New SORP for further and higher education: what you need to know

On 3 February 2025, the Statement of Recommended Practice – Accounting for Further and Higher Education Board (FEHE SORP) issued the exposure draft of the SORP for the further education sector. Hosted on the British Universities Finance Directors’ Group (BUFDG) website, this marks the first draft SORP to be released. This exposure draft is now subject to a 12-week consultation period, which will close at midday on 30 April 2025. The final SORP is due to be published in August 2025. As the new SORP must apply to accounting periods beginning on or after 1 January 2026, the first set of accounts impacted for institutions will be for the year ending 31 July 2027. 

In addition to the exposure draft of the SORP, BUFDG has also released additional draft guidance on the most significant areas of the SORP, including: Leases and Revenue.

Changes in lease accounting

As previously reported, the biggest expected impact on the sector is the significant change in lease accounting, which will be reflected as a prospective change rather than a retrospective change. Institutions must now recognise a lease liability reflecting the obligation to make lease payments over the lease term and a corresponding right-of-use asset that is depreciated over the lease term. There are exemptions available for short-term leases or low-value assets.

Impact of SORP changes on institutions operations and financial statements

Before institutions can start accounting for their leases, they will have to make an assessment as to whether a contract is, or contains, a lease at the contract’s inception. They need to perform this assessment for each potential separate lease component. For a lease to exist, there must be a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. The additional guidance provides examples to help institutions achieve this.

Institutions will need to consider numerous points in each of the above areas. However, a particularly interesting point for the sector will be the measurement of the lease liability and the right-of-use-asset, especially in determining the appropriate discount rate. FRS 102 allows public benefit entities to use the interest rate obtainable on deposits held by financial institutions if it cannot readily determine either the lease’s implicit interest rate or the lessee’s incremental or obtainable borrowing rate.

Most institutions will record increased lease liabilities and right-of-use assets on their balance sheets, with a consequential impact on the cash flow statement. As a result, the operating lease charges currently recorded by institutions in their income and expenditure accounts will be replaced by depreciation and interest charges, which are reported after EBITDA. This could significantly impact key metrics, such as KPIs and debt covenants.

Additionally, institutions will need to provide a new note, setting out the value and movements in right-of-use assets and related lease liabilities. They must also disclose commitments for short-term and low-value leases, as well as a number of other disclosures.

How the new SORP changes revenue recognition for institutions

Another principal amendment to the SORP is the update of the guidance set out in Section 16 to reflect the new revenue accounting requirements in FRS 102. These new requirements introduced a fundamental change to the accounting and disclosure requirements for revenue from contracts with customers. This section of the SORP does not apply where contracts do not have commercial substance or in respect of incoming resources from non-exchange transactions for public benefit entities.

Under the new SORP, institutions will also need to apply a new five-step revenue recognition model, which focuses on the transfer of promised goods or services and the consideration expected in return. The application of this model may require institutions to apply significant judgement and estimation.

This five-step model requires institutions to:

• Identify the contract(s) with a customer.
• Identify the performance obligations in the contract.
• Determine the transaction price.
• Allocate the transaction price to the performance obligations in the contract.
• Recognise revenue when (or as) the institution satisfies a performance obligation.

Depending on the number of contracts that institutions have with customers, this could involve a considerable time commitment for institutions staff.

Impact on institutions’ financial statements

A new note will be required in the financial statements to disclose the following:

• Income from contracts with customers, split by income stream for the year.
• Contract balances for opening and closing balances.
• Contract costs incurred to obtain contracts.
• Asset balances at the year-end.
• Explanations of performance obligations, including their significance and expected timing of satisfaction.

The good news for institutions is that the new SORP introduces only one other significant change to their financial statements: a note showing the impact of the new accounting policies on prior-year figures. The overall structure and sections of the accounts will remain consistent with SORP 2019.

Top tips for institutions

Become familiar with the new guidance: This may sound obvious, but institutions should familiarise themselves with the new SORP and the additional guidance as there are useful examples in these that may be relevant to them. They may also wish to submit queries during the consultation period.

Collate all contracts with customers and lease agreements: As institutions prepare for the year ended 31 July 2025 financial statement preparation and audit, now is the perfect time to collate all lease agreements and contracts with customers to ensure data is complete and accurate.

Prepare an impact assessment (including a workflow plan)

Following collation of the agreements/contracts above, institutions should:

• Identify the agreements/contracts that fall under the scope of these sections of the SORP.
• Determine which elections to take in respect of short-term leases and low-value assets.
• Review the existing accounting policies and prepare new policies to reflect those that are material rather than significant.
• Consider the impact on key metrics (eg KPIs and debt covenants).
• Determine the appropriate transition approach for revenue recognition.

Finally, consider the impacts of the changes on the overall format of the financial statements.

For further information or to understand how the new SORP will impact your institution, please get in touch with Richard Lewis or your usual RSM contact.