Sayer Vincent's Joanna Pittman provides a technical article focusing on setting out a practical approach to identifying exchange and non-exchange transactions, explaining the relevant recognition criteria under the new SORP, and outlining how income should be recognised in each case to ensure compliance.
Overview
SORP 2026 makes a clear, practical distinction: income is either exchange or non‑exchange, and each follows different recognition rules. Getting this right matters for transparency, comparability and donor trust.
Non‑exchange transactions (voluntary income)
What it is
Non‑exchange income is value given freely by a donor or grantor where the charity does not provide equal value in return. Typical examples are donations, legacies, some grants, gifts in kind and investment income. These receipts can still carry performance‑related conditions or other usage terms.
When to recognise
Recognise non‑exchange income when it is probable and measurable, usually on receipt or when receivable, unless there are performance‑related conditions. If such conditions exist, recognise income only when those conditions are satisfied.
Exchange transactions (consideration for goods or services)
What it is
Exchange income arises when the charity receives payment in return for goods or services. This includes contracts with third parties, membership subscriptions that confer service rights, royalties, licence fees, event participation fees and corporate sponsorships.
How to recognise
Apply the five‑step model:
- Identify the contract with the third party.
- Identify the performance obligations within that contract.
- Determine the transaction price.
- Allocate the price to the separate obligations.
- Recognise income as each performance obligation is satisfied.
Practical example
A professional membership body charging for training and exams must split the total fee into course materials, taught modules and assessments, and recognise each element when delivered.
Mixed transactions and timing issues
Some receipts contain both exchange and non‑exchange elements, for example, a membership fee that buys service rights (exchange) and includes a donation component (non‑exchange). Where services are provided over time and the charity cannot predict usage (for example, unlimited annual visits to a historic garden), recognise income over time on a straight‑line basis across the period of entitlement.
An upfront non‑refundable fee that does not transfer goods or services at inception is an advance payment and should be recognised when the related services are provided, not on receipt.
Grants versus contracts: how to tell the difference
The SORP says that transactions must be accounted for and presented in accordance with their substance and not simply their legal form. So, a funding agreement may be called a grant, a contract, a service level agreement, or something else, but what is important for the income recognition is whether the income is being given in exchange for something or not.
This can be difficult to determine so here are some hallmarks of grants and contracts which can be helpful:
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Grant
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Contract
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A gift
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Consideration (which may not be in the form of money)
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To support a project or charitable activity
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To purchase goods or services
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Freely given, with the timing, amount and frequency at the discretion of the funder
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Agreement between two parties including offer and acceptance
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Subject to trust law
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Legally binding and subject to contract law
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Activities, deliverables or outputs often set by the charity
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Performance obligations likely to be precise and set by the funder
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Unspent funds may need to be returned to the donor
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Unspent funds can be retained as profit
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If things go wrong – repayment or clawback of the funding
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If things go wrong – can be sued for damages for breach of contract
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Performance related conditions are different from performance obligations. Under FRS 102, a performance related condition makes entitlement conditional on delivering a specified activity or output (for example, planting a set number of trees). Recognise the grant to the extent those conditions have been met.
This is not the same as a restriction, which is a requirement that limits or directs the purpose for which a resource may be used but does not require a specific level of performance or output from the charity. The existence of a restriction does not prohibit a non-exchange transaction from being recognised as income when received or receivable.
Practical checklist for trustees and finance teams
- Classify early: decide whether income is exchange or non‑exchange at the point of agreement.
- Document substance over form: label (grant, contract, SLA) is secondary to whether consideration is exchanged.
- Split mixed receipts: allocate fees between service rights and donation elements.
- Match recognition to delivery: recognise income when performance obligations or conditions are satisfied.
- Review agreements for clawback, repayment or conditionality and reflect these in recognition decisions.
Final thoughts
SORP 2026 asks charities to be deliberate and transparent about income recognition. Treat classification as a governance issue: clear policies, consistent application and good documentation will reduce risk and strengthen stakeholder confidence.