Income recognition under SORP 2026: what changed and what your charity needs to do

Income recognition is one of the areas most charities think they have under control. In practice, it is one of the areas where we see the most errors — and SORP 2026 has made significant changes that will require many charities to revisit how they account for the money they receive.

This post sets out what changed, what stayed the same, and what you need to do. It is written for trustees, finance leads, and anyone responsible for preparing or reviewing charity accounts. No prior accounting knowledge assumed.

All references are to the Charities SORP 2026, published by the SORP-making body in October 2025 and available at charitysorp.org. SORP 2026 applies to accounting periods starting on or after 1 January 2026.

The single most important change: exchange vs non-exchange income

The current SORP applied a single three-part test to most income: was the charity entitled to it, was receipt probable, and could it be measured reliably? Under SORP 2026, the first question is different: is this income exchange or non-exchange?

The answer determines everything else — which recognition rules apply, when income appears in your accounts, and what happens if you underspend.

Module 5 of SORP 2026 explicitly states that income must be accounted for in accordance with its substance, not simply its legal form or the label on the document. A funding agreement called a grant may, in substance, be a contract — and must be treated as one.

For exchange income: the five-step model

Where income is exchange income, SORP 2026 introduces a five-step model for recognition. This replaces the previous risk-and-reward approach and is now mandatory for all exchange contracts.

According to the SORP-making body's summary of changes, this is introduced to reflect changes to FRS 102 and represents one of the most significant technical updates in Module 5.

For many charities, applying this model may not change the total amount of income recognised in a year. But the analytical process required is more rigorous than before, and the timing of recognition may change for contracts that span multiple periods or involve multiple deliverables.

The distinction that catches most charities out: conditions vs restrictions

This is the area where we see the most errors in practice — and SORP 2026, following the current SORP, makes the distinction explicit. Module 5, paragraph 5.14 and 5.18 of SORP 2026 state:

In plain English: a restriction on how you spend the money does not stop you recognising the income. A genuine performance-related condition — where your entitlement depends on delivering something specific — does.

Many charities have historically deferred income on the basis of restrictions — treating them as if they were conditions. This overstates deferred income and understates the charity's available resources. Under both the current SORP and SORP 2026, this is incorrect.

Income type by income type: what changed under SORP 2026

Here is a straightforward account of what the SORP-making body changed in each income category, based on the official summary of changes published at charitysorp.org.

Grant income

Previously: charities could choose between two approaches — the performance model (recognise when conditions are met) or the accrual model (recognise in line with related expenditure). Many charities used the accrual model, recognising grant income as they spent it regardless of whether conditions had been satisfied.

Under SORP 2026: the accrual model has been removed. The performance model is now the only permitted approach for grant income. Income from grants is recognised when the performance-related conditions are met, not simply when expenditure occurs.

Module 5 of SORP 2026 also provides new guidance — in response to stakeholder feedback — on how to determine whether a grant is income from an exchange transaction or income from a non-exchange transaction. This distinction now determines which recognition rules apply. If the grant requires your charity to provide specific goods or services to the funder, it may be exchange income and the five-step model will apply instead.

Contract and SLA income

Previously: exchange income followed the risk-and-reward model from FRS 102 Section 23 — income was recognised when significant risks and rewards had transferred, or when services were substantially performed.

Under SORP 2026: the risk-and-reward model has been replaced by the five-step model described above. Each contract must be assessed for separate performance obligations, the transaction price allocated to each, and income recognised as each obligation is satisfied. For many charities the timing may not change substantially — but the process of getting there is now more structured and must be documented.

Donations and voluntary income

Previously and under SORP 2026: unconditional donations are recognised when receivable. No material change in principle.

The key clarification — set out explicitly in Module 5, paragraphs 5.14 and 5.18 — is the conditions vs restrictions distinction described above. If your charity has historically deferred donation income because it was designated for a particular purpose, this may need correcting.

Legacy income

Previously and under SORP 2026: legacy income is recognised when it is probable that the legacy will be received and can be measured reliably. No change in the core principle.

SORP 2026 clarifies, at paragraph 5.30, that establishing entitlement alone is not sufficient — probability of receipt and the ability to estimate reliably must also be met. Module 13 (Events after the end of the reporting period) has been updated to include examples specifically for legacies, following stakeholder feedback that this is an area that causes confusion.

The SORP-making body also notes that for tier 2 and tier 3 charities, the Trustees' Annual Report must now provide more narrative on how legacies are recognised in the accounts.

Membership subscriptions

Previously: treatment depended on what the subscription conferred. If it gave substantive service rights, it should be spread across the membership period. If essentially a donation with nominal benefits, recognise on receipt.

Under SORP 2026: the exchange vs non-exchange split now formally governs the treatment. Module 5 includes specific guidance on membership subscriptions. If membership confers genuine service rights of approximately equal value, it is exchange income and the five-step model applies. If the subscription is essentially a donation with nominal or token benefits, it is non-exchange income. The SORP 2026 provides worked examples to assist with this classification.

Donated goods, facilities and services

The SORP-making body classifies Module 6 (Donated goods, facilities and services) as having limited changes — made to be consistent with FRS 102 and to improve clarity. The existing treatment — recognise at fair value where reliably measurable; the impracticability exemption for high-volume low-value goods (such as charity shop donations) remains — is preserved.

Transitional arrangements

For exchange contracts already in progress at the date of transition, SORP 2026 permits a prospective approach — applying the five-step model to ongoing contracts from the transition date, with any adjustment made through opening reserves rather than restating comparatives.

This means you do not need to restate your prior year accounts. You do need to identify which contracts were in progress at transition and assess the impact of applying the new model going forward.

The three-tier structure and what it means for income reporting

SORP 2026 replaces the previous two-tier structure with three tiers based on gross income. The income recognition rules in Module 5 apply to all three tiers — but the extent of disclosure and narrative reporting differs.

How much will this affect your charity?

The honest answer is: it depends on your income mix.

What your charity needs to do now

SORP 2026 applies to accounting periods starting on or after 1 January 2026. If your financial year started on 1 April 2026, your first SORP 2026 accounts will be for the year ending 31 March 2027. The time to prepare is now — before that year-end, not after.

Income recognition is not a back-office technicality. It determines what trustees see in the accounts, what funders read in your reports, and how your charity's financial health is understood by the people who matter most to you.

SORP 2026 does not make the task harder. In many ways, the clearer framework — exchange vs non-exchange, conditions vs restrictions — is easier to work with than the old approach once you understand it. The key is building that understanding now, before your first set of SORP 2026 accounts is due.

The full text of Module 5, including worked examples and the official guidance on applying the five-step model, is available free at charitysorp.org.