Preparing for Charities SORP Lease Accounting Changes 2026

Executive Summary: What Changes and When

The updated Charities SORP, aligned with the revised FRS 102, applies to financial years beginning on or after 1 January 2026. For charities with a 31 December year-end, the first affected accounts will be for the year ending 31 December 2026.

One of the most significant changes is the increase in on-balance-sheet lease accounting. Most leases will require recognition of a right-of-use (ROU) asset and a corresponding lease liability, subject to the available exemptions.

This represents a structural accounting change rather than a disclosure refinement. Reported assets and liabilities will generally increase, while the profile and presentation of expenditure in the Statement of Financial Activities (SoFA) may change. Trustees may also need to understand the potential effect on reserves, financial measures and borrowing covenants.

This guide is intended for charity finance teams, trustees and accounting professionals applying the SORP 2026 requirements.

September 2026 Update from the Charity Commission

The Charity Commission has reminded charities that SORP 2026 applies to financial years beginning on or after 1 January 2026, including the revised requirements for lease arrangements and certain types of income.

For charities in England and Wales, separate increases to the statutory thresholds for accruals accounting, independent examination and audit apply to financial years ending on or after 30 September 2026:

• Accruals accounts: required for relevant non-company charities with gross income above £500,000, increased from £250,000.
• Independent examination: required where gross income is above £40,000, increased from £25,000, unless an audit is required.
• Statutory audit: required where gross income is above £1.5 million, or where gross income exceeds £500,000 and gross assets exceed £5 million.

These threshold changes may affect how some charities in England and Wales prepare or scrutinise their accounts. They do not change the underlying lease accounting requirements for charities that prepare SORP-compliant accruals accounts. Different statutory thresholds continue to apply in Scotland and Northern Ireland, while charitable companies must prepare accruals accounts under company law.

What Has Actually Changed Under Charities SORP?

Previously, operating leases were typically expensed on a straight-line basis. Under the revised lessee accounting model:

• A lease liability is recognised at the present value of relevant future lease payments.
• A right-of-use asset is recognised at commencement.
• The right-of-use asset is depreciated.
• Interest is recognised on the lease liability.

For leases recognised on the balance sheet, this generally creates a more front-loaded expense profile and replaces the previous operating lease expense with depreciation and finance costs.

For charities, the changes may also affect SoFA presentation and the allocation of costs between funds and charitable activities. Lease expenditure that was previously presented as a single operating cost may now be divided between depreciation and interest.

In Practice: What This Means for Finance Teams

The underlying accounting model will be familiar to many accountants. The main challenge is applying it consistently across the lease portfolio and maintaining the required information over time.

• Discount rate governance: Discount rates must be determined and documented. Where the interest rate implicit in the lease cannot be readily determined, charities must select and support an appropriate rate from the approaches permitted by FRS 102 and SORP 2026. Consistency is particularly important across multi-entity groups.
• Lease population completeness: Finance teams need to identify relevant property, vehicle and equipment leases, together with arrangements that may contain an embedded lease. Completeness may become an important area of audit or independent examination review.
• Recurring journals: Each recognised lease generates ongoing depreciation and interest entries. This can create a significant processing and reconciliation requirement where a charity has multiple entities or a larger lease portfolio.
• Modifications and reassessments: Changes such as rent reviews, extensions, terminations and revisions to the lease term may require the lease liability and right-of-use asset to be recalculated.
• Spreadsheet control: Where lease accounting is managed solely through spreadsheets, version control, calculation consistency, change history and reconciliation can become increasingly difficult to manage.

Worked Example: Simple Property Lease

Consider a five-year property lease with annual payments of £100,000 and a discount rate of 5%. This simplified example assumes that no recognition exemption applies and excludes incentives, prepayments, initial direct costs and non-exchange components.

At commencement:

• The lease liability is calculated as the present value of the relevant lease payments.
• The right-of-use asset initially equals the lease liability, subject to any required adjustments.

During the lease:

• Interest accrues on the outstanding lease liability.
• Lease payments reduce the liability.
• The right-of-use asset is depreciated over the appropriate period.

For this lease, the SoFA would include:

• Depreciation of the right-of-use asset within the relevant charitable activity or cost category.
• Interest on the lease liability within finance costs.
• No separate operating rent expense for the recognised lease payments covered by the calculation.

This change in timing and presentation can affect reported surplus or deficit patterns, internal performance measures and financial covenant calculations.

Transition Considerations

Transition requires more than transferring existing operating lease commitments into a new calculation. Finance teams need to determine:

• Which arrangements meet the definition of a lease.
• Which leases qualify for the short-term or low-value recognition exemptions.
• Which transition options and practical expedients are appropriate.
• How opening balances reconcile to previous operating lease commitment disclosures.
• How social donation leases, peppercorn arrangements and other non-exchange components should be treated.

Opening entries must be calculated by entity and supported by documentation sufficient for audit or independent examination. Early discussion with the charity’s accountant, auditor or independent examiner remains advisable where material judgements are involved.

The changes do not alter the contractual cash payments due under a lease. However, they formalise the recognition, measurement, presentation and documentation required within the financial statements.

Tiered Reporting and Trustees’ Reports

What is the new tiered reporting framework?

The new tiered framework under SORP 2026 introduces proportionate reporting requirements based on a charity’s gross income. Smaller charities generally face fewer disclosure requirements, while larger charities must provide more detailed information within their financial statements and Trustees’ Annual Report.

Under the SORP tiering requirements, Tier 3 charities must prepare a cash flow statement. Charities in other tiers must still consider whether a cash flow statement is required by FRS 102 or another applicable requirement.

Trustees should be briefed on the effect of lease recognition on the balance sheet, reported reserves, financial measures and potential covenant calculations before the first affected accounts are finalised.

Provisions and Contingent Items

SORP 2026 also updates and clarifies the treatment of provisions, contingent liabilities and contingent assets.

Charities should:

• Assess recognition probability thresholds carefully.
• Use reliable estimates when measuring provisions.
• Apply discounting where its effect is material.
• Provide appropriate disclosures for contingent liabilities.
• Exercise caution when disclosing contingent assets.

These requirements are separate from lease accounting but form part of the wider SORP 2026 reporting changes.

FRS 102 Alignment

The updated SORP reflects changes within FRS 102, including the revised lease accounting model and revenue recognition requirements.

Charities should map their accounting policies to the relevant FRS 102 requirements and the charity-specific guidance within SORP 2026. Module 10B of SORP 2026 provides the detailed charity-specific guidance and examples for lease accounting.

Where classification, measurement or recognition depends on significant judgement, professional advice may be appropriate.

Why Action Still Matters

SORP 2026 is now effective for relevant financial years beginning on or after 1 January 2026. Many charities are therefore already within their first affected reporting period, even though the first annual accounts may not yet have been prepared.

Charities should now have reviewed their lease arrangements, identified relevant data, agreed accounting policies and established a repeatable process for calculations, journals and disclosures. Where this work remains incomplete, acting before the first year-end will reduce the risk of compressed implementation and avoidable audit pressure.

Implementation Roadmap

Finance teams should confirm that they have:

1. Established a complete inventory of leases and potentially embedded lease arrangements.
2. Identified short-term, low-value and other relevant arrangements requiring separate assessment.
3. Confirmed the methodology used to select and document discount rates.
4. Calculated and reconciled the required opening balances.
5. Modelled the effect on financial statements, reserves and covenant calculations.
6. Updated accounting policies, procedures and responsibilities.
7. Tested lease journals within the management accounts process.
8. Updated SoFA presentation, disclosure notes and supporting working papers.
9. Briefed trustees and other relevant stakeholders on the expected effect.

A controlled test of the calculations, journals and reporting process before the first affected year-end can help identify missing data and policy questions while there is still time to resolve them.

How FMIS Lease Accounting Supports SORP 2026 Processes

FMIS Lease Accounting provides a structured system for maintaining lease information and producing the calculations, schedules and accounting entries needed to support lease reporting under standards including FRS 102.

FMIS can help finance teams:

• Maintain property, equipment and other lease agreements within a central lease register.
• Calculate right-of-use assets, lease liabilities, interest charges and payment schedules.
• Record different payment frequencies and payments made in advance or arrears.
• Manage short-term and low-value lease information for reporting purposes.
• Process mid-term adjustments, changes to payment terms, early settlements and terminations.
• Update payment schedules and lease liabilities following relevant changes.
• Produce lease accounting reports, schedules and general ledger postings.
• Import and process lease information in bulk where larger portfolios are involved.
• Close accounting periods to support reconciliation and period control.

Specialist software does not replace the accounting policies, judgements or professional advice required when applying SORP 2026. It can, however, provide a more controlled and repeatable alternative to maintaining lease calculations across multiple spreadsheets.

Organisations considering how to manage the revised requirements can find out more about FMIS Lease Accounting or request a product demonstration.

Final Observation

SORP 2026 aligns charity reporting more closely with the revised FRS 102 requirements and introduces a substantially different approach to lessee accounting. The underlying calculation model is manageable, but applying it consistently requires complete data, documented judgements and an ongoing process for lease changes.

Charities that have not completed their transition work should prioritise the lease inventory, accounting policies, opening calculations and reporting process. The objective is not simply to produce the first set of compliant accounts, but to establish a process that remains controlled throughout the lease lifecycle.

Frequently Asked Questions: Charities SORP 2026 and Lease Accounting

What is changing under Charities SORP 2026?

Charities SORP 2026, aligned with the revised FRS 102 issued by the Financial Reporting Council, introduces changes covering lease accounting, revenue recognition, tiered reporting and the Trustees’ Annual Report. For lessees, most leases will now be recognised through a right-of-use asset and corresponding lease liability, subject to the available exemptions.

When does Charities SORP 2026 take effect?

The requirements apply to financial years beginning on or after 1 January 2026. A charity with a 31 December year-end will therefore apply SORP 2026 to its accounts for the year ending 31 December 2026.

Which charities must follow SORP 2026?

Charities preparing accruals accounts that provide a true and fair view generally follow the applicable Charities SORP. The precise requirement depends on the charity’s legal structure, jurisdiction and income. Charitable companies must prepare accruals accounts under company law, while the statutory thresholds applying to other charities differ between England and Wales, Scotland and Northern Ireland.

What changed for charities in England and Wales from 30 September 2026?

For financial years ending on or after 30 September 2026, the gross income threshold for relevant non-company charities to prepare accruals accounts increased to above £500,000. The independent examination threshold increased to above £40,000. A statutory audit is generally required where gross income exceeds £1.5 million, or where gross income exceeds £500,000 and gross assets exceed £5 million.

Do the new accounting thresholds change the SORP 2026 lease requirements?

No. The threshold changes determine how some charities in England and Wales must prepare or scrutinise their accounts. They do not change the lease accounting treatment required where a charity prepares SORP-compliant accruals accounts.

How does the new lease accounting model affect charities?

Under the revised FRS 102 lease section, most leases held by a charity as lessee move onto the balance sheet. The charity recognises a right-of-use asset and a lease liability, increasing reported assets and liabilities. Depreciation and interest generally replace the previous operating lease expense for recognised leases, affecting SoFA presentation and the timing of reported expenditure.

Are there exemptions from on-balance-sheet lease recognition?

Yes. Recognition exemptions are available for qualifying short-term leases and leases of low-value assets. The short-term lease exemption is applied by class of underlying asset, while the low-value exemption is assessed for each lease. A short-term lease must have a term of 12 months or less at commencement and cannot contain a purchase option.

How are peppercorn lease arrangements treated?

Peppercorn or nominal consideration arrangements may have the legal form of a lease but are unlikely to meet the FRS 102 definition of a lease where there is little or no consideration. Nominal payments are generally treated as an operating expense. The charity must also assess the economic benefit received and determine whether a donated asset, facility or service should be recognised under the relevant SORP requirements.

How are below-market or social donation leases treated?

A below-market arrangement is not automatically measured as a donated right-of-use asset at the full fair value of the underlying property. The charity must first determine whether the non-exchange component represents an asset, service or facility. The nature of the resource received determines how it is measured. Where the incoming resource forms part of a right-of-use asset, the non-exchange component increases the cost of that asset and related income is recognised in accordance with the relevant SORP requirements.

How does Charities SORP 2026 change revenue recognition?

The revised FRS 102 Section 23 introduces a five-step revenue recognition model for exchange contracts. Charities must identify the contract and performance promises, determine the transaction price, allocate that price and recognise revenue as the relevant promises are satisfied. This may affect the timing and measurement of income from contracts for goods or services.

Will grant income and donations be affected?

Grant and donation income is not automatically covered by the exchange-contract model. Charities must assess the substance and terms of each arrangement to determine whether it is an exchange transaction or a non-exchange transaction. Conditions, performance-related requirements and restrictions may affect when income is recognised, so accounting policies and significant agreements should be reviewed carefully.

What is the new tiered reporting framework?

SORP 2026 introduces three reporting tiers based on gross income:

• Tier 1: up to £500,000.
• Tier 2: above £500,000 and up to £15 million.
• Tier 3: above £15 million.

Each tier introduces progressively more detailed reporting requirements. SORP 2026 requires Tier 3 charities to prepare a cash flow statement. Charities in other tiers must still consider whether one is required under FRS 102 or another applicable requirement.

How are Trustees’ Annual Reports changing?

The Trustees’ Annual Report must provide information appropriate to the charity’s reporting tier. The revised SORP includes additional guidance covering achievements, impact, reserves, risks, future plans and environmental, social and governance matters. The most extensive requirements apply to Tier 3 charities.

Will the reporting burden increase?

For many charities, yes. The revised requirements provide greater transparency but also require more detailed information, additional accounting judgements and stronger supporting records. The effect will depend on the charity’s reporting tier, legal structure, activities and lease portfolio.

How will lease accounting affect the balance sheet and financial position?

Charities with recognised leases will generally report higher assets and liabilities. The revised treatment may affect reported reserves, covenant calculations, financial ratios and internal performance measures. The contractual cash payments do not change, but their recognition and presentation within the financial statements will.

Do charities need professional advice?

Professional advice may be appropriate where the charity has material or complex leases, social donation arrangements, significant contract judgements or uncertainty over transition. Early engagement with the charity’s accountant, auditor or independent examiner can help resolve these questions before the accounts are prepared.

What should finance teams do now?

Finance teams should confirm that the lease inventory is complete, the accounting policies and discount rate methodology have been agreed, opening calculations have been prepared, and the journal and disclosure process has been tested. Trustees should also understand how the changes may affect the charity’s reported financial position.

Can lease accounting software support SORP 2026 reporting?

Yes. Specialist lease accounting software can centralise lease data, calculate right-of-use assets and lease liabilities, produce payment and interest schedules, process lease changes and generate reporting information. It supports a more repeatable and controlled process, although the charity remains responsible for its accounting policies, judgements and financial statements.

How does FMIS support lease accounting under FRS 102 and SORP 2026?

FMIS Lease Accounting helps finance teams maintain lease records, calculate right-of-use assets and lease liabilities, manage payment schedules, process adjustments and terminations, and produce accounting reports and postings. These capabilities support the operational processes needed to apply the revised lease accounting requirements without relying on separate calculations across multiple spreadsheets.

Why are these changes considered significant?

The combination of revised lease accounting, updated revenue recognition and tiered reporting represents a substantial change to charity financial reporting. For many charities, leases that were previously held off the balance sheet must now be identified, measured and managed throughout their lifecycle, supported by documented judgements and appropriate financial statement disclosures.