closing out their accounts?
The SORP changes should not lead to delays in your audit but is likely to involve more work to audit the adjustments required on adoption of the new SORP, and also potentially increased fees. The key is to begin preparations early so that you, your finance team, and your auditors are aligned on how the new requirements affect your charity. If you have completed the necessary fact finding, understood the nature of your contracts, identified your performance obligations, and documented your assessments with appropriate diligence, your auditor should be able to review your conclusions efficiently. They will typically test a sample of contracts to confirm that they agree with your analysis and the resulting accounting treatment.
Having these conversations in advance gives you more time to resolve any areas of judgement. If, during your review, you find that contract wording does not clearly reflect the substance of the arrangement, consider whether updates to future contracts could make the terms and obligations clearer.
Should you require any further information or assistance regarding SORP, please do not hesitate to contact:
Hannah Catchpool Head of Not for Profit, RSM hannah.catchpool@rsmuk.com
Andy Ka Financial Reporting Partner, RSM andy.ka@rsmuk.com
Read the second part of this article, featuring responses to scenario-based questions, as well as questions about the tiered reporting framework and lease accounting