Draft SORP 2025: 5 Key Changes Every Charity Should Prepare For
Draft SORP 2025: 5 Key Changes Every Charity Should Prepare For
With less than two weeks to go before the draft SORP 2025 consultation closes on 20 June, we’ve spent the last few weeks reviewing the proposed changes, the various commentaries on them, and have identified five areas that we think are most important for our clients to comment on or prepare for.
Three-tier changes in the draft SORP 2025 – a welcome relief
For years, many of us in the sector have been calling for a review of the threshold for large charity reporting, which currently stands at £500,000. This has placed a disproportionately higher reporting burden on many smaller charities that are just over this threshold, impacting the majority of our clients.
We’re incredibly pleased to see that the draft SORP 2025 proposes a three-tier system:
- Tier one – all charities below £500,000 gross income
- Tier two – all charities with income above the Tier 1 threshold but not more than £15 million gross income
- Tier three – all charities with gross income above the Tier 2 threshold
This means many current requirements such as the Statement of Cash Flows, reporting on material fundraising objectives, and new requirements around sustainability will only be compulsory for Tier 3 charities (although we’d recommend Tier 2 charities still consider these disclosures). These proposed changes to the draft SORP 2025 should reduce disproportionate burdens on smaller charities while maintaining transparency.
Improved reserves and going concern requirements
One of our pet hates has always been the inability to reconcile some charities’ general reserves figures and policy with the relevant figures in the statutory accounts. We wholeheartedly support the new requirement to reconcile these where the relationship is not immediately clear to the reader.
This helps put all charities on an even keel. It makes accounts more understandable and transparent.
We also welcome the draft SORP 2025’s decision to clearly link this to going concern, helping trustees and funders gain a better view of this important matter.
Volunteer disclosures in the draft SORP 2025
This one is likely to impact our clients more, as many smaller charities are far more reliant on volunteers in both charitable activity and fundraising. It will now be required for all charities (not just larger ones) to include an explanation that helps users understand the scale and nature of the activities undertaken by volunteers and the input they provide. Tiers 2 and 3 will also be required to provide more detailed quantitative data on this.
Lease accounting changes in the draft SORP 2025
To align with the new FRS 102, all leases apart from a select few (short-term leases of less than twelve months and low-value items such as personal computers, mobile phones, etc.) will now require a right-of-use asset to be recognised on the balance sheet at commencement, alongside a lease liability calculated using the present value of future lease payments. Subsequently, depreciation (and possibly impairment losses) will be recognised against the asset, and the lease liability will need to be released over time with relevant finance charges recognised.
This is going to be time-consuming, and charities will need to prepare for this. We’ll be publishing a separate blog in the coming months to help you prepare, but in the meantime, the draft SORP 2025 committee has suggested taking the following steps:
- Refer to FRS 102 and resources provided by the FRC
- Review current lease arrangements
- Establish whether current leases would qualify for any simplification (i.e., short-term or low-value leases; see section 20, FRS 102)
- Identify what leases will need to be accounted for on the balance sheet
- Understand the approach required to identify the value of the leases and relevant transactions
- Consider what record-keeping would assist with future financial statements
- Assess whether the change in asset position will impact any current or planned borrowing/financial arrangements or covenants
- Consider whether changes in the balance sheet asset value may result in the need for an audit
- Seek professional advice from a firm such as ours if you have any questions
Revenue recognition under the draft SORP 2025
Finally, as expected, charities will need to apply the new five-step revenue recognition approach from the updated FRS 102. This will affect three main areas (though others may be impacted depending on the organisation):
- Contracts – Any contracts for service provision will need to be reviewed to determine whether recognition is affected
- Membership – Membership payments may now need to be recognised on a different basis
- Legacies – At long last, we have a SORP that provides more clarity on legacy recognition, including when the “probable” clause is met. This now considers not only probate but also other conditions and the availability of sufficient estate assets. While it would be helpful to see worked examples, the direction is clear. We’ll cover this in more detail in a separate blog.
There’s a lot more in the draft SORP 2025, and we strongly recommend speaking with your auditor, independent examiner, or a sector expert such as ourselves if you have any concerns or questions.
Make your voice count this is a rare opportunity to influence the financial future of the sector.
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