Significant changes to financial reporting for charities are imminent as the Financial Reporting Standard (FRS) 102 undergoes revisions, directly affecting the Charities Statement of Recommended Practice (SORP). These updates, effective for financial periods starting on or after January 1, 2026, will introduce key modifications to how charities prepare their financial statements. With a focus on enhancing transparency, consistency, and financial clarity, charities are advised to start preparing for the transition.

The revised FRS 102 aligns with the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs), requiring charities to adopt new standards that could significantly impact financial reporting. Major changes include:

• Recognition and measurement of income: Charities will need to implement a more structured approach to recognizing income, particularly for donations, grants, and contracts. This may lead to changes in how and when income is reported in financial statements
• Enhanced disclosure requirements: There will be a greater emphasis on transparency, necessitating charities to provide more detailed disclosures about their income sources, restricted funds, and the assumptions made in financial reporting
• Leases and other financial liabilities: Changes in lease accounting will require charities to recognize more lease agreements on the balance sheet, potentially affecting financial ratios and reporting obligations.

The Charities SORP-making body, including representatives from the Charity Commission for England and Wales, the Scottish Charity Regulator (OSCR), and the Charity Commission for Northern Ireland, has collaborated closely with the Financial Reporting Council (FRC) to ensure the updated SORP provides appropriate guidance for charities implementing these changes.

While the fundamental principles of charity financial reporting remain, charities will likely need to adjust their accounting systems, update internal policies, and train staff on the new requirements. Larger charities, in particular, may need to review their existing income recognition policies to ensure compliance with the revised framework.

To ensure a smooth transition, charities should begin reviewing the changes now and take the following steps:

• Finance teams should familiarise themselves with the upcoming changes and identify areas where adjustments will be needed
• Consulting with charity auditors will help charities assess how the changes will impact their specific operations:
  • Charities receiving grants, donations, or funding from multiple sources should evaluate their income recognition policies to ensure alignment with the new standards
  • With the changes in lease accounting, charities should review their lease portfolios and consider how this will affect financial reporting
  • Ensuring that financial statements include the necessary details will be crucial for maintaining transparency and regulatory compliance.

While the changes to FRS 102 and SORP represent an evolution in charity financial reporting rather than a complete overhaul, charities must proactively adapt to avoid last-minute compliance challenges. By planning ahead and integrating these updates into their financial reporting practices, charities can continue to provide clear, transparent, and accountable financial information to regulators, donors, and stakeholders.