The revised Charities SORP 2026 will be released in Autumn 2025, incorporating changes to the underlying FRS 102. Watch our on-demand webinar to understand the changes to lease accounting, income recognition and trustees’ reports and discover how your Charity can start preparing.

The implementation date for SORP 2026 is for accounting periods beginning on or after 1 January 2026, so this will affect year ends from 31 December 2026 onwards (potentially earlier if a charity has a short accounting period).    

In our recent webinar, we explored the key areas that Charities should start preparing for. The most significant changes for many charities will be the following:  

• Lease accounting – SORP 2026 requires recognition of the assets leased on the balance sheet as a ‘right of use asset’ with a corresponding liability reflecting the discounted value of the future payments. For charities with leased property and/or vehicles, this will be a significant change and will require significant work to prepare for implementation.  

• Income recognition – SORP 2026 introduces the five-step model for contract income recognition to match the timing of income recognition with progress on delivery of the contract. This will require a review of income streams to determine whether income is being recognised at the appropriate time. 

• Trustees’ report - the exposure draft introduces a three-tier structure with the tiers based on the level of income, and there are different requirements for each tier across nine areas. This presents a good opportunity to review trustees’ reports and the message they convey as well as ensuring compliance with the new requirements. At present, the tier thresholds are not directly linked to the audit threshold, and we hope that this is something which will be considered in the final version.

We have also covered other changes and some initial thoughts from the sector including input from Richard Sagar, Head of Policy from Charity Finance Group (CFG). 

Watch our webinar on-demand

View the webinar slides:

Upcoming changes 

At the time of writing, the consultation has closed, and we are awaiting the publication of the final version of the SORP which is expected in Autumn 2025. However, the Financial Reporting Council have stated that there will be no substantive changes to the income recognition or leases sections – a key point we have highlighted in the webinar.  

In parallel, there is also a consultation ongoing around the audit thresholds. If audit thresholds increase, then more charities will have the option of an independent examination rather than an audit in future.  

While there will be no prior year restatement of previous year’s accounts, charities with significant leases or complex contracts for income are recommended to start preparing for the FRS 102 changes now.   

Once the final text of SORP 2026 is released, we will be able to provide a further update on the implications and changes needed, especially on the trustees’ report. It is hoped that some of the comments made by the sector on the proposed changes to the trustees’ report will be reflected in the final version so for the moment our advice is to watch this space but to be aware that the trustees’ report will need a full review from 2026 onwards.  

Below, you will find the answers to the questions submitted during the Q&A.

If you have further questions, please contact our team.

Q: Do all rental operating leases need to be included?

A: Yes, unless the term is shorter than 12 months (or less than 12 months remains at the date of transition – 1 January 2026, if the year-end is 31 December 2026). The other exemption is for low value items, but land and buildings, motor vehicles, trains, ships, aeroplanes and other heavy plant cannot be classified as a low value lease.

Q: Do you have to do a net present calculation on the lease?

A: Yes, unless it meets one of the exemption criteria above (low value assets and lease terms less than 12 months).

Q: How do rent-free periods factor into the new lease accounting rules? Are they reflected via the discounting of the (cash) lease payments, or are they averaged over the life of the lease?

A: Rent-free periods are factored into the cash payments in arriving at the discounted lease liability (which is then the starting point for determining the right of use asset). There will no longer be an accrual for rent-free periods as it is part of the discounted liability, and instead of the release of the accrual each year the benefit of the incentive will be lower depreciation/ interest charges as the right-of-use asset and the lease liability will both be lower than they would have been without the lease incentive. This will effectively spread the benefit over the life of the lease, so same outcome (subject to fluctuations in the interest charge over time) but a slightly different method.

Q: Previously, only lease commitments up to the break clause had to be disclosed. Is there any change to this under the new SORP with discounting future payments?

A: The SORP states that the lease calculations need to include the ‘non-cancellable period’ which would normally be the period to the first break clause. However, paragraph 10B.39 states that if the organisation is ‘reasonably certain’ that a break clause will not be taken then the full lease term can be included. ‘Reasonably certain’ is a judgemental area and it is difficult to know in advance exactly what decisions are made so this approach is likely to be relatively rare.

Q: How is the discount rate decided?

A: The SORP specifies that the default discount rate is the implied rate in the lease but this is not always easy to determine if not stated in the lease.

If this is the case the following options are permitted:

• the charity’s incremental borrowing rate which is defined as the rate of interest a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment;

• the charity’s obtainable borrowing rate which is the rate of interest the charity would have to pay to borrow, over a similar term, an amount similar to the total undiscounted value of the lease payments to be included in the measurement of the lease liability; or

• the rate of interest that it could otherwise obtain on deposits held with financial institutions.

Q: Would we need to include operating leases which don’t have discount rates (in the lease documentation)?

A: Yes. You will need to follow the criteria for setting a discount rate set out in the SORP (summarised above).

Q: Is VAT included in the lease payments?

A: This is not explicitly stated in the current version of the SORP and we hope for clarification in the final version. Our view is that any irrecoverable VAT incurred on lease payments should be include in the calculations.

Q: Does the lease liability need to be split between creditors less than one year and creditors more than one year?

A: Yes. See the example on slide 23 in the presentation which shows this.

Q: What happens with Lease income disclosure (i.e. a Charity receives rent for investment properties) or are there no proposed changes?

A: Paragraph 10B.104 states that ‘As a lessor there remains a distinction between an operating lease and finance lease. The lessor must classify the lease to be a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset otherwise it is classified as an operating lease’. In the context of this question where a charity has an investment property which is let, assuming the lease has a fixed term which is not so long that it is an effective disposal then this would continue to be treated as an operating lease and income recognised as received.