The Charities Statement of Recommended Practice 2026: A summary
The Charities Statement of Recommended Practice 2026 (SORP) was published on 31 October 2025 and will be effective from 1 January 2026.
The new SORP reflects changes introduced by the Financial Reporting Council (FRC) to FRS102, particularly regarding how charities recognise certain types of income and leases in their accounts. This aims to enhance transparency and accountability in charity financial reporting.
Improvements are also made in other areas that are within the discretion of the SORP-making body. These are to make the SORP more straightforward to navigate for charities, and to improve information for beneficiaries, donors and the public about how charity resources are stewarded.
These changes include:
- Introduction of 3 tiers based on income levels to ensure proportionate reporting, whilst also meeting the information needs of users
- Key accounting changes to leases, revenue recognition and provisions, contingent liabilities and contingent assets
- Advancing reporting in important areas such as impact reporting, reserves, going concern, legacies and volunteering
- Introduction of proportionate reporting for environmental, social and governance issues.
Tiered reporting requirements and statement of cash flow
There are now three tiers of reporting based on charity size, aiming to make requirements more proportionate and manageable for smaller charities.
| Tier # | Description | Statement cash flow requirement |
| Tier 1 | All charities applying accruals accounts and with a gross income of not more than £500,000 | Not required |
| Tier 2 | All charities with a gross income falling above the tier 1 threshold and with a gross income of not more than £15 million | Not required |
| Tier 3 | All charities with a gross income falling above the tier 2 threshold. | Required |
Please note, the Trustees’ Annual report and disclosures will have different levels of reporting based on the tiers above.
Lease accounting
The current FRS102 allows charities to account for operating leases as an expense, whereas the new FRS102 requires charities to account for most operating leases on the balance sheet. As a result, charities that lease assets will see an increase in assets and liabilities on the balance sheet. There will also be changes to how a charity presents expenses relating to the lease in the statement of financial activities.
The SORP-making body acknowledge that this will be a challenging area for charities to understand and to make the necessary changes. Charities must now consider how the changes impact them and apply the changes as necessary to all leases. Page 144 of the SORP has a diagram which simplifies the new SORP guidance for charities, this can be used to ensure the application of the new SORP is accurate.
In readiness for the changes introduced by FRS102, charities should:
- Refer to FRS102 and resources provided by the FRC
- Review current lease arrangements
- Establish whether current leases would qualify for any simplification, i.e. short term of low value lease (see section 20 FRS102)
- Identify what leases will need to be accounted for on balance sheet (see section 20 FRS102)
- Identify and understand the approach that will need to be taken to identity the value for the leases and relevant transactions
- Consider what record keeping would be helpful to implement now to assist with future preparation of financial statements
- Consider whether the change in asset position on the balance sheet will impact any current borrowing or financial arrangements/covenants or planned future financial arrangements/covenants (if applicable)
- Consider whether any potential changes in balance sheet asset value will result in the charity needing to have an audit
- Seek professional advice if needed and consider speaking with auditors or independent examiners
Revenue recognition
The new FRS102 Section 23 introduces a five-step revenue recognition model for income from exchange contracts. This will mean that charities will need to recognise income from exchange contracts differently. Charities will need to carefully assess their revenue recognition accounting policies to ensure they are compliant with the new requirements.
In readiness for the changes introduced by FRS102, charities should:
- Refer to FRS102 and resources provided by the FRC
- Review current contracts and income streams
- Identify both the amount and timing of income using the new five-step mode
- Consider what record keeping would be helpful to implement now to assist with future preparation of financial statements
- Consider whether the change will impact any current borrowing or financial arrangements/covenants or planned future financial arrangements/covenants
- Seek professional advice if needed and consider speaking with auditors or independent examiners
The SORP explains how the five-step revenue recognition model is applied on exchange income in paragraph 5.14-5.53. There are additional examples specific to charity income from exchange transactions, e.g. membership subscriptions, long term contracts, royalties and contract costs in paragraph 5.54-5.62.
Provisions, contingent liabilities and contingent assets
Module 10A of the Charities SORP provides detailed guidance on how charities should account for provisions, contingent liabilities, contingent assets, and funding commitments. The key components include:
- The application to all charities, regardless of size or tier
- Alignment with FRS102, particularly Section 21 and Appendix A, for recognition and measurement
- Consideration of definitions of a provision, contingent liability and contingent asset
- Consideration of the recognition criteria and measurement which includes best estimates, discounting of cash flows and unwinding of discounting impacting the Statement of Financial Activities (SoFA) Funding Commitments
- Clarification on onerous contracts
- Disclosures required for unrecognised commitments, including funding sources and timing
- Exemption of disclosures in rare cases, if disclosure could harm the charity’s position in disputes, limited disclosure is allowed per FRS102.
Enhanced reporting
The Trustees’ Report is a vital component of a charity’s financial statements, offering an opportunity to showcase the charity’s impact on its beneficiaries. To maintain consistency and transparency, the SORP sets out specific requirements for this report. Under the new SORP, these requirements are now structured around the new tiered framework.
For all tiers, trustees must now include more detailed commentary on:
- Aims and objectives: Clear articulation of charitable purpose
- Achievements and performance: Evidence of impact and delivery against objectives
- Plans for the future: Strategic direction and anticipated developments
- Financial review: Including reserves policy and going concern assessment
New disclosure areas mandatory for tier 3 and encouraged for tiers 1 and 2 include:
- Impact reporting: How the charity’s work benefits society
- Environmental, Social, and Governance (ESG): Including sustainability practices and governance transparency
- Volunteer contributions: Recognition and quantification where feasible
- Social investments: Clarified treatment and optional classification as charitable expenditure or other income
- Legacies: Description and impact of any material legacy income recognised in the accounts prior to the resources being received (accruals)
- Pension liabilities: Impact, if any, of a material pension liability arising from obligations to a defined-benefit pension scheme or pension asset on the financial position of the charity
We're here to help
We understand that charity regulation can be complex, not only due to recent changes but also because of variations across different jurisdictions. It’s important that you feel confident in your reporting and that your financial statements are compliant. If you’d like to learn more about how we can support you, please contact us using the form below or speak to your usual Azets adviser.
