SORP update
The SORP making body are currently working with FRC to finalise the drafting of the next Charities SORP. As the finalised SORP will not be published until Autumn 2025, the charities need to be proactive in identifying and understanding how the changes introduced by FRS 102 will impact them. There are two significant changes in FRS 102 which will impact the charities and will be introduced as new requirements in the SORP.
Changes to the SORP
The first one is lease accounting. The current FRS 102 allows charities account for operating leases as an expense. The new FRS 102 will require charities to account for most operating leases on the balance sheet. FRS 102 has moved to this approach as it continues to align with international accounting standards. As a result, charities that lease assets, will see an increase in assets and liabilities on the balance sheet. There will also be changes to how a charity presents expenses relating to the lease in the statement of financial activities.
All entities applying FRS 102 will be required to follow section 20 (Leases) of FRS 102 with some simplifications available. The new SORP module will provide examples to assist charities and will also provide further detail on charity specific issues such as peppercorn leases. The SORP cannot override the standard so the new changes introduced by FRS 102 will also be set out in the SORP.
The second significant change is the five-step revenue recognition model which will need to be applied to income from exchange contracts. This will mean that charities will need to recognise income from exchange contracts differently under the new FRS 102. Charities will need to carefully assess their revenue recognition accounting policies to ensure they are compliant with the new requirements.
The new SORP module will provide examples to assist charities and will also provide further detail on charity specific issues such as peppercorn leases. The SORP cannot override the standard so the new changes introduced by FRS 102 will also be set out in the SORP.
What should the charities do to prepare themselves for these changes
Regarding the changes to lease accounting, charities should:
- Refer to FRS 102 and resources provided by the FRC
- Review current lease arrangements
- Establish whether current leases would qualify for any simplification i.e. short term of low value lease (see section 20 FRS 102)
- Identify what leases will need to be accounted for on balance sheet (see section 20 FRS 102)
- Identify and understand the approach that will need to be taken to identity the value for the leases and relevant transactions
- Consider what record keeping would be helpful to implement now to assist with future preparation of financial statements
- Consider whether the change in asset position on the balance sheet will impact any current borrowing or financial arrangements/covenants or planned future financial arrangements/covenants
- Consider whether any potential changes in balance sheet asset value will result in the charity needing to have an audit
- Seek professional advice if needed and consider speaking with auditors or independent examiners
Regarding the changes to revenue recognition from exchange contracts, charities should:
- Refer to FRS 102 and resources provided by the FRC
- Review current contracts and income streams
- Identify both the amount and timing of income using the new 5 step model
- Consider what record keeping would be helpful to implement now to assist with future preparation of financial statements
- Consider whether the change will impact any current borrowing or financial arrangements/covenants or planned future financial arrangements/covenants
- Seek professional advice if needed and consider speaking with auditors or independent examiners
The SORP-making body will submit the draft SORP to the FRC in January 2025 for the FRC’s approval ahead of the public consultation on the SORP. The public consultation will run for 12 weeks and the current project plan anticipates that the draft will be subject to public consultation in March 2025.
