The Exposure Draft of the Further and Higher Education is (FEHE) SORP now available. The revised SORP covers the interpretation of the revised FRS 102 for the Further and Higher Education sector, including a number of sector-specific considerations. The most significant changes are in relation to lease accounting and revenue recognition, but the consultation which closed at the end of April, also covered a number of other points.
Lease accounting
The revisions to FRS 102 take a significantly different approach to lease accounting, particularly for lessees. As a lessee, almost all leases will now result in the recognition of a liability for the future lease payments, and a corresponding asset, known as a right-of-use asset. Institutions may choose not to apply the new lease accounting model to leases which are short term (i.e. less than 12 months) or where the leased asset is of low value. Neither FRS 102 nor the draft SORP specifies what low value is in monetary terms, but FRS 102 provides examples of the types of asset that would not be considered to be low value. This includes cars, vans, coaches, and land and buildings.
When assessing a lease term, institutions will need to consider the non-cancellable period. If an institution can cancel a lease within a year, and it is reasonably certain to renew, then the short term lease exemption may be applied. This will be relevant for non-specialist equipment which could be easily replaced by the institution. Similarly, if the institution has the option to extend the lease beyond a contractual break and is reasonably certain to do so, then the term of the lease will include both the period up to the break and the period after the break.
One specific accounting consideration will be separation of components within an agreement, for example where the contract contains a lease and related services. An institution will account separately for non-lease components, such as associated services, unless it chooses to apply a practical expedient which is available to lessees which enables the institution to treat each lease-component and any associated non-lease components as a single lease component. This practical expedient is applied by class of assets, and must be applied consistently to all leases relating to that class of assets.
Revenue recognition
There are specific considerations for the FE and HE sectors, including the requirement to recognise income from a non-exchange transaction where lease payments are significantly below market rate. The draft guidance provides an example of leased facilities which are significantly below market rate. In this example, the institution reflects income equivalent to the value of the donated facilities. This income forms part of the initial cost of the lease asset which is then capitalised.
The SORP also notes that there may be situations where the “contractual payments are so low that they are not substantive”, such as a peppercorn rent. In such situations, the agreement may not meet the definition of a lease.
The revisions to FRS 102 include some significant changes to income recognition, with the five-step model (as used in IFRS) adopted for recognition of contract revenue. This does not affect all income streams. For example, dividends from an investment portfolio would not be impacted because there is no customer or contract.
Applying the five-step model may require significant judgements and estimates. To support institutions with these complexities, BUFDG has issued additional guidance for implementing the new requirements.
The five-step model requires an institution to:
- Identify the contract(s) with a customer
- Identify the performance obligations
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognise revenue as the institution satisfies each performance obligation
The changes apply to contracts that have commercial substance, rather than non-exchange transactions (e.g. donations).
The draft guidance issued by BUFDG sets out several relevant and helpful examples, which include:
- Situations where a contract has no enforceable rights and obligations – e.g. where a student can withdraw before commencement without penalties.
- Contract modification, with an example provided of a change to a commercial research contract.
- Situations of principal versus agent, such as when the institution is acting as an agent by arranging the provision of goods on behalf of others.
- Dealing with variable consideration, with examples including accounting for a research contract and accounting for the expected value of student fees paid by a commercial company, where the institution anticipated that some students will not complete the course.
- Non-cash consideration – e.g. donated equipment as part of a wider contract.
Further changes to consider
An interesting question for institutions to think about is whether contracts include “distinct goods or services”. A contract with a student, for example, could be a single performance obligation (i.e. to provide tuition including course materials, equipment, etc) or a series of distinct performance obligations (e.g. the draft guidance gives an example of a student provided with a laptop which is separate in the contact). Identifying the number of performance obligations is critical, as this will impact on the accounting for revenue.
One specific change is that fee waivers, bursaries and scholarships are now to be accounted for as a reduction to revenue rather than as expenditure. There is currently inconsistency across the sector, and this change aims to provide consistency. One particular situation to consider early will be full scholarships, as the guidance states the institution “may conclude that a contract does not exist” which has an impact on the accounting.
There is a further important point to note around the changes to revenue recognition. FRS 102 permits entities to account for the changes in the same way as a traditional change to an accounting policy. However, the SORP Exposure Draft requires that the changes are accounted for retrospectively as an adjustment via reserves. Given the importance of benchmarking in the FE and HE sectors, this is logical however it means early preparation is crucial.
The consultation also asks stakeholders to consider whether the SORP should continue with the single column presentation, as opposed to aligning more closely with the Charities SORP which analyses income by fund using multiple columns. This appears a sensible approach as, in my experience, fund accounting does not usually have the same significance in a set of FE/HE accounts compared to most charity accounts.
There are several key actions institutions can take now to prepare effectively for the upcoming SORP. These include ensuring that:
- There is a full register of leases, which includes key contractual documentation such as minimum lease terms and any associated non-lease services.
- Any lease terms which are non-exchange transactions and are below market rate are identified, with an assessment of the value to the institution.
- The institution has a complete assessment of its contracts and key terms, such as whether there are enforceable obligations or variable consideration.
- There is a clear understanding of performance obligations across the institution’s key contracts – e.g. whether all student contracts are for a single performance obligation to supply education, or whether there are any performance obligations which are separable.
Further support and preparation for institutions
With the final version of the SORP expected to launch in summer 2025, institutions have a valuable window of opportunity to prepare for the upcoming changes. Taking proactive steps now such as compiling a comprehensive lease register, identifying non-exchange lease terms, reviewing contract obligations, and clarifying performance obligations, will help ensure a smooth transition.
Early preparation will not only reduce future disruption but also support stronger financial reporting and compliance. If you would like more information or wish to discuss how these changes may affect your institution, please get in touch with
