SORP 2026 Income Recognition: The Five-Step Model Explained

Q: Will this change how much income we report?

Not the total — it changes the timing. Exchange income paid in advance is recognised as you deliver, with the undelivered portion carried as deferred income.

Last reviewed: 19/06/2026 Written by Ivan Siyanko, who runs a UK registered charity.

TL;DR

SORP 2026 introduces a five-step model for recognising income from exchange transactions (where your charity gives goods or services of roughly equal value in return) — aligned with the updated FRS 102 Section 23.

Non-exchange income — donations, fundraising, and most foundation grants — is largely unchanged.

The practical effect: income from contracts, fees and sales is recognised as you deliver, not when the cash lands.

Most charities under £100k income feel this minimally; charities with delivery contracts or trading should review with their accountant.

This is the most technical SORP 2026 change — use it as a checklist for a conversation with your accountant, not a substitute for one.

Of all the SORP 2026 changes, income recognition is the one that worries trustees most — and the one most often misunderstood. The good news: if your charity runs mainly on donations and grants, very little changes. This guide explains the new five-step model, who it actually affects, and how your existing income is treated. For the full picture, start with our SORP 2026 trustee guide.

This is a starting point for a conversation with your accountant, not formal accounting advice.

The short answer

SORP 2026 changes when you recognise certain income, not how much you receive. It splits income into two types. Non-exchange income — donations, fundraising, and most foundation grants — follows broadly the same rules as before: you recognise it when you’re entitled to it, it’s probable you’ll receive it, and you can measure it reliably. Exchange income — contracts, fees, and sales, where you provide something of roughly equal value in return — now follows a five-step model and is recognised as you deliver, spread across the life of the contract rather than booked up front.

Exchange vs non-exchange — the distinction that decides everything

Before the five steps matter, you need to know which of your income is even affected. SORP 2026 hinges on one question: does your charity give something of roughly equal value in return for the money?

Income type	What it means	Examples	SORP 2026 treatment
Non-exchange	You receive without giving roughly equal value back	Donations, legacies, fundraising income, most foundation/trust grants, most government grants	Largely unchanged — recognise on entitlement, probability, measurability
Exchange	You provide goods/services of roughly equal value in return	Service-delivery contracts with a council or NHS body, course/training fees, ticket sales, gift-shop and trading income, room hire	New five-step model applies

The single most important takeaway: most small-charity income is non-exchange and is not subject to the five-step model. If you’re funded by grants and donations, you can relax. If you hold contracts or trade, read on.

The five-step model, in plain language

For each exchange contract, SORP 2026 (following FRS 102 Section 23) asks you to work through five steps:

Identify the contract. What has your charity formally agreed to — with whom, for what, over what period?
Identify the performance obligations. What specific, distinct things have you promised to deliver?
Determine the transaction price. The total you’ll receive under the contract.
Allocate the price to each performance obligation.
Recognise income as each obligation is satisfied — i.e. as you actually deliver.

The shift from previous practice is mostly in steps 2, 4 and 5: you break a contract into what you’ve promised, and you recognise the money as you deliver each part, rather than all at once when you sign or get paid.

A worked example

Riverside Youth Trust (a fictional Tier 1 charity) signs a £36,000 contract with its local authority to run a 12-month youth mentoring programme, paid in advance in April.

Under a naïve “cash-in” approach, it might book all £36,000 as income in April.
Under SORP 2026’s five-step model, the performance obligation (delivering mentoring) is satisfied steadily across the year, so income is recognised at roughly £3,000 per month. At its 31 December year-end, it recognises 9 months (£27,000) as income and carries the remaining £9,000 as deferred income (a liability) into the next year.

The total is identical — £36,000. The timing is what the model controls, and it gives a truer picture of the year’s activity. (For a grant of £36,000 from a foundation with no service in return, this model would not apply — that’s non-exchange income.)

How your common income types are treated

Income	Exchange or non-exchange?	Typical SORP 2026 treatment
Individual donations & fundraising	Non-exchange	Recognise when entitled, probable, measurable (as before)
Foundation / trust grants	Non-exchange (usually)	Recognise on entitlement; restrictions tracked as restricted funds
Government / local-authority grants	Non-exchange (usually)	As above — a grant, not a contract
Local-authority / NHS service contracts	Exchange	Five-step model — recognise as delivered
Training, courses, event tickets	Exchange	Five-step model — recognise as delivered
Trading subsidiary / shop income	Exchange	Five-step model
Membership subscriptions	Depends on what members get	Judgement — ask your accountant
Legacies	Non-exchange	Recognise when receipt is probable and measurable

From CharityIQ

The hard part isn’t the five steps — it’s knowing which of your income lines is exchange vs non-exchange, and tracking restricted funds correctly alongside it.

CharityIQ’s compliance module flags how each income type maps to SORP 2026 and keeps the audit trail behind every figure. Trustees review and approve. See how it works.

Restricted grants: a quick clarification

Restricted foundation grants are still non-exchange income — the five-step model doesn’t apply just because money is restricted. Restriction affects which fund the income sits in (restricted vs unrestricted), not whether it’s exchange income. You recognise a restricted grant when you’re entitled to it, then spend it within its restriction. The exception is where a “grant” is really a contract for services dressed up in grant language — substance over form decides, so check the agreement’s terms.

Does this affect small charities?

For most charities under £100,000 income: minimally. Their income is overwhelmingly donations, fundraising and foundation grants — all non-exchange. The five-step model is something to understand, not fear.

You should specifically review income recognition with your accountant if your charity:

holds service-delivery contracts with a local authority, NHS body, or similar;
earns significant fee income (courses, training, consultancy);
runs a trading subsidiary, shop, or events programme; or
receives money described as a “grant” that actually requires you to deliver specific services in return.

Frequently asked questions

Q: Does the SORP 2026 five-step model apply to grants? A: Usually no. Most foundation and government grants are non-exchange income and keep broadly the same treatment. The five-step model applies to exchange transactions — contracts, fees and sales — where you deliver services of roughly equal value in return.

Q: What’s the difference between exchange and non-exchange income? A: In an exchange transaction you give goods or services of roughly equal value in return for the money (a council service contract, course fees). In a non-exchange transaction you don’t (a donation, most grants). Only exchange income uses the five-step model.

Q: We get a council grant — is that a contract? A: It depends on the agreement. If you must deliver specified services in return, it may be an exchange contract; if it’s funding toward your charitable aims without a service in return, it’s a grant (non-exchange). Substance over form decides — check the terms with your accountant.

Q: Will this change how much income we report? A: Not the total — it changes the timing. Exchange income paid in advance is recognised as you deliver, with the undelivered portion carried as deferred income.

Q: Do we need an accountant for this? A: For accruals accounts with any contract or fee income, yes — confirm your treatment with a SORP-aware accountant. Charities on receipts-and-payments accounts are affected far less.

What to do next

List your income lines and tag each as exchange or non-exchange using the table above.
Flag every contract and fee to your accountant for the five-step model and deferred-income treatment.
Check any “grant” that requires you to deliver services — it may be an exchange contract.

For charities that want each income line mapped to SORP 2026 with the working shown, that’s exactly what we built CharityIQ for.

Ready for SORP 2026 without the spreadsheet panic? Tier-aware drafts. Audit trail by default. Join Waitlist →

Written by Ivan Siyanko, founder of CharityIQ. Ivan runs a UK registered charity and built CharityIQ because the existing tools weren’t built for what trustees actually need.

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This article is general guidance, not accounting advice. Confirm your charity’s income treatment with a SORP-aware accountant.