A significant update to the Charities Statement of Recommended Practice (SORP) is on the horizon. The new draft Charities SORP 2026 was released for public consultation in March 2025, with the final version anticipated to be published by Autumn 2025. It will apply to accounting periods starting on or after 1 January 2026, aligning with the revised Financial Reporting Standard (FRS) 102, which was updated in March 2024. Charities are encouraged to prepare in advance to ensure a smooth transition to the new standards.
Key Changes in the Draft SORP
Lease Accounting Overhaul
The most significant change for many charities is the revised lease accounting. This presents a major change for operating leases, which have historically been presented within annual expenditure and a financial commitments disclosure in the accounts.
Under the new standard, the distinction between operating and finance leases will be removed for lessees. This means that most operating leases, for items such as property, vehicles and equipment, will need to be recognised on the balance sheet, reflecting both a right-of-use asset and a corresponding lease liability, which aims to bring the SORP in alignment with the latest FRS 102 requirements in respect of leases.
The change to the value of assets may mean that the charity breaches the asset-related audit threshold and the resulting lease liability could have implications for bank loan covenants.
New Revenue Recognition Model
The draft SORP introduces a five-step model for recognising income from exchange contracts, such as a service level agreement. This approach requires charities to identify distinct goods or services promised to customers/funders and the amount of consideration they are entitled to in return. This change may affect the timing of revenue recognition, potentially impacting whether a charity’s total gross income crosses audit thresholds.
The five steps are outlined below:
- Identify the contract with a customer/funder
- Review the contract for the specific performance obligations
- Determine the transaction price
- Apply the transaction price to the performance obligations in the contract
- Recognise income as the performance obligations are met
The idea of the introduction of this model is not designed to facilitate a major change to income recognition, as for most charities, it will not alter how much income they recognise or when they recognise it. The new model will, however, ensure that charities apply a consistent approach to income recognition which identifies the performance obligations in an exchange contract, and ensures that revenue is recognised in line with the performance obligations being satisfied by the charity.
There are no proposed changes to income recognition from non-exchange transactions, such as grants. Therefore, where income is received free of any performance-related conditions on the charity, the income is recognised when received. For income received which requires a charity to meet certain performance-related conditions, the income will be recognised when those conditions are met by the charity.
Tiered reporting requirements
A new three-tier reporting framework will be introduced. The tiers will be based on income levels as follows:
- Tier 1 – Charities with income below £500,000 will have reduced reporting requirements.
- Tier 2 – Charities with income between £500,000 and £15 million will have moderate reporting requirements.
- Tier 3 – Charities with income above £15 million will have more extensive reporting requirements.
The new tiers allow closer alignment with the latest Companies Act reporting standards for small, medium and large companies. Therefore, a statement of cashflows will only be required to be prepared for charities who breach the small company thresholds.
Having a tiered approach also ensures that not all charities will need to apply every requirement of the new draft SORP, allowing smaller charities to adopt a simplified reporting format. This change aims to reduce the administrative burden on smaller organisations, while maintaining transparency and accountability.
All charities will need to continue to outline the impact that the charity is making in the Trustees’ Annual Report (TAR), specifically in relation to achievements and performance. However, it will only be charities that fall in tiers 2 and 3 that will need to explain the indicators upon which performance has been assessed, together with detailed information by activity in the TAR.
There will be a requirement for all charities to include information about the impact of volunteers. Whilst the value of volunteers cannot be quantified, all charities will have to clearly describe the contribution of the work of volunteers on its activities.
Charities falling in tier 1 and 2 will be encouraged to provide detail on how the organisation is managing sustainability issues concerning environment and social matters. This will be a mandatory requirement for tier 3 charities, who will also have to present key performance indicators to demonstrate progress towards sustainability-related goals.
In the financial review section of the TAR, all charities will have to outline their reserves policy, to state the desired level of funds that the charity aims to hold at any point in time. Where the level of reserves held differs from the reserves policy, the report will need to explain the steps that the charity is taking to bring the level of reserves in line with the desired level.
Preparing for the Changes
It is important to take proactive steps to prepare for the upcoming changes, such as:
- Review Lease Agreements: Compile a comprehensive list of all current leases, assessing their terms and conditions to determine the impact on your balance sheet.
- Assess Revenue Streams and Contracts: Evaluate the charity’s income streams to identify those that involve exchange contracts with performance related conditions, ensuring compliance with the new revenue recognition model.
- Update Financial Policies: Revise accounting policies and procedures to align with the new standards, providing training to staff and trustees as necessary.
- Engage with Advisors: Consult with auditors and financial advisors to understand the implications of the changes and receive guidance on implementation.
Final Thoughts
SORP 2026 is designed to ensure greater transparency, consistency and accountability in reporting, but one that requires your careful consideration. Preparing now will ensure that your charity will be well placed to implement the necessary changes.
If you would like further information or guidance on this subject, please get in touch with our in-house expert on charities and the author of this blog, sumeet.bajaria@myersclark.co.uk
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