At the end of October, the Charity Commission issued an update outlining a raft of changes to the Statement of Recommended Practice (SORP) which impact key areas such as reporting, income recognition, lease accounting, and ESG disclosures. The SORP is structured using a modular approach, which sets out the requirements for particular aspects of annual reports and accounts. Of the 29 total modules that make up the guidelines, nine have been noted as having “significant” changes made. The new guidelines apply to the accounting periods beginning on or after 1st January 2026 so charities should begin preparing now to fully understand to what extent to which the changes will affect the organisation.
One of the main structural changes to the guidance is the introduction of a three-tier reporting system, which aims to make transparency and reporting requirements proportionate to the size of the organisation. The three-tiers will be defined as:
At the same time, the Department for Culture, Media and Sport (DCMS) has announced an increase to the threshold for producing accrual accounts to income of £500,000, in line with the changes in the SORP.
As charities grow in size and move up the tiers, the reporting and disclosure requirements become more complex and detailed. One key example of this is the decision to limit the requirement to present a Statement of Cash Flows to Tier 3 charities only, streamlining the reporting requirements of Tier 1 and Tier 2 charities significantly. It was noted that these thresholds are still under review, and the Charities Commission may move them as there was feedback that the £500,000 threshold for Tier 1 may be too low given the added complexity of some changes.
It will be up to charities to assess which tier they fall into in the upcoming financial year. Importantly, this assessment will be based on forecast income for 2026 rather than actual income for the prior financial year.
This means that revenue forecasting for the next financial year will be extremely important to avoid falling foul of the new tiered approach, especially considering other changes to lease accounting which may lead to higher reported incomes from leased assets, potentially bumping smaller organisations up into a higher tier. Finance teams and Trustees will need to plan ahead, identifying any changes to disclosure requirements that go along with the appropriate tier of the organisation.
A new module has been added to the SORP covering lease accounting to align requirements with the recently revised Financial Reporting Standards (FRS) 102. The main change here is that most operating leases will now be required to appear on the balance sheet, requiring charities to recognise a right-of-use asset and a corresponding lease liability. The full published guidance includes a flowchart to help organisations demonstrate which parts of the guidance will be applicable to their individual circumstances, with example scenarios laid out to aid understanding.
If your organisation has substantial property or equipment leases, particularly where these have been provided on non-commercial terms, this change could have a large impact on your reporting requirements. Undertaking a full inventory of lease commitments ahead of the implementation date in 2026 will allow finance teams to assess which commitments will need to be shown on the balance sheet and prepare the relevant data capture and valuation work required.
Under the new tiered system, Tier 1 charities are now “encouraged” to provide some explanation of how the organisation is managing environmental, governance, and social matters. For Tier 3 organisations, the requirements are slightly more detailed and mandatory. These charities “must” provide a summary of how the charity is responding to and managing these matters, including a report setting out KPIs to assess progress against targets. The guidance sets out climate related risks and opportunities as examples of where calculations of these KPIs would need to be explained.
So, what should you do now? The first step will be to determine which tier your charity will fall into under the new regime (and check whether changes in accounting treatments might move you into a higher Tier). Next, inventory all leases and contracts (especially operating leases and service contracts) to map against new reporting requirements to avoid any surprises when accounting for FY 2026/27. It would also be worth considering whether any new measurement of leases impacts your gross income (and the new tier limits) and any existing covenant arrangements.
These changes may also be a reasonable time to undertake a reconciliation of existing accounting policies and system capabilities to ensure everything will continue to be compliant and compatible with new reporting requirements. Engaging with trustees, finance teams, and senior management early to map out any required changes to policies and practices will also help to facilitate a smooth transition.
Arlingclose can assist by offering a range of technical accounting, treasury, and ESG advisory expertise. Our technical team can assist in interpreting and implementing the new lease recognition requirements and the possible impact of this on the income of the organisation. This technical expertise can extend to reviews of strategy documents to ensure regulatory compliance and consistency with overall strategic goals. We can also conduct ESG reviews of investment portfolios, assessing managers’ sustainability credentials or conduct due diligence on potential investment opportunities.
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