Impact of FRS 102 Amendments on Charities SORP Compliance

As the ongoing updates to FRS 102 continue, efforts are also being made to revise the Charities Statement of Recommended Practice (SORP) under FRS 102. This development process was initiated following recommendations from a governance review completed in 2019, which led to the formation of an expert group known as the SORP committee. This committee comprises 14 members representing the four charity law jurisdictions within UK-Irish GAAP. In a recent announcement on the Charities SORP website, the committee stated:

“The drafting of the new SORP is well underway, and this can now be progressed based on the final FRS 102 amendments. The new SORP will be subject to a three-month consultation period anticipated to commence in early 2025. It is expected that the new SORP will be published by Autumn 2025, with an effective date of January 1, 2026.”

Key changes in FRS 102

The two significant updates to FRS 102 include:

• Revenue Recognition: A new model based on IFRS 15’s five-step approach has been introduced, incorporating necessary simplifications. The impact on entities will vary depending on their customer contracts.
• Lease Accounting: A revised model for lease accounting has been established, aligning with IFRS 16’s on-balance sheet approach, also with some simplifications. Organisations utilising operating leases will likely experience significant changes.

Implications for the Charity Sector

While these updates will affect all sectors reporting under UK GAAP, certain aspects of the revised standard may particularly influence the not-for-profit sector:

1 – Legacy Income: Previously addressed in Appendix B of Section 34, legacy income is now integrated into Section 34 itself, but without clarifying when a legacy receipt is considered probable. This indicates that the Charities SORP will serve as a reference for legacy income recognition.

2 – Heritage Assets: The updated standard clarifies what constitutes a heritage asset and how it should be accounted for under Section 34 or other relevant sections. Heritage assets acquired through non-exchange transactions must be recognised at fair value, with exceptions only in rare cases where reliable measurement is not feasible.

3 – Leases Involving Non-Exchange Transactions: Section 20 of FRS 102 provides guidance on leases where payments are significantly below market rates, a common scenario in the charity sector. Such arrangements effectively provide resources from non-exchange transactions. Under the new standard, these resources will be recognised as part of the cost of the right-of-use asset. This addition may increase total assets for some charities, potentially necessitating statutory audits even for those with low income and employee counts. The upcoming SORP is expected to clarify whether these incoming resources should be recorded as deferred income or recognised fully at lease commencement.

4 – Incoming Resources from Non-Exchange Transactions: Section 34 has been expanded to include guidance specific to public benefit entities regarding incoming resources from non-exchange transactions. It outlines reliable measurement examples and acknowledges instances where measurement may be impractical, such as low-value donated goods or volunteer time. However, it lacks clarity on defining donated services or facilities.