Charities SORP (October 2025) - The Key Changes

Introduction

The updated Charities SORP, which was issued in September 2025, includes a number of significant accounting and reporting changes which charities will need to carefully consider during 2026. The updated SORP is effective for accounting periods commencing on or after 1 January 2026.

The SORP is based on Financial Reporting Standard (FRS) 102 and this update therefore includes the significant changes relating to lease accounting and income recognition which were included in the recent update to FRS 102 following its second periodic review. The SORP also reflects the results of a significant consultation both within the sector and with key stakeholders. There was a particular focus on ensuring that the SORP took into account the requirements of smaller charities.

The key changes in the updated SORP are set out below under the following headings:

Charity Tiers
The Trustees Annual Report
Lease Accounting
Income Recognition
Other Changes

The Charity Tiers

The extant SORP has different reporting requirements for small charities (income up to £500,000) and larger charities. The updated SORP has introduced three tiers as follows:

Tier 1: Income up to £500,000
Tier 2: Income from £500,001 to £15,000,000
Tier 3: Income above £15,000,000

The majority of the accounting and reporting requirements of the updated SORP apply to all three tiers. However, there are some exemptions for Tier I and Tier 2 charities and, in some areas, Tier 3 charities are required to provide more detailed narrative information. The most significant exemption relates to the requirement to prepare a Cash Flow Statement which, henceforward, will only be required by Tier 3 charities.

It should be noted that these tiered thresholds are based only on income. There are no other criteria. Also, there are no provisions requiring charities to consider the thresholds over two consecutive years. If a charity has a one off increase to its income, perhaps due to a large legacy, it may immediately find itself in a higher tier.

Charitable companies need to be careful when applying the tiers as the SORP does not override company law. Therefore, for example, a charitable company which is Tier 2 under the SORP may still have to prepare a Cash Flow Statement if it does not qualify as a small company under the Companies Act.

The Trustees Annual Report

The Trustees Annual Report section of the SORP has been significantly redrafted with a number of additional narrative reporting requirements. For Tier 2 and Tier 3 charities, Trustees are required to consider a number of prompt questions to assist them with the drafting of the objectives, activities and achievements sections of the report, with a particular emphasis on explaining in more detail the impact of the charity’s activities. Other changes include the following:

Additional information is required on the scale and nature of volunteer roles. Small charities (Tier 1) have to report on volunteers for the first time and Tier 2 and Tier 3 charities are required to provide detailed information on the number of volunteers.
Small charities (Tier 1) now have to provide a summary of their future plans which was previously only required by larger charities.
There is now a clearer definition of free reserves and the figure disclosed must agree with, or be reconciled to, the reserves figure in the financial statements. Where charities have negative reserves, they are required to explain why they are still going concerns.
In setting out their principal risks, Tier 2 and 3 charities must now consider environmental and cyber security risks.
Tier 2 and Tier 3 charities must also set out the implications on their financial position where material legacies have been accrued but not yet received.
Tier 3 charities are required to include a section on sustainability, setting out how the charity manages and responds to environmental, social and governance (ESG) matters. Tier 1 and 2 charities are encouraged to also provide this information, but it is not compulsory.

Lease Accounting

The change to lease accounting will have a significant impact on the financial statements of many charities, particularly those which have property leases. Previously, leases were categorised as finance leases or operating leases. Only finance leases were brought onto the Balance Sheet with operating leases (which would have included most property leases) being charged to the profit and loss account as the lease payments fell due.

Under the new regime, there are two categories of lease which are exempt and which can continue to be accounted for as operating leases:

Low value leases: There is no monetary threshold. FRS 102, on which the SORP is based, simply includes a list of assets which would not qualify as low value, such as land and buildings, cars and heavy equipment
Short term leases: These are leases with a term period of less than 1 year as at the commencement of the lease and with no purchase option.

All other leases must be accounted for on the Balance Sheet. Under the new regime, the net present value of future lease payments are brought onto the Balance Sheet as a liability. The discount rate used to calculate the net present value (if it is not implicit in the lease agreement) would be the charity’s cost of borrowing and the SORP sets out various options on how to calculate this. The leased assets would be brought onto the Balance Sheet at the same value as the lease liabilities subject to adjustments for other costs, such as initial legal costs, not included in the lease liability. The lease liability would then be increased by the interest charge and reduced by the lease payments each year. The leased asset would be subject to annual depreciation.

In the first year that this change in accounting policy for leases is implemented there is no requirement to do a prior year adjustment or amend comparative figures The net present value of the outstanding lease payments relating to any existing leases, whose outstanding term exceeds one year, is calculated as the lease liability for the Balance Sheet and the leased asset is brought onto the Balance Sheet, at the corresponding amount. If, exceptionally, there is any difference between the opening leased liability and opening leased asset, the difference is simply adjusted against opening reserves.

The SORP provides specific guidance on how to account for lease agreements which have a non-exchange component. This is where the lessor has accepted a lower lease payment in order to support the aims of the charity. This includes:

Peppercorn or nominal arrangements: These arrangements do not meet the definition of a lease, even if a formal lease agreement is in place, and the transaction would be accounted for as donated facilities
Social donation leases: Under the lease terms, the lease payments are significantly less than market value. In this case, the fair value of the lease liability, from the perspective of the charity, is calculated and this is used as a basis for capitalising the asset. The difference between the asset and the actual lease liability represents the non-exchange element and this would be accounted for as a donation over the term of the lease.

Reference is also made to leases with conditions as to the asset’s use. In this case the lease payments, although below market rates, may simply reflect the reduced value of the assets arising from the attached conditions.

Complex lease terms are also set out in FRS 102 and reflected in the SORP. These include:

Options to determine and extend leases
Lease review dates
Dilapidation terms
Non-lease payments included in the lease payments such as maintenance charges.

Income Recognition

The Charities SORP module on income recognition is now divided into two sections with commercial income (exchange transactions) dealt with separately from voluntary income such as donations and legacies (non-exchange transactions). The SORP recognises that grant income can potentially fall into either category and it sets out the criteria which determine how grants should be classified.

Income recognition from exchange transactions is now based on a five step methodology:

Identify the contract with a customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance promises in the contract
Recognise the income when a promise is satisfied.

For the majority of exchange contracts, this new methodology is unlikely to result in any change to the way income is recognised. However, the new methodology may well affect contracts where there are distinct obligations which are delivered over time or where there are significant upfront costs associated with obtaining or preparing for the contract.

FRS 102 also covers the accounting treatment of more complex arrangements such as non-refundable up-front fees and the implications for long term construction contracts. The SORP provides a number of examples relevant for charities including:

Subscription income
Education services
Welfare services such as a help line service

In the first year of implementing this change in accounting policy for income recognition, a full prior year adjustment is permissible. However, a simpler option is available which is to amend the position for contracts which are ongoing at the start of the year and make an adjustment against opening reserves.

The section dealing with non-exchange transactions has not amended the existing income recognition criteria in practical terms. The recognition principles have been redrafted so that there is no longer any reference to ‘entitlement’. However the entitlement requirement is still implicit throughout the section. There is also no change to the recognition criteria where non-exchange grant income is received with performance related conditions.

Other Changes

The SORP includes a template for a Statement of Financial Activities (SOFA) prepared on a natural classification basis which can be used by Tier 1 charities. However, the SORP encourages all charities to analyse income and expenditure on an activity basis.
The accounting requirements for provisions, contingencies and funding commitments have been pulled together in a new section. The section provides clear guidance for grant giving charities on how they should account for grant commitments including where conditions are attached to the grant.
The exemption from accounting for the fair value of donated heritage assets, where a reliable estimate cannot be made of the asset’s fair value (or the cost of valuation is likely to exceed the benefits provided by the information), has been removed. In future, an estimate of the value of the donated asset must be made except in exceptional circumstances.
Social investments were previously classified as either programme related investments or mixed motive investments. These classifications have been superseded and all such investments are now referred to simply as social investments. Previously gains, losses and impairments of mixed motive investments were accounted for with other investments in the SOFA. Henceforward, gains must be accounted for as other income, and losses and impairments must be accounted for as a charitable expenditure cost. In the first year of application of the new SORP, comparative figures must be adjusted to reflect these changes in disclosure.
In the accounting policies note, additional narrative information is required about the going concern basis of accounting. When the accounts have been prepared on a going concern basis this must be disclosed together with confirmation that future operations, for at least the next twelve months, have been considered. Any significant judgments made in assessing the charity’s ability to continue as a going concern most also be disclosed. Any material uncertainties relating to going concern must also be disclosed or a note stating that there are no such uncertainties.
The section of the SORP dealing with Fund Accounting has been expanded to provide additional clarity and to reflect legislative changes.