Revenue Recognition for Small Charities: For many small charities, income recognition has traditionally been one of the most challenging areas of financial reporting. Trustees often need to determine whether grants, donations, contracts and legacies should be recognised immediately or deferred to future periods. While the fundamental principles remain familiar, the new Charities SORP 2026 introduces important changes that will affect how charities account for certain types of income, particularly where goods or services are provided in exchange for payment.
Under the previous Charities SORP, most charities applied the well-known “entitlement, probability and measurement” approach when determining whether income should be recognised. If the charity was entitled to the income, receipt was probable and the amount could be measured reliably, income was generally recognised. This approach worked well for many traditional charitable income streams such as donations, grants and legacies.
The new SORP, effective for accounting periods beginning on or after 1 January 2026, aligns more closely with the revised FRS 102 requirements and introduces a clearer distinction between exchange and non-exchange transactions. This is one of the most significant developments affecting revenue recognition.
For many small charities, the good news is that donations and most voluntary income streams will remain largely unchanged. Unrestricted donations, fundraising income and many grants will continue to be recognised when the charity becomes entitled to the income and any relevant conditions have been met. Likewise, legacy income continues to be recognised when receipt is probable and can be measured reliably, although the guidance has been modernised and clarified.
The biggest impact is likely to arise where a charity receives income in exchange for providing goods or services. Examples include training fees, membership subscriptions with member benefits, consultancy work, service level agreements with local authorities, educational courses or performance-related grants. Under SORP 2026, these arrangements may fall within the revised five-step revenue recognition model derived from FRS 102.
Revenue Recognition for Small Charities: The new model requires charities to:
- Identify the contract with the customer.
- Identify the performance obligations within the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations.
- Recognise income when those obligations are fulfilled.
For example, a charity may receive £12,000 in advance to deliver a year-long training programme. Under previous practices some charities may have recognised most or all of the income on receipt. Under the new framework, income is more likely to be recognised over the period during which the training is delivered because the performance obligation is being satisfied over time.
Similarly, charities that receive grant funding linked to specific deliverables will need to assess carefully whether the arrangement is genuinely a grant (non-exchange income) or whether it represents a contract for services (exchange income). This distinction will become increasingly important because it directly affects the timing of recognition. Performance-related funding may need to be deferred until the relevant obligations have been fulfilled.
Although these changes may sound technical, the practical impact on many Tier 1 charities, those with gross income up to £500,000, is likely to be manageable. The new SORP has been deliberately structured to increase proportionality for smaller organisations while improving consistency and transparency. The objective is not to make accounting more complicated but to ensure that reported income better reflects the activities undertaken during the year.
Trustees of small charities should now review their main income streams and identify any arrangements involving contractual obligations or service delivery. Finance teams should consider whether existing accounting policies remain appropriate and whether deferred income balances may increase under the new rules. Early preparation will reduce the risk of unexpected adjustments when the first SORP 2026 accounts are prepared.
Ultimately, while SORP 2026 introduces a new framework for recognising certain types of income, most small charities will find that the accounting for donations, grants and legacies remains familiar. The key change is a sharper focus on identifying when a charity is earning income through the performance of contractual obligations. Trustees who understand this distinction early will be well placed to ensure accurate reporting and compliance under the new charity accounting regime.
Need assistance with the new Charity SORP requirements? Contact Millet Audit to discuss impact assessments, accounting policy reviews and audit readiness planning. info@milletaudit.com
Further information https://www.gov.uk/guidance/charity-commission-guidance