Charities Statement of Recommended Practice 2026: The headlines

9 May 2025

Last updated: 18 June 2025

Christine Scott
Head of Charities and Reporting, ICAS

Following the launch of the much-anticipated consultation on the revised Charities Statement of Recommended Practice (SORP), it is vital for the sector and their accountancy advisers to engage in the consultation process. Most importantly charities should be taking practical steps to ensure they can comply.

A consultation draft of Charities SORP 2026 was published on Friday 28 March 2025. The comment period is open until noon on Friday 20 June 2025.

There are significant proposed changes to the Charities SORP arising from:

The Financial Reporting Council (FRC)’s most recent periodic review of FRS 102, the Financial Reporting Standard applicable in the UK and the Republic of Ireland
The Charities-SORP-making Body’s Charities SORP development process.

The Charities SORP development process involved engagement between the UK charity regulators (who collectively form the Charities SORP-making Body), the Charities SORP Committee, who advise the SORP-making Body, and engagement partners, including funders, charity finance professionals and accountancy advisers. We were an engagement partner in the SORP development process.

Changes to FRS 102, arising from the periodic review, and the revised Charities SORP will apply to periods commencing on or after 1 January 2026.

While there will be an opportunity to influence the final version of the Charities SORP, significant proposed changes will be going ahead. Charities and their accountancy advisers shouldn’t underestimate their magnitude, or the effort needed to comply in time.

The new Charities SORP 2026: Have your say

You can engage with this consultation and ensure your views are heard by joining our webinar about the Charities SORP consultation on 22 May, those who are involved in the preparation and scrutiny of charity accounts are encouraged to join.

The webinar is free and is open to our members and students, and non-members.

Please visit our event page for more information and to sign up.

What are the significant proposed changes arising from FRS 102?

Significant changes have been made by the FRC to FRS 102 to reflect changes to two IFRS Accounting Standards:

IFRS 15 Revenue from contracts with customers
IFRS 16 Leases

Most accounts preparers and accountancy advisers should be familiar with these well trailed changes to FRS 102. However, for charities preparing ‘true and fair’ accounts, there are significant additional matters to consider in the application of changes relating to these two standards.

Revenue (income) recognition

Section 23 of FRS 102 on Revenue from contracts with customers has been revised to include a new five-step model for recognising revenue based on IFRS 15. This means that revenue (i.e. income) from exchange transactions must be recognised when control of the good or service is transferred to the customer.

Applying the five-step model may impact on the timing of income recognition. This impact can only be determined through identifying and assessing contracts with customers against the model.

For charities there’s additional complexity in that they will need to distinguish between exchange transactions and non-exchange transactions.

A non-exchange transaction is defined in FRS 102 as “A transaction whereby an entity receives value from another entity without directly giving approximately equal value in exchange or gives value to another entity without directly receiving approximately equal value in exchange.”

Module 5 of the proposed SORP on the Recognition of income, including legacies, grants and contract income includes separate sections on exchange and non-exchange transactions.

The proposed SORP doesn’t include any specific requirements for charities on first-time adoption of the revenue accounting changes and cross-refers directly to the relevant paragraphs in Section 1 of FRS 102 on Scope. This means that the proposed SORP doesn’t limit the choices charities can make on initial recognition and charities can apply the practical expedients available in FRS 102.

The single lease accounting model

Section 20 of FRS 102 on Leases introduces a single lease accounting model for lessees, based on IFRS 16, meaning that there are no longer two distinct categories of lease: operating leases; and financial leases. This distinction remains for lessors.

As a consequence, for lessees, there’s likely to be an increase in lease related assets and liabilities being brought on balance sheet.

Charities will need to determine whether there’s a non-exchange element in relation to any contractual payments made for the use of assets, including facilities, as the non-exchange element will need to be measured and recognised.

A non-exchange element is most likely if contractual payments are:

“Significantly below market rents”; or
“So low that they aren’t substantive (e.g. peppercorn or nominal consideration),” [meaning that] “the arrangement may not meet the definition of a lease.”

[FRS 102.20.35]

Module 10B of the proposed Charities SORP on Lease accounting along with FRS 102 will guide charities through the process of how to account for the non-exchange element of a contractual arrangement, including where the non-exchange element is classified as a government grant.

Under FRS 102, there are two practical expedients available when applying the lease accounting requirements in section 20. These are for:

Short-term leases.
Leases where the underlying value of the asset is of low value.

A short-term lease is a lease with a term of 12 months or less at the commencement date.

An assessment of whether an asset is of low value is on an absolute basis and not dependent on whether the related lease is material to the charity. Examples of leases which are not considered to be of low value include land and buildings, and vehicles.

The selection of a discount rate is important in the calculation of lease liabilities and their ongoing measurement. FRS 102 states the following:

“At the commencement date, a lessee shall measure the lease liability at the present value of the lease payments that aren’t paid at that date. The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the lessee shall choose, on a lease-by-lease basis, to apply either the lessee’s incremental borrowing rate or the lessee’s obtainable borrowing rate. [FRS 102.20.49]

A public benefit entity that’s unable readily to determine either the interest rate implicit in the lease, or the lessee’s incremental or obtainable borrowing rate for a lease, shall use the rate of interest otherwise obtainable by the public benefit entity on deposits held with financial institutions.” [FRS 102.PBE20.50]

Further material on the selection of a discount rate is included in the proposed Charities SORP.

When applying the revised lease accounting requirements for the first time, the proposed SORP requires charities to refer directly to Section 1 of FRS 102. As with first time adoption of the new revenue accounting requirements, FRS 102 offers practical expedients. However, FRS 102 states the following about how entities must approach the implementation of this change in accounting policy:

“A lessee shall not restate comparative information. Instead, it shall recognise the cumulative effect of initially applying the periodic review 2024 amendments to Section 20 as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the date of initial application.” [FRS 102.1.47]

Also worth noting is that the application of the practical expedient at paragraph FRS 102.1.48, which permits a full IFRS 16 approach to the measurement of lease liabilities and right-of use assets, is unlikely, in most circumstances, to be appropriate for charities. This is because charities are unlikely to be included in the consolidated financial statements of a parent entity applying IFRS Accounting Standards.

Charities should be looking to identify and review contracts which may contain a lease and should thinking about how to source appropriate discount rates.

In addition, charities should be considering whether they:

Are to take advantage of the practical expedients available for short term leases or low value assets.
Have any leases where contractual payments made for the use of assets are significantly below market rents and therefore contain a non-exchange element; and
have any contractual arrangements for the use of assets where the arrangement may not meet the definition of a lease due to a nominal or peppercorn rent being paid. On this point the proposed Charities SORP states:

“While these arrangements may have the legal form of a lease, it’s unlikely they will meet the definition of a lease under FRS 102 as the payments due are likely to be very small or there may be no payment due. Any nominal payments that are made are treated as an operating expense. Such arrangements are outside the scope of Section 20 of FRS 102.” [Draft Charities SORP paragraph 10B.75]

What are the significant changes arising from the SORP development process?

The proposed Charities SORP introduces changes across the board, some more significant than others. Significant changes relating to the following topics are discussed further below:

Tiered reporting (limited to five modules)
Trustees’ annual report (module 1)
Statement of cash flows (module 14)

Tiered reporting

Previous editions of the Charities SORP have included an element of tiered reporting and the revised SORP proposes a three-tiered approach to requirements rather than the current two-tiered approach. The proposed tiers are as follows:

Tier 1 – charities with a gross income of not more than £500,000.
Tier 2 – charities with gross income above the tier 1 threshold but not more than £15 million.
Tier 3 – charities above the tier 2 threshold.

For simplicity, there’s no proposal to include an asset or employee numbers criterion for each tier as is the case for companies under company law. However, this will add complexity in certain respects.

Care will need to be taken when charities are assessing whether they are eligible for the statement of cash flows exemption available under FRS 102 (see further commentary below) as the small companies size threshold applies here to all entities.

Tier 2 has been set to align in part with revised company law threshold for small companies, by referencing gross income of £15 million. However, it should be noted that ‘gross income’ and ‘turnover’ aren’t equivalent measures: ‘turnover’ may be a lower number than the legal definition of ‘gross income’ within the relevant charity accounting regulations. While charity law financial thresholds tend to be stricter than company law financial thresholds, care should always be taken to apply thresholds appropriately.

The current Charities SORP includes reporting concessions for charities with a gross income of not more than £500,000. Following publication of the Charities SORP consultation, the Scottish government announced its commitment to increase the Scottish charity audit threshold from gross annual income of more than £500,000 to £1 million so it’s likely there will be pressure from those responding to this consultation to increase the tier 1 criterion.

The tiered approach is intended to emphasise the concessions available to the smallest charities applying the SORP, while placing more onerous disclosure and presentation requirements on larger charities. Tiered reporting requirements are set out in the following modules:

Module 1 Trustees’ annual report
Module 4 Statement of financial activities
Module 8 Allocating costs by activity
Module 9 Disclosure of trustee and staff remuneration, related party and other transactions
Module 14 Statement of cash flows

It’s important to note that while the Charities SORP can place additional requirements on charities, it cannot offer concessions which would disapply FRS 102 requirements.

The proposed Charities SORP provides helpful clarification that charities aren’t eligible to apply Section 1A of FRS 102.

Trustees’ annual report

Module 1 of the Charities SORP on the Trustees’ annual report has had a significant revamp including proposed new requirements for charities to report their impact, i.e. the difference they have made to their beneficiaries and to society more generally, and their sustainability credentials.

There’s also a greater emphasis, within the financial review requirements, on ensuring that the relationship between the trustees’ annual report and accounts is clear. This is to be achieved by a requirement that “Any financial details used in the report must be consistent with the figures in the accounts.” There’s a specific requirement for all charities to report the value of their reserves in the report and, where consistency with the accounts isn’t obvious, to provide a reconciliation between the two.

Under the new tiered reporting approach, a tier 2 charity must comply with both tier 1 and tier 2 reporting requirements and a tier 3 charity must comply with the requirements of all three tiers.

Trustees should be thinking about how they wish to approach the new reporting requirements, for example, the development of both qualitative and quantitative measures for impact and sustainability reporting. Time should be set aside for discussions at board level and plans established to gather the relevant information.

Statement of cash flows

Under the proposals, there’s no requirement for tier 1 and tier 2 charities to prepare a statement of cash flows. This is a significant proposal. Under the current SORP, only charities with a gross income of not more than £500,000 could chose not to prepare a statement of cash flows i.e. charities now eligible for proposed tier 1 concessions.

Tier 3 charities must prepare a statement of cash flows even if they meet the FRS 102 exemption criteria. The exemption criteria equate to the small company size threshold, even if the entity isn’t a company.