Gravita charity bulletin – Q3 2026
The Gravita charity bulletin brings together the latest developments and practical insights for charities. In this edition, we focus on the 2026 Charities SORP, one of the most significant changes to charity reporting in recent years.
Effective for accounting periods beginning on or after 1st January 2026, the new SORP introduces enhanced Trustees’ Annual Report disclosures, updated lease accounting requirements and a revised revenue recognition model for exchange transactions.
Our specialists guide you through these key changes. David McGeeney provides an overview of the 2026 Charities SORP, Katherine Wilkes explains why the new lease accounting requirements are proving so challenging for charities and Dougal Howard explores the changes to income recognition. Together, their insights highlight the practical implications of the new reporting framework and the steps charities can take now to prepare for a smooth transition.
What’s inside:
- An update on the 2026 Charity SORP
- Income recognition changes under SORP 2026
- Why is the new lease accounting for charities so tricky?
How we can help:
If anything you’ve read in this bulletin raises questions, or you’d like to understand what the new Charities SORP means for your organisation, we’d be delighted to help. Get in touch with one of our charity specialists to discuss your specific circumstances.
An update on the 2026 Charity SORP
By David McGeeney , Audit Manager
The move from the 2019 SORP to the 2026, sees more in the way of narrative reporting, some helpful clarifications in areas and updates as a result of FRS 102.
What’s New
Tiering
The SORP-making body recognises that the vast majority of charities are small and, to that end, they have adopted a “small first” approach. This means reporting will be on a tiered basis, with tiers based on income: below £500,000 (Tier 1), between £500,000 and £15 million (Tier 2), and over £15 million (Tier 3). Primarily, this tiering is used to define the disclosures required in the Trustees’ Annual Report, while also giving Tier 1 charities choices in relation to the Statement of Financial Activities (SOFA).
A charity within Tier 1 will be required to report less than one in Tier 2, and likewise a charity in Tier 2 will be required to report less than a charity in Tier 3. In general, there are more narrative requirements, which are now mandatory at Tiers 1 and 2. In the past, these disclosures have been viewed as best practice, including:
- Recognition of volunteer contributions in activities
- Impact reporting for all charities
- Widening the scope on disclosures of reserves for Tier 1 charities
- Inclusion of plans for the future for all charities
Sustainability reporting
Charities frequently lead the way in changing the social environment and attitudes. The SORP makes it best practice for Tier 1 and two charities to outline how they are responding to environmental, governance and social matters in the Trustees report.
Tier 3 charities are likely to be subject to these requirements already under the Corporate Sustainability Reporting Regulations 2024 requirements.
Operating leases
Changes to FRS 102 flow through into charity reporting. Operating lease commitments will now feature as a liability in the balance sheet, with the corresponding asset being shown as a “right of use” fixed asset. No prior period restatement is required, however this may represent a significant piece of work for finance teams.
These changes may have an impact on any loan covenants a charity may have, so discussions should take place with the key stakeholders on this matter.
Further to this, the calculation of reserves should consider right of use assets and the associated liability.
We have included a detailed leases section to take a deeper dive into some of the trickier issues in calculating the lease numbers.
What’s Changed
Impact reporting
This is perhaps the most significant change, as this now becomes a requirement, as opposed to best practice, impact reporting should answer two questions, (lifted directly from the SORP):
- In what way has the charity’s work made a difference to the circumstances of it’s beneficiaries?
- Has the charity’s work provided any wider benefits to society as a whole?
It has long been acknowledged that impact reporting is a notoriously difficult thing to do, and to do well, significant thought and consideration must be directed at measuring the outcomes achieved (and then reporting them).
As the implementation date of the new SORP will be for periods commencing from 1st January 2026, this will affect December 2026 year-ends onwards. This provides some time for collection of data and information prior to the mandatory reporting of this information.
Trustees and Senior Management teams should develop processes (if these don’t already exist) for capturing the necessary information and use the current year’s Trustees Report as a practice run for impact reporting. After all, it is likely to be a journey with iterations and refinements to the reporting.
Reserves
For smaller (Tier 1) charities, there was no requirement to compare the actual reserves held against the reserves policy, along with the steps necessary to align the two. This has now been introduced. This move reflects the view that those charged with governance of a charity should be considering the sustainability of the entity.
Income recognition
In light of changes to FRS 102, there is additional guidance on income recognition (but there could always be more!). This SORP introduces the five-step process for recognition of income from “exchange transactions”, with exchange transactions being income from contracts, service level agreements and the like. Further clarifications have been given on legacy income.
Depending on the nature of income received by a charity, the changes here may be significant or limited. A charity purely funded by donations will see no changes to the income recognised in the SOFA. However, a charity with service level agreements will need to assess the agreements and determine how the income should be recognised in line with the framework.
We have included a deeper dive on income recognition in this bulletin.
What’s Gone
Cashflow statements
For almost all Tier 1 and Tier 2 charities, the requirement for a cashflow statement will disappear. This will be positive news for those who have chased rounding differences through this statement.
As the requirement for a cash flow statement arises from Companies Act legislation, they will still be required for medium-sized companies and those over the £15m tier three threshold.
Next steps
We would encourage a plan to be put in place on these points now, so that your finance teams have a guiding structure and timeline to achieve through 2026 as and when resources allow. This will be easier than at the end of the year or when next year’s audit takes place.
If you have any questions on the above points or anything else in relation to your charity, please get in touch.
Why is the new lease accounting for charities so tricky?
By Katherine Wilkes, Audit and Assurance Partner
One of the most significant changes introduced by the new Charities SORP is the requirement for most operating leases to be recognised on the balance sheet. While the principle may sound straightforward, the reality is that implementation is likely to be one of the most challenging aspects of the new SORP for many charities.
Step One: Identify all your lLeases
The first challenge is simply identifying every lease that your charity has in place. This sounds simple, but can be problematic if documentation is not all in one place. This is also not a one-off exercise carried out at transition. Charities will need processes to identify and account for new leases as they are entered into, and to reassess existing arrangements where circumstances change.
Many organisations will immediately think of property leases, but leases can also include vehicles, equipment, photocopiers and other assets where the charity has the right to control the use of a specific asset for a period of time.
Not every lease is included
Fortunately, there are some important exemptions.
The new requirements do not apply to short-term leases, defined as leases with a total lease term of 12 months or less. However, charities need to be careful. If a lease originally had a much longer term but has less than 12 months remaining at the reporting date, the exemption does not automatically apply because the total lease term exceeded 12 months.
There is also an exemption for low-value leases. Unfortunately, FRS 102 does not provide a precise monetary threshold, meaning judgement will be required. As a practical rule of thumb, most leases of motor vehicles, significant equipment and property would not generally be considered low value and are therefore likely to fall within the new requirements.
Determining the lease term
Working out the lease term can be more complicated than it first appears.
The lease term is the non-cancellable period of the lease, together with any extension periods that the charity is reasonably certain to exercise. For example, if a charity occupies offices under a five-year lease with an option to extend for a further five years, and trustees are reasonably certain that the extension will be taken, the lease term should be considered to be 10 years rather than five. This assessment requires judgement and should reflect the charity’s intentions and operational needs. This should also be something that is discussed and documented clearly from a governance perspective.
Rolling leases
Many charities occupy premises under rolling lease arrangements that have no specified end date.
In these situations, the focus should be on the enforceable non-cancellable period. Understanding precisely when either party can terminate the arrangement can be critical in determining the lease term and ultimately the value recognised on the balance sheet.
What discount rate should be used?
Once a charity has identified its leases and determined the lease term, the next challenge is calculating the lease liability.
This requires future lease payments to be discounted back to present value. Determining the appropriate discount rate to use can often be one of the most difficult judgements in the entire calculation.
Potential discount rates include:
- The rate implicit in the lease, where this can be readily determined
- The charity’s incremental borrowing rate
- An obtainable borrowing rate from a lender
- In some circumstances, a deposit or savings rate with a financial institution where no borrowing rate can reasonably be established
The choice of discount rate can have a significant impact on the value of both the lease liability and the corresponding right-of-use asset.
Don’t forget rent-free periods
Many property leases contain rent-free periods, particularly at the start of a lease.
These periods must be reflected in the lease calculations. The discounted cash flow model should incorporate the actual payment profile over the life of the lease, including any periods where no rent is payable. Ignoring these incentives could materially overstate the lease liability.
The spreadsheet challenge
The calculation itself can be surprisingly complex. For many charities, spreadsheets will be the most practical solution. However, lease calculations can involve large numbers of linked formulas and assumptions, creating a significant risk of errors. Robust review procedures and clear documentation of assumptions will therefore be essential.
Some good news: Peppercorn leases
There is one area where charities may breathe a sigh of relief.
Many charities benefit from peppercorn leases, where a property is occupied for a nominal or substantially below-market rent. The new SORP provides an exemption from the lease accounting requirements for peppercorn leases, meaning these arrangements will not need to be brought onto the balance sheet in the same way as commercial leases.
For charities operating from local authority, church or charitable trust premises at a token rent, this exemption should significantly reduce the implementation burden.
Start preparing now
Although the first affected accounting periods began on 1st January 2026, many charities are only now starting to appreciate the scale of the work involved. The most successful transitions will be those where charities begin preparations early by compiling a complete lease register, gathering lease agreements, assessing lease terms and considering how the necessary calculations will be performed.
Lease accounting may not be the most exciting aspect of the new SORP, but for many charities it is likely to be one of the most time-consuming. Taking steps now will help avoid a last-minute scramble and ensure a smoother transition to the new reporting requirements.
Income recognition changes under SORP 2026
By Dougal Howard, Audit Associate Director
Non-exchange (voluntary) transactions
Pre-2026, non-exchange income such as donations, most grants and legacies, were recognised when measurable, probable, and the charity had entitlement to the funds. Under the new SORP, entitlement is no longer one of the broader recognition criteria. Rather, income is recognised when measurable, and control over the source has passed to the charity. This results in a shift in focus from ‘entitlement’ to ‘control’.
Legacy recognition, in particular, has been simplified to when receipt is probable, and the amount can be reliably measured. Measurability will be broadly the same as previously, with probability potentially being the more subjective criterion for recognition, dependent on probate and the absence of any disputes among other factors.
Exchange transactions
This includes income for goods and services, and performance-related grants. Previously, income was recognised when the risks and rewards had been transferred, and the amount could be measured reliably. There was limited guidance on multi-element agreements, variable consideration, contract modifications and performance obligations.
The new SORP introduces a five-step model, which involves separating out distinct goods and services, and treating each separately to determine how much income should be recognised:
Step 1: for many charities, this could be the most judgemental step, particularly where grant agreements are structured as contracts, or vice versa. Broadly, where the other party is benefiting from the arrangement and there is commercial substance, it is likely to be an exchange transaction.
Step 2: a performance obligation is a distinct good or service, and there may be multiple such within the same contract.
Step 3: the transaction price may have fixed or variable consideration, or non-cash elements.
Step 4: may be directly allocatable, or via estimations.
Step 5: recognise revenue either over time, or at a specific point in time depending on the nature of the exchange.
Practical considerations
Charities should detail all of their different income streams and identify which may meet the definition of exchange transactions. Decision processes should be documented along with the rationale for the various treatments. For those income agreements that the charity views as meeting the definition of exchange transactions, the charity should follow the above steps to determine how and when income should be recognised.
There is significant overlap between exchange versus non-exchange transactions and income that is subject to VAT, but it is not always clear-cut and there are some exceptions. If in doubt, please contact one of our team and they will be happy to assist you.
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