The implications of the new FE HE SORP 2026 for higher and further education institutions
Stuart McKay · Posted on: March 2nd 2026 · read
Statements of Recommended Practice, or SORPs, inform sectors such as further and higher education, as well as the charities sector.
The FEHE SORP 2026 is effective for accounting periods beginning on or after 1st January 2026 and is set to materially affect the accounting and reporting of further and higher education establishments. This article looks at the recent changes to the FEHE SORP, as well as their implications for the organisations involved.
The FEHE SORP 2026 was published on 3rd November 2025. For many universities and colleges, their first impacted year will be 2026-2027. The change representing probably the biggest impact for HE/FE institutions is that related to lease accounting. Under the new SORP, most operating leases must be brought on balance sheet as a Right-of-Use (ROU) asset and a lease liability. Although there are exemptions for short-term leases or low-value assets, institutions will now be required to choose or estimate a discount rate for lease liabilities.
"In some cases, public benefit entities may use the interest rate on deposits as a proxy. The ‘lease expense’ under the old rules will, be replaced by depreciation (on the ROU asset) and interest expense (on the lease liability). There will be new disclosures, including movements in ROU assets and lease liabilities, and commitments for short-term, low-value leases. The cash flow implications cover a likely effect on cash flow classification, and metrics such as EBITDA, since lease payments will no longer be just operating expenses."
FEHE SORP 2026 aligns with the revised FRS 102 on revenue. That includes a five-step model for revenue recognition, similar to IFRS 15. The five steps are:
- Identify the contract.
- Identify performance obligations.
- Determine transaction price.
- Allocated price.
- Recognise revenue when, or as, performance obligations are satisfied.
For HE and FE institutions, this means a need for greater judgement and potentially estimation, especially when contracts are complex or include multiple deliverables. New disclosure requirements include:
- Income from contracts. (by stream)
- Contract balances. (opening and closing)
- Costs to obtain contracts.
- Performance obligations. (description and timing)
There is also a note on the impact of the policy change for prior-year comparatives. Alongside the new SORP are a number of updated guidance notes, including:
- Leases and Lessee guidance.
- Revenue Recognition guidance.
- Government Grants & Non-Exchange Transactions guidance.
- Model Financial Statements updated.
In addition, there is also transition guidance to support HE and FE institutions in adopting the new standard. The FEHE SORP 2026 does not fundamentally diverge from FRS 102 on technical accounting, but it gives interpretations tailored to FE and HE institutions, plus additional disclosures to ensure comparability and consistency.
In addition, there is also transition guidance to support HE and FE institutions in adopting the new standard. The FEHE SORP 2026 does not fundamentally diverge from FRS 102 on technical accounting, but it gives interpretations tailored to FE and HE institutions, plus additional disclosures to ensure comparability and consistency.
Given these changes, there are a number of likely effects and risks for FE and HE institutions, as well as a number of opportunities and practical challenges. These include:
Balance sheet impacts. Many institutions will see higher assets and liabilities on their balance sheets because of the lease capitalisation. This could affect financial ratios, in particular:
- Leverage/gearing because of larger lease liabilities
- EBITDA or other performance metrics because lease costs will be split into depreciation and interest, which typically increases EBITDA versus the old operating lease charge
Cash flow presentation might change. More payments may go into financing activities rather than operating, depending on how cash flows are classified.
Contract and revenue management: Institutions may need to review all major contracts with students, government, commercial customers and more, to identify performance obligations, including for ‘bundled’ services (teaching, accommodation, services).
There may be more administrative burden, especially for teams in finance, contract management and procurement, assessing, documenting, and monitoring performance obligations and transaction prices. Judgements and estimates could increase. For example, allocation of price to different obligations, and how to recognise revenue over time versus at a point in time.
Systems, processes and internal controls: Colleges and universities may need to upgrade or adapt their accounting systems, such as ERP and finance software, to capture the new data required, including lease registers, contract balances, cost of obtaining contracts, and performance obligations.
Training is likely to be required. Finance teams will need to understand the five-step revenue model, how to discount lease liabilities, how to make the transition and how to populate the new disclosures. There may also be a need for stronger governance and documentation around leases. This means procurement and estates teams will need to liaise with finance to gather the right information.
Stakeholder and covenant risk: Because financial metrics change (for example increased liabilities), institutions with external debt or covenants will need to assess whether their debt covenants might be breached or require renegotiation. The new disclosures might change how stakeholders such as funders, regulators and rating agencies, view the financial health of institutions.
Reporting and transparency: The new SORP encourages clearer and more detailed reporting of resources, performance obligations, and the way in which grants and contracts are fulfilled. This is to deliver better-informed stakeholder decisions. The sector might benefit, as a result, from improved consistency and comparability, because of the model financial statements, and more prescriptive guidance in the SORP.
Cost implications: There will likely be one-off costs such as staff time, consulting (or audit) implementation costs, systems investment and training. There may also be ongoing costs associated with more detailed reporting, maintenance of lease data, preparing disclosures and, potentially, more audit work.
Strategic opportunities: Institutions could sensibly use the new SORP to better align financial planning and resource management. For example, by analysing lease agreements, renegotiating leases, or optimizing the use of leased assets.
More robust contract accounting may help some institutions better understand the profitability and sustainability of certain activities, especially ‘entrepreneurial’ activities, partnerships and non-traditional revenue sources. The new SORP does come with a number of risks and challenges. Specific risks to be aware of include the potential for institutions to miss leases or misclassify lease components, which can lead to misstated assets and liabilities. Errors in selecting an appropriate discount rate may further distort right‑of‑use assets and lease liabilities. Weak documentation of contracts and performance obligations can undermine revenue recognition judgements, particularly during audits. In addition, differing transition approaches across institutions may create early‑stage comparability issues, and without clear communication, stakeholders may misinterpret increased liabilities or changes in performance metrics.
As always, there are actions that institutions can take to ensure the transition is smooth and the outcomes beneficial. The most important of these are:
- Early assessment Carrying out a lease inventory by gathering all existing leases, contracts that might contain a lease, and relevant terms such as length, payments, renewal options, termination clauses. Customer/funding contracts should be mapped. Identifying where institutional contracts with students, commercial partners, and government bodies might have performance obligations.
- Establish a working group Form a cross-functional team from finance, estates, procurement, and contract management. This group can lead the implementation planning, and documentation, and ensure that key stakeholders are aligned.
- Systems readiness It is vital to evaluate whether current accounting/ERP systems can manage the new data, including lease registers and contract accounting. If the system needs to change, it is critical to plan upgrades or develop workaround processes in advance.
- Training and capacity-building Staff may need to be trained in the five-step model, lease accounting, discount rate estimation, disclosures and transition methods. Guidance published by BUFDG, Universities UK and audit firms, can be hugely beneficial. It is also wise to engage with auditors early to ensure there is an understanding of their expectations and any potential audit issues.
- Scenario planning It is sensible to model yje financial impact by running ‘what-if’ scenarios on balance sheet, P&L, covenants ands cash flows. It is also worthwhile considering renegotiating leases or restructuring the leasing strategy in light of the new accounting treatment.
- Stakeholder communication It is essential to communicate with internal stakeholders, including Board and Governors, about how the new SORP will change financial statements. External communications such as annual reports will need to explain material changes, especially increases in liabilities.
- Transition planning It is important to decide on a transition approach – fully retrospective, or modified retrospective. This will affect restatement and disclosure burdens. A ‘transition note’ should be developed to explain policy changes, impacts and any one-off adjustments.
The FEHE SORP 2026 represents a significant update, driven largely by FRS 102 changes to leases and revenue. This will materially affect the accounting and reporting of further and higher education institutions.
It is likely that these changes will increase complexity, requiring judgement, system changes, and stakeholder engagement, but they are also likely to bring an opportunity for greater transparency, better financial planning, and alignment to modern accounting standards and practices.
As always, the institutions that prepare proactively, and look upon the changes as a strategic opportunity rather than as a regulatory burden, will be better placed for a smooth and productive transition.
