Revisions to the FRS 102 and the Charities Statement of Recommended Practice (SORP) are mandatory for accounting periods commencing on or after 1 January 2026. For most schools this means it will be your 2027 year-end financial statements that are first impacted, with the key revisions that will impact the sector set out below.
Lease accounting – moving leases to the balance sheet
The significant changes only apply to lessees, so lessors can rest easy.
At present we have two types of leases: finance leases (recognised on the balance sheet), and operating leases (recognised as an expense as the obligation falls due). When the new SORP comes in, all leases other than short-term and low-value ones will move onto the balance sheet, with recognition of a right-to-use asset and a corresponding lease liability. Lessees must discount the lease payments using an implicit, incremental or obtainable borrowing rate. The aim of these changes is to enhance transparency and comparability.
These changes will impact metrics such as EBITDA because depreciation charges will be higher and will also lead to higher asset values on the balance sheet. If your school has financial loan covenants, it would be wise to calculate the estimated impact of these changes early.
FRS 102 fails to provide any examples of ‘low value’ assets, but the SORP does: naming PCs and tablets, small items of office furniture and telephones as low value. Cars, vans, minibuses and land and buildings are among the assets specifically noted in FRS102 as not being low-value, and so any such leases will need to be brought onto the balance sheet. Other assets may be more subjective, such as high-end photocopiers and estates equipment. Have early discussions with your auditor or accountant about any leases where you are unsure, to help avoid any late adjustments to your accounts. There is a helpful flowchart in module 10B of the SORP which is designed to help you identify whether lease accounting rules apply to the assets that you are utilising.
Low or nominal value leases
Some schools have historic arrangements with related or connected entities that allow them use or lease buildings for a low or nominal value. The new SORP specifically addresses occasions where assets, particularly land and buildings, are leased at a nil or nominal value, often by another charity in order to further its own charitable purpose. The SORP states that these types of arrangements are unlikely to meet the definition of a lease, and that charities should consider the benefit that is being received and how it should be measured and accounted for by recognising a benefit in kind for the value that would otherwise have been paid to lease a similar asset.
Social donation leases
The concept of a ‘social donation lease’ has also been introduced where, unlike in the situation described above, a charity does have a lease arrangement that meets the SORP criteria for lease accounting, but where the lease payments are significantly below market rents. In these instances, the charity must account for the ‘non-exchange’ component of the lease, which will generally be the difference between the fair value of the asset and the lease payments. This will result in an increased asset value and increased depreciation charge; and the recognition of a donation-in-kind for the element of the asset that has effectively been gifted.
The discount rate
FRS 102 sets out a hierarchy of how to calculate the discount rate, as follows:
- The rate implicit in the lease
- The school’s incremental borrowing rate: the rate of interest you would have to pay to borrow, over a similar term and with a similar security, the funds necessary to obtain an asset of similar value to the asset
- The obtainable borrowing rate: the rate of interest you would pay to borrow, over a similar term, an amount similar to the undiscounted value of the lease payments
- The rate of interest you could otherwise obtain on deposits held with financial institutions. This will be the most suitable option where you never or seldom borrow money.
Frist year transition
Thankfully, there is no restatement of comparatives when bringing in this change to lease accounting. Previously existing operating leases are accounted for using a modified retrospective approach, by adjusting the opening balance for the cumulative effect of applying the new standard.
Income recognition overhaul
One of the key changes to FRS 102 is the move to a five-step model for income recognition, aligning it with International Financial Reporting Standards which introduced a similar model in 2018. This five-step model only applies to income from contracts with customers, meaning donations, legacies and other income from non-exchange transactions are excluded. Such income streams will broadly continue to be recognised in their current manner.
The five-step model requires you to:
- Identify a contract with a customer
- Pinpoint distinct performance obligations
- Determine the transaction price
- Allocate that price to each obligation
- Recognise revenue (income) as each obligation is satisfied
This change is likely to have a significant impact on some charities – for example membership organisations that charge a joining fee – however, we are not expecting this change to impact many schools significantly, as contracts generally span an academic year which aligns with the financial year end, and contracts spanning multiple years are not commonplace. If your school has income-generating relationships with international schools, such as royalty or profit-sharing arrangements, you should review these contracts in the coming months to assess whether there is any impact from this change.
Tiered reporting explained
The revised SORP brings in a tiered structure for charity reporting, with the current tiers as follows:
| Tier | Income |
| 1
| Below £500,000 |
| 2
| Between £500,000 and £15 million |
| 3
| Above £15 million |
As all charities must follow FRS 102 with their accounting, the main areas affected by the tiered reporting is the required disclosures in the governors’/trustees’ report. There is also more flexibility for charities in Tier 1 regarding how they present their income and expenditure in their accounts, with the option to classify income and expenditure by natural classification.
Bursars whose schools fall into Tier 2 may be happy to hear that the exposure draft removes the requirement to prepare a Statement of Cash Flows for Tier 1 and 2 charities, though you can continue to include one if you wish. Currently, cash flow statements must be prepared by all charities with income above £500,000.
Trustees’ Report requirements
The Trustees’ Annual Report module of the SORP has received a significant overhaul in terms of style. One of these stylistic changes is that questions are posed for trustees to ask themselves, such as: who are the users of the report, and what are their information needs?
The new SORP is more prescriptive about charities providing details and examples of their activities and impact. One of the questions that trustees in all but Tier 1 must answer in their report is ‘what are the changes or differences the charity seeks to make through its activities?’. You are also specifically asked to provide details of the criteria or measures that are used to assess success. There is a further requirement to consider the long-term effect of the charity’s activities both on individuals and on society as a whole, with impact stories being encouraged. This presents an opportunity for schools to showcase not only the bursarial support given to deserving individuals during the year, but also the success that historic bursary awards and their wider educational and pastoral support has had on individuals’ lives and their contributions to society.
The headings that the Trustees’ report requirements are structured under have remained the same (objectives and activities, achievements and performance, etc.), but there is an entirely new section headed ‘Sustainability’. The requirements of this section are only mandatory for schools in Tier 3; all other schools are merely encouraged to explain how they are responding to and managing environmental, governance and social matters. There is a degree of flexibility for Tier 3 charities in how they report on sustainability matters, with the SORP suggesting indicators such as board diversity, privacy and data security, and progress against targets for climate-related matters. Many larger schools are already reporting on various energy-related matters as part of the 2018 Energy and Carbon Reporting requirements, and these will form a part of the sustainability section of the report.
What to do now
It is time to start planning how the changes will affect you; particularly any impact that the changes to lease accounting will have on your management reporting, financial covenants, and current and planned borrowing. Early adoption is permitted, but we are not expecting this to occur often.
The SORP changes present an opportunity to consider whether an overhaul of the contents and presentation of your financial statements would be beneficial, particularly if you haven’t revisited the style and content of your governors’ report in recent years. I’ve seen more schools preparing a ‘glossy’ governors’ report recently, with pictures and graphics used to showcase achievements. Interest in your school’s financial statements from both current and prospective parents is likely to be heightened in the current climate, and so it is worth reconsidering the document to ensure it remains as valuable as possible in the years ahead.
If you would like any specific assistance with the changes, such as forecasting the impact of the changes to lease accounting, please don’t hesitate to get in touch.
