What’s on the horizon for charity reports and accounts?

With last week’s publication of the Charities SORP 2026, charities preparing ‘true and fair’ accounts, can assess with certainty what steps they need to take to comply with the revised trustees’ annual report and accounts requirements for reporting periods beginning on or after 1 January 2026.

Read the Charities SORP 2026

Charities need to be clear-sighted as to the magnitude of the task in hand. 

Tiered reporting

The three-tiered approach to aspects of reporting and accounts presentation proposed during the consultation phase remains intact with no uplift in the tier 1 threshold of gross income per annum of not more than £500,000.

Also, the proposed increase in the threshold for the preparation of a statement of cash flows from gross income of not more than £500,000 to gross income of not more than £15 million remains unchanged. The uplift means that under the SORP only tier 3 charities will have to prepare the statement. This is sensible and delivers a proportionate change. However, the statement of cash flows exemption in FRS 102 aligns with the small company threshold which includes additional criteria, meaning that some tier 2 charities will have to prepare this statement to comply with UK GAAP.

Charities within tier 1 have access to all SORP-related concessions. The tier 1 threshold corresponds with the threshold within the current SORP for reporting and presentation concessions and hasn’t been raised for many years. This threshold was once linked to what was the charity audit threshold across UK charity law jurisdictions.

Many consultation respondents, us included, hoped to see this threshold raised, especially in view of anticipated changes to the audit threshold in England and Wales, and in Scotland. The UK government announced specific increases in the financial thresholds for charities in England and Wales, alongside the publication of the Charities SORP 2026. The threshold increases include an increase in the income criterion of the audit threshold from income of more than £1m to income of more than £1.5m. The related consultation report about this and other financial threshold changes, published by the Department for Culture Media and Sport, states that these will not come into effect before 1 October 2026.

This move by the UK government sits within the wider context of its stated intention to reduce bureaucracy, enhance regulatory transparency, and make it easier for businesses to grow and invest.

At the time of writing, we’re waiting in anticipation for the Scottish government to announce an increase in the income criterion of the audit threshold for Scottish charities which currently sits at gross income per annum of £500,000 or more. Expectations are that this will rise to gross income of £1 million or more.

While we’re disappointed not to see more charities gaining access to concessions, we’re pleased that the Charities SORP-making body, the three UK charity regulators, will consider the case for a threshold increase in its 2026/27 work programme. We would strongly urge that the tier 1 threshold is increased to provide a more proportionate reporting regime for UK charities.

More requirements and guidance

The Charities SORP has increased in length from around 200 pages to 300 pages, so there’s an overall increase rather than decrease in the reporting burden placed on charities, particularly with new trustees’ annual report requirements and new accounting requirements for income from exchange transactions and the introduction of the single lease accounting model for lessees.

Some of the increase in SORP-length is down to the introduction of a detailed navigation tool, in the form of hyperlinks to modules and sections within modules and new guidance. Both are designed to support charities prepare their reports and accounts and illustrate that the SORP-making body is aware of the magnitude of the changes.

The trustees’ annual report

Changes of substance to the trustees’ annual report requirements include the introduction of impact reporting requirements for all charities, enhanced reporting on the contribution of volunteers, disclosures about reserves which illustrate that the reserves figure reported in the narrative reconciles to the accounts, and sustainability (social, environmental and governance) reporting for tier 3 charities.

We funded academic research on impact reporting by charities designed to support the development of the Charities SORP 2026 and to illustrate that impact reporting doesn’t need to be complicated. We published two related research reports, the first in 2022 and the second in 2024. While we’re delighted to see impact reporting introduced as a concept, we would like to have seen the ‘Achievements and performance’ reporting requirements placed on tier 1 charities, being specifically referred to as impact reporting requirements as they’re for tier 2 and tier 3 charities. This would have ensured that the headline message that all charities are required to report their impact (i.e. the difference they have made) was reflected in the detailed wording.

Accounting for income

While charities traditionally receive income from exchange transactions (contracts with customers for the provision of goods and services) and from non-exchange transactions (donations, grants and legacies), the introduction of the five-step model for accounting for income from contracts with customers brings this distinction to the fore.

In order to apply the five-step model to account for income from contracts with customers, introduced by the FRC’s most recent Periodic review of FRS 102, the Financial reporting standard applicable in the UK and Ireland, charities must first determine whether income received, or receivable arises from an exchange or non-exchange transaction.

Neither term is defined in the respective glossaries of FRS 102 or the Charities SORP 2026. However, there’s a description of both within the SORP. Worthy of note is the revised SORP’s statement that:

“Transactions must be accounted for and presented in accordance with their substance and not simply their legal form. The substance of any conditions attached to donations or grants and contract income should be considered when determining whether income should be recognised. A charity should consider whether a grant is either an exchange or non-exchange transaction where a charity receives grant income in exchange for the transfer of goods or services and there is a contract between the parties, the income must be accounted for as an exchange transaction………” (SORP 2026 paragraph 5.6).

While the reference to grants, in certain circumstances, being contracts, seems like a contradiction in terms, we’re aware that some agreements described as grants are in fact contracts with customers. For example, where the terms are such that legal action could be taken for a failure to deliver the promised goods or services.

Looking at the specific requirements within the SORP on non-exchange transactions, the wording on accounting for performance related grants is consistent with the current SORP. This means that income from grants with performance related conditions which specify the goods and services to be delivered will continue to be classified as ‘income from charitable activities’ rather than ‘income from donations or legacies’, but the five-step model will not apply here.

For example, the SORP says:

“Non-exchange transactions include donations of money, goods, facilities or services which are given freely to the charity by a donor. Grants are a form of non-exchange transaction where the grant-maker awards a grant without receiving equal value in exchange. However, a grant may be presented as income from charitable activities where the payment is made to secure the provision of particular goods or services…...” (SORP 2026 paragraph 5.63).

This means that performance-related grants which are in substance grants should continue to be accounted for as non-exchange transactions. For government grants this also means complying with Section 24 of FRS 102 on Government grants, and for other grants this also means complying with the material on incoming resources from non-exchange transaction in Section 34 of FRS 102 on Specialised activities.

Lease accounting by lessees

Under the Charities SORP 2026, the distinction between finance leases and operating leases is replaced by a single lease accounting model for lessees. This change also arises from Periodic review changes to FRS 102.

For charities, this brings considerable complexity to lease accounting where payments made under lease arrangements are below market rents as there are related non-exchange transactions to account for. The level of complexity is much higher than it is for entities which aren’t public benefit entities, as they are unlikely to enter into leases on non-commercial terms.

Lease arrangements where there are non-exchange components fall into three broad categories:

• Arrangements below market rents
• Nominal or peppercorn arrangements
• Social donation leases

While nominal or peppercorn arrangements may take the legal form of a lease, the SORP considers that these are unlikely to meet the FRS 102 definition of a lease, meaning that the lease accounting requirements in both FRS 102 and the Charities SORP don’t apply. Instead, a charity will need to determine whether it has received donated goods, services or facilities. These donations should be accounted for in accordance with Module 6 of the SORP on Donated goods, facilities and services, including volunteers. If the leased asset is a heritage asset, Module 18 of the SORP on Accounting for heritage assets must be followed.

For lease arrangements which seem to be below market rents, a key judgement will need to be made as to whether the arrangement is in fact below market rents. For example, restrictions such as a ban on the serving of alcohol, may mean that rental payments are lower than for a similar property in a nearby location without such a restriction.

Where a charity determines that such an arrangement is in fact below market rents there will be non-exchange components to account for. 

Measuring non-exchange components could be challenging from the perspective of identifying market rents where limited evidence of these is available by way of similar properties nearby. A charity may be willing to occupy a property which wouldn’t be suitable for commercial business or is in a less desirable location, so judgement is required to determine whether the lease arrangement is at or significantly below market rents.

Social leases exist where another entity is providing a social donation, for example, as part of its own corporate and social responsibility strategy. In these circumstances there will be a non-exchange component to account for and the SORP highlights what these are:

“The measurement of the non-exchange component will take into account the lease payments that are actually made and:

• where the incoming resource is an asset, the fair value of that asset; or
• where the incoming resource is a service or facility, the value of that service or facility to the charity.” (Charities SORP 2026 10B.82).

Charities will need to apply judgement in determining the accounting treatment of leases which include non-exchange components and should ensure they’re in a position to justify decisions made to their independent examiner or auditor. Therefore, they should keep a written record of key judgements made.

Conclusion

All in all, there’s a considerable amount of groundwork for charities to undertake to be ready for the Charities SORP 2026. There are practical steps which need to be taken, such as:

• Ensuring processes are in place to gather the information trustees will need to prepare the trustees’ annual report.
• Making sure records of contracts with customers and lease arrangements are up to date.
• Formalising contracts or leases where terms aren’t in writing or aren’t clear.
• Sourcing interest rates for discounting lease liabilities.
• Speaking to providers of finance, if the accounting changes are likely to impact on banking or loan covenants.