Significant changes to the Charities SORP have been introduced which affect accounting and reporting for charities of all sizes. In addition to that, proposals to amend the audit thresholds for charities are expected to come into force later this year. 

The revised Charities SORP came into effect for periods beginning on or after 1 January 2026 and the key changes are: 

  • New tiers for different sizes of charities 
  • Income recognition for exchange transactions 
  • Lease accounting 

Reporting tiers 

The Charities SORP 2026 introduces three reporting tiers: 

  • Tier 1 – Gross income up to £500,000 
  • Tier 2 – Gross income between £500,000 to £15 million 
  • Tier 3 – Gross income over £15 million 

As charities move up the tiers, the level of financial disclosure increases. 

Trustees should know that the assessment is based on income for each reporting year and a change in income can create additional reporting requirements immediately. 

Trustees’ Annual Report 

The Trustees’ Annual Report is receiving increased scrutiny under the new SORP. 

Trustees must clearly explain: 

  • The charity’s impact and achievements 
  • How volunteers contribute to the work 
  • The main risks and future plans 
  • How reserves are managed 
  • Environmental and sustainability changes (particularly for larger charities) 

Income recognition 

The section on income recognition has been re-written with a new five-step model for income received from exchange transactions. This requires charities to perform five key actions: 

1 Identify a contract with a ‘customer’ 

2  Identify promises within the contract 

3 Determine the transaction price 

4  Allocate the transaction price to the promises 

5 Recognise revenue when or as the charity satisfies the promise 

Depending on the contractual arrangements in place, this could result in significant changes to the pattern of income recognition.  

Leases 

These new requirements mean recognising a right-of-use (ROU) asset in respect of the lease contract, and a corresponding discounted lease liability, being the present value of remaining payments under the lease. 

The ROU asset will comprise: 

  • the present value of the lease liability, plus 
  • payments made before commencing the lease; less 
  • any lease incentives; plus 
  • any ‘social donation’ element within the lease arrangement; plus 

Any difference between the ROU asset value and lease liability is shown as an adjustment to opening reserves on the transition date (for example, 1 January 2026). 

The ROU asset needs to be depreciated over the remaining term of the lease, and the lease liability unwound as cash payments are made. The result is that the operating lease expense is replaced by a depreciation charge on the ROU asset, and a finance charge on the lease liability. 

Exemptions do exist for short-term and low-value leases, but trustees should still review their lease arrangements to assess whether they are affected. 

Charities will not be required to go back and reconsider whether an arrangement constituted a lease prior to the transition date. Furthermore, no prior year restatement will be required – the impact of the transition will be posted as an adjustment to opening reserves on the transition date. 

Audit thresholds 

The thresholds for audit and independent examination are increased for financial years ending on or after 30 September 2026. These are: 

  • Audit income threshold – £1.5m (previously £1m) 
  • Audit asset threshold – £5m, if income over £500k (previously £3.26m, if income over £250k) 
  • Independent examination income threshold – £40k (previously £25k) 

What should trustees be doing now? 

Trustees should be acting now and taking the right steps to stay compliant, including: 

  • Confirming the charity’s reporting tier 
  • Updating the Trustees’ Annual Report structure 
  • Reviewing income streams and funding agreements 
  • Spotting leases that will now appear on the balance sheet 
  • Reviewing external reporting requirements to see which is most appropriate for their charity. 

Contact 

For further support or advice on how these changes affect your charity contact our specialist team. See.