The new Charities SORP — what it is and what it means for charities, trustees and advisers
After a detailed consultation period, the SORP 2026 has been finalised, setting a new direction for charity financial reporting from 1 January 2026. This latest framework aligns the sector with updated FRS 102 requirements and introduces significant developments around income recognition, lease accounting and the structure of the trustees’ report. The result is a more proportionate and transparent approach – but one that will require careful preparation from charities and their advisers.
When it comes into effect
SORP 2026 applies to reporting periods commencing on or after 1 January 2026, so for Charities with a March year-end this will be financial statements for the year 31 March 2027. Early adoption of the underlying FRS 102 amendments is possible but will need careful, consistent application.
Income recognition – a significant change
The SORP’s module on income recognition adopts the revised FRS 102 approach: a five-step model for revenue from exchange transactions. Helpfully the SORP includes some sector specific examples as well as guidance on when grant income is income from an exchange transaction and when it is income from a non-exchange transaction.
Exchange transactions
When accounting for income from exchange transactions, charities should recognise income in a way that reflects the transfer of goods or services promised to the customer. To achieve this, charities should apply the 5 step model:
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- Identify the contract with a customer or funder.
- Identify the performance obligations within that contract.
- Determine the transaction price.
- Allocate the transaction price to each performance obligation.
- Recognise income when (or as) each performance obligation is satisfied.
Whilst by no means not a definitive list, the SORP lists the following as examples of income from exchange transactions – the provision of educational services in return for a course fee, the sale of educational goods by a museum and the provision of residential accommodation by a care home in return for payment.
Non-exchange transactions
A charity must recognise income from non-exchange transactions as follows:
- transactions that do not impose specified future performance-related conditions on the recipient are recognised in income when the resources are received or receivable.
- transactions that do impose specified future performance-related conditions on the recipient are recognised in income only when the performance-related conditions are satisfied.
- when resources are received or receivable before the performance-related conditions are satisfied, a liability is recognised
Practical implications
Charities will need to review all funding agreements and service contracts to determine whether they fall under exchange or non-exchange income.
Lease accounting – most leases on the balance sheet
The changes to lease accounting represent a significant development under the new Charity SORP. To reflect these updates, an entirely new module has been introduced, setting out revised requirements for the recognition, measurement and disclosure of lease arrangements.
Lessees will generally recognise a right-of-use (ROU) asset and corresponding lease liability for most leases (with exemptions for short-term or low-value leases). Lessor accounting is broadly unchanged. For lessees, the expense profile will change (depreciation and interest rather than straight operating lease expense), with potential impacts on operating surpluses, reserve levels, audit thresholds and covenants.
What this means in practice
- Charities with multiple property leases are most impacted and can expect a material balance sheet change.
- Smaller charities may be exempt for low-value leases but should still document decisions and thresholds.
- Trustees should be made aware of covenant and liquidity implications before year-end.
Section 10B of the new SORP includes a useful flowchart to assist charities in determining how to account for their leases, as well as examples of low value assets.
What should Charities be doing now:
- Create a lease register
- Determine an appropriate discount rate to use
- Forecast forward the impact this will have on the Income Statement and determine the impact on reserves, covenants and audit thresholds.
The new tier system – who needs to do what
The SORP introduces three tiers based on annual income levels:
- Tier 1: income up to £500,000
- Tier 2: income between £500,000 and £15 million
- Tier 3: income over £15 million
The new tier system should bring a more proportionate reporting system compared to the previous two tier system which brought a heavy reporting burden on small charities.
A key point to note in the new tier system is that only tier 3 charities are required to provide a detailed cash flow statement (unless one is required by FRS 102). Tier 1 charities will benefit from simplified disclosures in the Trustees annual report.
What this means:
- Smaller charities (Tier 1) will generally face lighter narrative and disclosure burdens.
- Mid-sized charities (Tier 2) should review whether current systems capture the extra disclosures required at that tier.
- Large charities (Tier 3) must plan for the fuller reporting package (statement of cash flows, enhanced disclosures and more detailed trustees’ reporting).
Other notable updates include simplified accounting for social investments, updated guidance on provisions and contingencies and enhanced disclosure requirements for the Trustees’ Annual Report.
Practical next steps
- Carry out an assessment for revenue streams and leases – identify likely timing and balance-sheet effects.
- Create a contract and lease register
- Review and update accounting policies to ensure they align with the new SORP.
- Engage early with auditors.
SORP 2026 brings the most significant changes to charity reporting in over a decade, aiming to improve transparency, consistency and proportionality across the sector. Trustees and finance teams should begin preparing now to ensure a smooth transition
Our Charity Team is on hand to help you understand the implications for your organisation – from reviewing accounting policies and lease arrangements to training trustees on the new requirements. Please get in touch with us if you would like tailored guidance or support.
Useful Links
Full SORP – charities-sorp-2026-1
Summary of key changes – summary-of-changes-sorp-2026-pdf
Charity commission announcement – Shift to more proportionate accounting regime for UK charities
