Getting income recognition right under SORP 2026

For exchange transactions, SORP 2026 aligns with the revised FRS 102 and requires charities to apply a five-step revenue recognition model. Exchange transactions arise where a charity provides goods or services to a third party in exchange for consideration (usually cash). Examples may include service delivery contracts, training fees, membership fees, and ticket sales among others. The five steps:

1. Identify the contract
2. Identify the performance obligations
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognise income as, or when, performance obligations are satisfied

A key consequence of this approach is that income recognition becomes linked to the transfer of promised goods or services rather than receipt of cash; i.e. for a service delivery contract delivered over multiple years, though funding may have been received up front, income would need to be assessed for the above steps and recognised progressively as the services are delivered. It is worth noting that for simple arrangements, timing of income recognition could well be un-changed under the new SORP compared to the last.

Potentially the most nuanced challenge for charities may be the distinction between grants and contracts, a long-standing issue that often requires judgement. The existence of reporting requirements or performance monitoring alone does not automatically make a funding arrangement a contract, rather a charity must consider whether the funder receives goods or services of approximately equal value in exchange for the funding provided. This continues to require assessment on a case-by-case basis.

Non-exchange transactions; a focus on control

Most donations, grants and legacies remain non-exchange transactions because the donor or funder does not receive goods or services of approximately equal value in return. While the accounting outcomes for many charities may appear similar to current practice, the conceptual basis has evolved.

One of the most important shifts within the revised SORP is the increased emphasis on control of a resource, rather than the erstwhile concept of ‘entitlement’. The previous recognition criteria trio has been removed, with recognition now linked more explicitly to the underlying asset definition in FRS 102.

Under the revised framework, charities must consider whether they control an economic resource and whether any barriers or conditions outside the charity’s control remain before recognising non-exchange income. Restrictions on how funds may be spent do not generally prevent recognition, whereas genuine performance-related conditions or barriers may require deferral until those conditions have been satisfied. From my own experience, most grant agreements among smaller charities, restricted or not, tend not to have genuine performance-related conditions preventing recognition, and for these, income should continue to be recognised in full when received, or receivable.

When to recognise donation income

For donations, the cash basis would appear be more reasonable; it is difficult to justify control of resources being under the charity’s purview for a pledged donation, though showing amounts receivable held by third party platforms, or in relation to open gift aid claims at the balance sheet date, remains appropriate.

Assessing when to recognise legacy income

Within non-exchange transactions, the area tending to spark the most discussions with external auditors and accountants is legacy income. There is a broad range of acceptable approaches under the revised SORP. Some finance teams prefer to be more conservative and recognise later in the legal process, some more proactive. The two questions I consider as an audit engagement partner are:

1. Is there a SORP-compliant accounting policy for when legacy income should be recognised; and
2. Has it been consistently (and correctly!) applied?

Granting of probate tends to be the minimum requirement, but it is also important that the charity considers whether the executors of the estate have established that there are sufficient assets available after liabilities have been settled to make the indicated payment, and that any attached conditions have been met or are within the charity’s control. This last is not always clear-cut, and particularly where the gift to the charity is a residuary (non-specified pound value) amount subject to sale of assets, it can be challenging to justify that economic control has passed to the charity before such sales have been finalised. Receipt may be probable in this scenario, but not reliably measurable, in which case it would be premature to recognise an asset.

Key takeaway

Overall, SORP 2026 retains familiar outcomes for many donations and grants, but places greater emphasis on understanding the substance of funding arrangements and the existence of a controlled economic resource. The result is a framework that aligns more closely with modern financial reporting concepts while requiring greater professional judgement from preparers, trustees, and indeed auditors.

Support with charity income recognition

Unsure how SORP 2026 affects your charity’s grants, contracts or donations? Our charity specialists can help you assess funding arrangements and review your income recognition policies. Get in touch to discuss what the changes mean for your charity.