SORP’s up: catch the charity accounting wave

Charities will soon need to follow new accounting rules. These will be set out in a new Charities SORP (Statement of Recommended Practice), effective for accounts periods commencing 1 January 2026. It will incorporate multiple revisions that come from a development process that started in 2018/19. It also incorporates changes forced by the new FRS 102, which will apply to all accounts prepared on an accruals basis.

The new FRS 102 is final, but the SORP is currently in exposure draft, and we have the opportunity to contribute to a consultation that closes on 20 June 2025. The major FRS 102 rule changes (leasing and revenue recognition) are not up for negotiation – but we can comment on how they are interpreted and explained for charities. There are also multiple changes that we can comment on and influence. 

Here are some of the proposed changes.

Likely changes

1. Tiering

A new three-tier model will replace the current two-tier system, designed to be more proportionate in requirements:

• Tier 1: Income <£500k (T1)
• Tier 2: Income £500k-£15m (T2)
• Tier 3: Income >£15m (T3)

The current SORP splits requirements at £500k income between “larger” and “smaller” charities, so the £500k split is proposed to be unchanged. The £15 million threshold corresponds to the income threshold of small/medium companies.

2. Trustees’ annual report

The following areas are enhancements or additions to current requirements. In some cases, this involves extending larger charity requirements to all tiers, so there are some additional requirements in the smaller charity Tier, T1, but the aim is to steer charities towards more thoughtful and relevant reporting.  

• Impact reporting (all tiers – more at higher tiers): Impact reporting has, until now, been encouraged (“should” and “may”) as an addition to mandatory reporting of achievements. The new SORP introduces mandatory reporting of how the charity’s work makes a difference (T1) and the long-term impact on individuals and society (T2 and T3).
• Sustainability reporting (T3 “must”; “recommended” for T1 and T2): In a wholly new section, T1 and T2 are encouraged to explain response to and management of environmental, governance and social matters. For T3, this reporting will be mandatory.
• Volunteers: There’s a new requirement for more narrative to support the scale and nature of volunteer activities (all tiers). This was previously required only for larger charities.
• Reserves: T1 charities will have to say more, explaining steps to bring reserves into line with their target, with more explanations around designated funds.
• To help interpretation, there’s additional explanation in the SORP of what makes up reserves. To help the accounts reader, notes will need to reconcile accounts figures to the reserves policy figure, if not “evident”. There’s also useful clearing out of some largely irrelevant clutter from the reserves policy.
• T2 and T3 charities that have accrued for legacies yet to be received should also explain the impact of those timing differences.
• Plans for the future: This disclosure will be required for all tiers, not just larger charities. The SORP Committee says that as trustees already have to consider the future for their going concern assessment, this is not a significant new burden. Small charities might disagree.

3. SOFA (statement of financial activities)

There is focus on providing more support for smaller charities in Tier 1. There’s already an option for smaller charities to report using natural classification reporting as opposed to activity basis, but the illustrative SOFA currently shows just the activity basis, so smaller accounts sometimes contained an uneasy mix of the two systems. The new SORP illustrates both methods, which we welcome.

4. Revenue recognition and lease accounting

The SORP follows the key changes to FRS 102, which include:

• Leases: All leases will be on the balance sheet unless exemptions apply. This is the area that will require most work for charities and there’s lots of detail in the new SORP. Charities often have leases different in type from commercial companies, and the SORP discusses and gives examples for peppercorn leases and social donation leases.
• Revenue recognition: The new five-step model for income from contracts with customers is included in a separate section, so there’s no confusion with accounting for grants and donations. Charities will need to spend time considering how the new model affects them. For many, there may not be significant change in practice. However, there’s specific guidance on membership subscriptions and royalties, which charities often have.

The SORP consultation does not ask for views on these changes but seeks to explain principles and requirements in a way that translates for charity arrangements.

5. Cashflow

The threshold for cashflow preparation has been raised from >£500k to >£15m, aligning with relevant criteria in FRS 102. We think this is a helpful change.

6. Total return and social investment

Changes stem from amendments to the Charities Act 2022 and simpler terminology for social investments.

What to do and how to prepare

To prepare for these changes, charities should:

• Use available resources: Familiarise yourself with the new standards and guidelines.
• Review existing agreements, particularly leases and complex revenue contracts: Make sure current practices align with upcoming requirements.
• Seek advice: Consult with accounting professionals to understand the implications.
• Participate in the survey: Share your feedback by completing the online survey or by talking to us to contribute to our response.

Invitation to respond to consultation – talk to us!

The consultation is live, closing 20/6/2025. Responses will be reviewed in June-July and the SORP then updated accordingly. Final approval by the FRC is expected in August-September, with the new SORP published in October. You can participate by completing the online Consultation. If you don't want to respond directly, speak to us and be part of our response.

In conclusion

We have touched on just some of the changes – the draft SORP itself is lengthy: 303 pages. The new SORP aims to help charities report smarter and not necessarily in lengthier annual reports. We think the draft is largely successful in this. We continue to review in detail, picking up drafting points as well as points of principle for our feedback. We continue our conversations in the sector to compile our response and look forward to hearing from you, if we haven’t already. Email enquiry@larking-gowen.co.uk to contribute your views.

Hannah Stewart