New Charities SORP: Income Recognition & Exchange Contracts

The new Charities SORP introduces some helpful (and occasionally head‑scratching) updates when it comes to income recognition.

In respect of income the new SORP prompts you to take a fresh look at your income streams and decide whether each one is an exchange transaction or a non‑exchange transaction.

So, what’s the difference?

An exchange transaction is where income is received in return for supplying goods and/or services under a contract. A non‑exchange transaction is when the funder does not receive goods or services of equal value in return – classic donation territory, but don’t forget legacies and the odd grant here too.

Once you’ve decided income is an exchange transaction, that’s when you must bring in the new five‑step model.

The five-step model:

1. Identify the contract with the customer
2. Identify the performance obligations
3. Determine the transaction price
4. Allocate the transaction price
5. Recognise revenue when (or as) the performance obligations are met

For most charities, this won’t dramatically change the amount of income recognised. What it does change is the route you take to get there – it’s a little more detailed and a bit more structured than before. However, let’s look at a simple example where this could make a difference.

Membership organisations

Membership organisations usually charge an annual fee to cover support throughout the year. Often, that fee also comes with a few extra perks. For example, imagine a membership organisation supporting mental health professionals. Members pay an annual fee, which includes ongoing support and an invitation to the annual conference.

Here’s how that works under the five‑step model:

Step 1 – Identify the contract
This one’s straightforward: the membership agreement.

Step 2 – Identify the performance obligations
These are the promises made to members—providing ongoing support during the year and delivering the annual conference.

Step 3 – Determine the transaction price
The annual membership fee is £100.

Step 4 – Allocate the transaction price
In this example the annual conference costs £30 per person to run. Consequently £30 of the annual fee is attributed to the conference, with the remaining £70 being linked to the ongoing membership support.

Step 5 – Recognise the revenue
Income is recognised once each promise has been fulfilled:

• The £30 conference portion is recognised only after the event takes place
• The £70 membership support portion is spread evenly over the 12‑month period

What does this mean in practice?

Now that the process is clearer, charities are encouraged to review their income streams, identify which ones fall under exchange transactions, and assess them using the five‑step approach.

If you’d like a hand working through this – or just want reassurance you’re on the right track – please do get in touch with one of our team. We’re very happy to help. www.burgisbullock.com