Important Changes Coming to Your Accounts: What Charities & CICs Need to Know About FRS 102
Today, we want to give you a heads-up about some significant changes coming to the way your financial accounts are prepared under FRS 102, which is the main accounting rulebook for many UK businesses and charities.
Don’t worry, we’re here to help you navigate this! Our goal is to explain it as simply as possible, so you know what’s coming and what we can do together to prepare.
When Are These Changes Happening?
The new rules officially kick in for accounting periods starting on or after 1 January 2026.
This means that if your financial year-end is 31 March, the changes will apply from 1 April 2026. Your annual accounts for the year ending 31 March 2027 will be the first to fully reflect these new rules.
While the effective date is 2026, the preparation starts now, in 2025. We’ll need to look at your contracts and leases from the beginning of your accounting period that starts in 2026 to ensure everything is set up correctly.
What’s Changing? Two Key Areas
The main areas affected by these updates are:
1 - How you recognise income from contracts (Revenue).
2 - How you account for leases (like renting your office or equipment).
Let’s break them down.
1. Income from Contracts: “Earning as You Go”
This is all about how and when your organisation records the money it earns from services or goods provided to customers. Think of things like:
- Fees for training courses you deliver
- Membership subscriptions where you provide services
- Income from specific service contracts
- Corporate sponsorships where you deliver something in return (like advertising or marketing)
The Big Shift: The new rules want to make sure your income is recorded as you deliver the promised service or good, not necessarily just when you receive the cash. It’s like “earning as you go” instead of counting all the money at once. This means revenue might be spread over a longer period than before.
There’s now a new 5-step model to follow for these types of contracts:
1 - Identify the Contract: Confirm an enforceable agreement exists with your customer.
2 - Identify Performance Obligations: Determine the distinct goods or services you’ve promised to deliver.
3 - Determine Transaction Price: Calculate the total amount of money you expect to receive.
4 - Allocate the Price: If you’re promising several distinct things, divide the total price among them.
5 - Recognise Revenue: Record the income as you satisfy each promise by delivering the goods or services.
Good News for Charities! Most donations and unrestricted grants are generally NOT affected by these specific new revenue rules. They’ll continue to be accounted for under existing charity-specific guidance (the Charities SORP). These new rules mainly apply to income where you provide a specific good or service in return for payment (what accountants call “exchange transactions”).
2. Leases: “On the Balance Sheet”
This is probably the biggest visual change you’ll see in your accounts.
The Big Shift: Currently, many leases (like renting your office or a company car) are treated as “operating leases.” This means the regular rent payments are simply shown as an expense in your profit & loss statement, and the lease itself doesn’t appear directly on your balance sheet.
Under the new rules, most leases will now appear on your balance sheet. This means your financial statements will show:
- A “Right-of-Use” (ROU) asset: This represents your right to use the leased item (e.g., the right to use the office space).
- A corresponding lease liability: This represents the money you owe for the lease payments.
What Does This Mean for Your Accounts? Your balance sheet will look different, likely showing more assets and more liabilities. This doesn’t change your cash flow, but it changes how your financial position is reported. Important financial metrics, like your debt-to-equity ratio, might look different too. We’ll help you explain this to funders or stakeholders if needed.
Also, the way lease expenses are shown in your profit & loss will change. Instead of a single “rent expense,” you’ll see depreciation on the ROU asset and interest expense on the lease liability. This typically means a slightly higher expense in the earlier years of a lease.
Are there any exceptions? Yes! To make it easier, there are exemptions available for certain leases, allowing them to remain off-balance sheet:
- Short-term leases: Those with a term of 12 months or less at the start of the lease.
- Low-value asset leases: Leases for assets that are considered “low value” (e.g., small office equipment like printers or laptops).
We can help you determine if your leases qualify for these exemptions.
Your Timeline: What to Do Now (and What Happens Next)
- Now (2025): Get Ready!
- This is the critical preparation phase. We encourage you to start gathering information.
- We’ll need to review all your active contracts for services you provide and all your lease agreements (for property, vehicles, equipment, etc.).
- We’ll look at the terms, what’s being delivered, payment schedules, and how they compare to current accounting.
- This early review helps us understand the impact and plan any necessary adjustments to your bookkeeping.
- Autumn 2025: The final charity-specific guidance (the Charities SORP FRS 102) is expected. We’ll be reviewing this carefully to ensure our advice is fully tailored for you.
- 1 January 2026: The official effective date for the new rules. For organisations with a calendar year-end, this marks the beginning of the first financial year under the new standards.
- Early 2027 (for March year-ends): Your annual accounts for the year ending 31 March 2027 will be the first to fully show these new accounting treatments.
Simple Steps You Can Take Now
The best way to prepare is to be proactive! Here’s a quick checklist to help you get started:
For Income (Revenue) Contracts:
1 - Identify All Customer Contracts: Make a list of all agreements where your organisation provides goods or services in exchange for payment.
2 - Review Contract Terms: Read through these documents to understand what you promise to deliver and when, and how you get paid.
3 - Identify Distinct Promises: For each contract, determine if you are promising to deliver separate, identifiable goods or services (e.g., distinct parts of a training course).
4 - Understand Payment Terms: Note when payments are due and if any consideration is variable (e.g., performance bonuses).
5 - Consider Variable Income: For income that might change (e.g., based on results), assess the most likely amount you expect to receive.
6 - Track Progress of Services: For ongoing services, keep records of how much of the service has been delivered at any point in time.
For Leases:
1 - List All Leases: Compile a comprehensive list of all your organisation’s lease agreements (e.g., for office space, vehicles, equipment).
2 - Check for Exemptions: For each lease, see if it is short-term (12 months or less) or for a low-value asset (e.g., small office equipment).
3 - Gather Lease Details: Collect all key information for each lease: start/end dates, payment amounts, renewal options, and any specific terms.
4 - Understand Discount Rate: Be prepared to discuss with your accountant how to determine the appropriate interest rate for your lease calculations.
5 - Track ROU Assets/Liabilities: Work with your accountant to understand how these new assets and liabilities will be recorded and tracked in your accounts.
Most Importantly: Talk to Us!
This is the most crucial step. We’re here to help you understand how these specific changes will impact your organisation. We can walk you through your contracts and leases, assess the impact on your financial statements, and ensure you’re fully ready for the transition.
These changes are significant, but with good planning, we can ensure a smooth transition for your charity or CIC. We look forward to working with you to make sure your accounts remain accurate, compliant, and transparent.
Feel free to reach out to us anytime to discuss this further. contact us.