What do changes to income recognition mean for charities?
18 June 2025
The Charity SORP-making body published the Exposure Draft 2026 on 28 March 2025. The 12 week consultation period ends on 20th June 2025. You can find details on this consultation process in their application guidance for charity accounting. The SORP is expected to be finalised in October 2025 and will apply for accounting periods beginning on or after 1 January 2026.
One area subject to significant changes in the draft is income recognition. These changes have been proposed to maintain consistency with FRS 102 and to provide additional guidance.
Module 5 on income recognition applies to all three tiers of financial reporting and has been restructured into two parts:
- Income from exchange transactions
- Income from non-exchange transactions.
The general rules on income recognition from the previous version (entitlement, probable, measurement) have been removed and each type of income now has its own reporting criteria.
Transactions must be accounted for and presented in accordance with their substance and not simply their legal form. As a result, charities need to assess the conditions attached to donations, grants and contract income to determine the correct recognition basis.
With these changes outlined, charities should begin to prepare for the new rules on income recognition by assessing their existing income streams using the basis set out in the draft. Module 5.6 of the draft SORP includes further guidance on what charities should consider when making this assessment.
Income from exchange transactions
Exchange transactions include income a charity receives for goods or services supplied under contract with third parties. The income the charity receives for the transfer of promised goods and services is an amount that reflects the consideration to which the charity expects to be entitled in exchange for those goods or services.
Criteria for the recognition of income
The SORP’s criteria for the recognition of income follows the model set out in section 23 of FRS 102, though some terminology has been changed to reflect terms used in the sector. Customers have been renamed as third parties and revenue is referred to as income.
The five-step model set out is as follows:
- Identifying a contract.
- Identify the performance obligations under the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations.
- Recognise the appropriate level of income as or when the charity satisfies each obligation.
Charities also need to consider whether performance obligations are satisfied over a period of time (for example the delivery of training sessions) or at a point in time (such as the transfer of a specific asset or service).
Charities must select a method of measuring performance against the obligations and apply the same method consistently across income streams with similar obligations. Charities must also remeasure progress against the obligations at the end of each reporting period and make any needed adjustments to the estimates used. Section 5.54 of the draft SORP includes the suggested forms of measurement set out in FRS 102.
Non-exchange transactions
Non-exchange transactions cover income the charity receives from a donor, who may be an individual or an entity, without directly providing equal value in exchange including donations, legacies and grants.
FRS 102 update: legacy income recognition still lacks clarity
In the latest version of FRS 102, guidance around legacies has been removed, so more detail is now included in the SORP. However, the hoped for clarity on when to recognise legacies hasn’t been provided and there’s little change from the previous version.
References to entitlement have been removed and the section now starts with a clear statement on recognition: “Income from legacies must be recognised when it is probable that the legacy will be received, and its value can be measured reliably.”
The draft does include an additional statement that legacy income must only be recognised when it can be reliably measured but still says that charities should measure or estimate the fair value of the legacy income receivable based on the information available.
However, there has been no change to the definition of ‘probable’ from the previous version of the SORP.
Guidance on taking a portfolio approach to multiple legacies and applying discount rates to legacies expected in more than one year also remains unchanged from the previous SORP.
How we can help with inhouse processes
To discuss the updated SORP, its ramifications for you and to explore ways to improve your inhouse processes, get in touch with Kerry Gallagher, Sharon Monteith or your usual RSM contact.
