The Charity Commission is launching a consultation into the Charities SORP in 2025.

Here's a roundup of some of the expected changes, and the significant impact they may have on VCSE groups & organisations in Gloucestershire.

The proposed changes

1. Lease accounting

The distinction between operating and finance leases will be removed for lessees. This means that more leases will be recognised on the balance sheet of lessees (asset and liability). If your charity currently holds operating leases, this is likely to impact your balance sheet values.

While there are some exemptions that allow short-term leases and leases of low-value assets to remain off-balance sheet, the exemptions granted to micro-entities reporting under FRS 105 are (unfortunately) not available to charities.

Implementation: these changes will not require a restatement of comparatives but will instead be reflected in an amendment to the opening reserves.

2. Revenue recognition

A five-step revenue recognition model will be introduced for all contracts with customers. This requires organisations to identify the distinct goods or services promised to the customer (verbally or in writing) and the amount of consideration it will be entitled to in return.

This may affect charities receiving income from contracts or certain performance-related grants. As a result, the timing of revenue recognition may change and could affect whether the charity’s total gross income in the reporting period crosses a threshold, e.g. the audit threshold.

Implementation: these changes can be reflected by restating comparatives or by amending the opening reserves.

Our Business Support Lead, Karen, attended an event hosted by the ICAEW last week and has shared an overview of their five practical steps that charities can take now, below:

1. Analyse lease commitments: create a comprehensive inventory of all current leases, categorising them as operating or finance leases under the current framework and listing the terms and conditions of the lease agreement. Estimate how the new lease accounting standards might affect your balance sheet and Statement of Financial Activities (e.g. increased depreciation, reduced rental costs). Also consider the impact of the changing recognition, for example for bank covenants, or on whether the charity breaches the asset-related audit threshold.
2. Assess revenue streams and contracts: conduct a detailed review of your charity’s income streams to identify those with performance conditions. Pay particular attention to agreements that span multiple accounting periods. For each revenue stream, document any performance obligations and their associated transaction values per the contract. This will help in determining when income should be recognised under the new rules.
3. Strengthen financial reporting processes: ensure that your organization is collecting the necessary data, such as detailed lease terms, and performance metrics for contractual income. Provide training for finance staff and trustees to understand the upcoming changes and their implications.
4. Engage early with professional advisors: consult with your auditors and advisors early to understand how the changes may affect your charity's specific circumstances, for example by modelling potential scenarios to ascertain how asset and liability values might be impacted by the changes and understand potential knock-on effects.
5. Stay informed and participate in the consultation: regularly check for updates on the Charities SORP consultation, for example by reading our newsletters and registering for relevant training events and webinars. Being informed will help you anticipate specific requirements. If your charity has specific concerns or unique circumstances, please consider responding to the SORP consultation in due course. Input from the sector will be invaluable in shaping the final version of the SORP.

About The Charities Statement of Recommended Practice (SORP)

The Charities SORP provides guidance to preparers of charity accounts. The SORP provides recommendations and requirements setting out how to prepare ‘true and fair’ accounts in accordance with UK accounting standards. The SORP is updated from time to time to take account of changes to accounting standards and/or charity law. (Source: Gov.uk)

You can find out more on the Gov.uk website.

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