Changes to Income Recognition - What Charity Trustees Need to Know

If you're a charity trustee, brace yourself! The way your charity recognises income is about to change significantly. Under updates to FRS 102, due to be reflected in the revised Charity SORP due to be published in Autumn 2025 and effective from accounting periods starting from 1 January 2026, there will be clearer guidance on when and how income should be recognised in your accounts

What is income recognition?

Income recognition isn’t just about when money is received. It’s currently about when a charity has entitlement to the income, when it can be measured reliably, and when receipt is probable. Recognising income too early or too late can misrepresent your charity’s financial health.

What’s changing?

In the past you’ve looked at entitlement as one of the defining factors for recognition of income. This will no longer be the case, but based on:

• Performance-related conditions – For example, income from grants must be recognised only after specified activities or outcomes are completed.

• Enforceable rights and obligations – If income depends on the charity doing something first (like delivering a service), it can't be recognised until that happens.

These rules mean trustees must pay closer attention to contracts and funding agreements to ensure that the income is recognised at the correct point in time in the accounts and distinguishing between ‘exchange’ and ‘non-exchange’ transactions.

What does that mean, exchange and non-exchange?

Exchange transactions are where you provide something specific in return for payment (like training courses), while non-exchange transactions are things like donations and most grants.

Introducing the 5-Step Process

To help charities apply these new rules consistently, FRS 102 now outlines a 5-Step Process for recognising income. Let’s use a practical example to demonstrate:

Let's say your charity runs professional development courses. You've signed a contract with a local council to deliver:

• 3-day leadership training course (£2,400)

• Course materials and workbook (£400)

• 6 months follow-up mentoring (£1,200)

• Total contract value: £4,000

1. Identify the arrangement
Assess whether a transaction is an ‘exchange transaction’ or a ‘non-exchange’ transaction. Consider substance, not just legal form – i.e. just because the paperwork says grant or contract doesn’t mean that’s necessarily what the arrangement is!

The contract must meet specific criteria. In our example, parties have approved it and are committed to perform, you can identify each party's rights regarding services, you can identify payment terms, and it's probable the customer will pay. Your signed agreement with clear terms meets this definition of an exchange transaction.

2. Determine the performance obligations
These are the promises to transfer distinct, or a series of distinct, goods or services to a customer and should be identified as separate performance obligations. In our example, we have 3 distinct services:

• Training course (standalone value)

• Materials (can be used independently)

• Mentoring (separate ongoing service)

3. Determine the transaction price
Work out the transaction price. Is it a fixed amount or variable depending on performance? In our example, this is simple – it's £4,000.

4. Allocate the transaction price to performance obligations
The transaction price should be allocated to each distinct performance obligation based on a relative standalone selling price. In our example, you would allocate based on what you would charge for each separate area of the contract:

• Training: £2,400 (60%)

• Materials: £400 (10%)

• Mentoring: £1,200 (30%)

This ensures that if you delivered just the training course, you'd recognise £2,400, not the full £4,000.

5. Recognise income when (or as) performance obligations are met
Revenue is recognised as the performance obligation is satisfied. Performance obligations can be satisfied over time or at a point in time. This is a change from the current recognition based on entitlement. You now recognise on delivery of the service or a milestone point.

In our example:

• Training: Revenue recognised when course completed (point in time)
• Materials: When delivered (point in time)
• Mentoring: Over 6 months as service provided (over time)

This process helps ensure that income will be recognised in the right period under the new SORP2026.

Here is a simple comparison using our training course example:

Old Way vs New Way - Training Course Contract Example

What should trustees do now?

• Start reviewing your current contracts now - don't wait until 2026

• Consider what record keeping would be helpful to implement now to assist with future preparation of financial statements

• Consider what this will mean for your cashflow reporting vs accounts reporting – they could be significantly different. You might receive £10,000 upfront for a 6-month programme, but only recognise income as you deliver each month. The board need to be clear on 'money we've earned' and 'money we have available to spend'.

• Remember, this approach is only for exchange transactions and differs from grant income (non-exchange) which follows different rules, which haven’t changed

In summary

These updates may alter when income appears in your accounts and ties income recognition more closely to when you deliver the value to your funders, rather than when you have legal entitlement to payment. While this might seem like a challenge, it gives a clearer picture of the organisations performance but requires more detailed tracking.

If you’d like help reviewing your income recognition processes or understanding your obligations under the new Charity SORP, the team at Beeston-Clarke Accountants is here to support you.