FRS 102 Changes Mean Charity Trustees Need to Review Their Contracts NowPosted: Oct 9, 2026

Changes to FRS 102 and charity accounting make this a particularly important time for trustees to check their understanding and how they report contracts.

As a specialist in charity insolvency, we can tell you first-hand that understanding what your charity has committed to deliver, what it owes, and which funds are available, are key to financial health. For trustees, this is also usually a core part of their role and a legal responsibility.

Before we look at these changes, though, I need to remind you that we are talking in general terms in this article. Your individual circumstances will require an individual response. This is only a guide, and you should speak to your accounting team to assess how it applies to you.

So, what has changed and what do you need to do?

FRS 102 Changes Should Prompt a Review

Revisions to FRS 102 are now reflected in the Charities Statement of Recommended Practice 2026 (SORP 2026). While SORP 2026 says it is recommended practice, realistically speaking, it is generally a requirement for charities preparing accruals accounts. The changes coming in are quite fundamental, and your next accounts will need to reflect your substantial lease liabilities and/or a different pattern of income recognition.

This will be true even where everyday activities have not actually changed.

Trustees need to understand why the figures will possibly look very different and whether a review reveals any underlying financial pressure. That means working with your accounting teams to examine the agreements behind the numbers. If you don’t, you could easily misrepresent the finances around your contractual responsibilities.

Another area that could potentially be affected is grants relating to service and service style provisions.

What will and will not be affected will again depend on your individual circumstances and your reporting requirements.

When do the changes apply and to which charities?

SORP 2026 applies to accounting periods beginning on or after 1 January 2026. That means the good news is that a charity with a common April-to-March financial year will only need to first apply it in its accounts for the year ending 31 March 2027.

These requirements also only concern charities preparing accounts under FRS 102 and the SORP. Charities preparing other receipts and payments accounts will not currently be affected by these SORP accounting changes.

Please check to confirm your status and response requirements.

Why a payment called a grant may need closer examination

In a nutshell, the new accounting treatment depends on what the agreement for the grant actually requires, rather than simply whether the document refers to the payment a grant.

What this means is that it will all come down to what is required in return for the ‘grant’.

Where an arrangement is effectively a contract to supply goods or services in return for payment, the revised contractual revenue rules will probably apply. These could be quite common for charities offering support services such as counselling or care, for example. In this case income is now recognised as the charity fulfils its delivery obligations not in a blanket way.

So, if a charity provides a service in return for the grant, then the new rules may well apply.

However, (there is always a ‘however’, isn’t there?) a grant can contain performance conditions and still be a genuine grant. Don’t assume that every condition makes an agreement a service contract.

Which is all very contradictory-feeling and rather vague in some ways. For trustees, the practical question is whether they understand what must still be delivered, how it will be funded and what happens when money in the bank may already be committed to future work.

How all this affects your reporting is an area where you need clear understanding.

The rent commitment becomes more visible

Most qualifying leases will now require the charity to recognise what are known as the right-of-use asset and the lease liability. Which will usually mean:

• The asset represents the right to use the premises or equipment.
• The liability reflects the discounted value of relevant future lease payments.

This could affect a lot of organisations. It is not uncommon, for example, for a charity to be leasing a shop or a facility like an advice or specialist treatment centre. If this is the case, it can make both sides of the balance sheet larger.

Depreciation and interest will now generally replace the previous operating-lease rental expenses.

A newly reported lease liability is therefore not automatically new borrowing. It makes an existing commitment more visible, though, and that is another good reason to look at these contracts in case that visibility is pointing to potential financial issues.

Here is a further complication. Sorry, but a building is not a low-value asset simply because its rent is minimal. Peppercorn style agreements and any subsidised premises will need particular attention. Donated facilities (and anything considered ‘non-exchange’ elements) may need separate consideration.

The practical upshot of this is that, as a minimum, the timing of the accounting expense may change even though the contractual rent payments remain the same.

Contract reviews are part of trustees’ due diligence

As we said at the start of this article, trustees must take responsibility for understanding their charity’s financial position. As part of that oversight, relevant funding agreements, service contracts and leases probably need to be reviewed to reflect the SORP 2026 and FRS 102 related changes. We suggest you do that review with appropriate professional support to ensure accuracy and also show due diligence.

As a reminder, this is part of trustees existing responsibilities and not a new duty to review contracts created by FRS 102. In England and Wales, the Charity Commission guidance clearly states that trustees remain responsible for financial management even when work is delegated.

In short, trustees should understand contractual commitments and whether those obligations are manageable. If they aren’t, then you need to act.

Use the changes to protect the charity’s future

Our suggestion is to embrace the new requirements and take the opportunity to review and assess your financial position!

It seems sensible to use the review to improve your financial understanding. It is an opportunity to examine your real commitments and ask questions such as:

• Can the charity meet its remaining lease payments?
• Does service funding cover the expected delivery costs?
• What happens if a major grant ends while staffing or property commitments continue?

An accounting change like this doesn’t necessarily alter cash flow, but it can affect your financials and potentially lending conditions.

A realistic cash-flow forecast remains essential alongside the annual accounts. If that work identifies unaffordable obligations, funding gaps or concerns about meeting payments, seek advice early. Understanding the position sooner gives trustees more time to consider their options and protect beneficiaries.

At Smart Business Recovery, we help charities and third-sector organisations facing financial difficulties understand their position and the options available. If a review raises concerns about your charity’s ability to meet its commitments, speak to us before those pressures become harder to manage.

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