What the charity SORP’s changes to lease accounting mean

The SORP-making body published the Exposure Draft Statement of Recommended Practice 2026: Accounting and Reporting by Charities on 28 March 2025. We are now in a period of consultation on the new draft SORP, and stakeholders have until 20 June to submit their comments. 

In our previous article on proposed changes to the Charities SORP, we identified six areas of significant changes, one of which was lease accounting. In this article, we’ll focus on lease accounting in more detail and look at the new tier approach proposed in the new SORP.

What are the charity SORP's changes in lease accounting?

Under the new tier approach, charities have different requirements based on their size. However, the proposed changes to lease accounting are applicable to all tiers and therefore all charities.

As a lessee there is no longer a distinction between lease agreements that transfer all the risks and rewards of ownership of the asset (finance leases) and lease agreements that do not (operating leases). Instead, there is now a single accounting treatment for lessees, meaning charities’ accounts will record many more leases on their balance sheets.

What do charities need to consider?

Charities will first need to determine whether or not a lease exists. The SORP provides useful guidance on how to do this.

Secondly, if a lease does exist, charity trustees should consider the exemptions offered by FRS 102 and whether they believe these apply and they wish to take them up.

What exemptions are available?

FRS 102 offers two exemptions:

• Short term leases with a term of 12 months or less at the commencement date.
• Low value assets such as personal computers, tablet devices, small items of office furniture and telephones.

If an exemption is used, lease payments are recognised as an expense on either a straight-line basis over the lease term or on an alternate basis reflecting the pattern of benefit to the charity using the asset.

What is the impact on charity financial statements?

Most charities will record increased lease liabilities and right of use assets on their balance sheets which will subsequently impact cash flow statements. As a result, the operating lease charges currently being recorded by charities in their statements of financial activities will be replaced by depreciation and interest charges. This could have significant implications on certain metrics like KPIs and debt covenants.

A new note will also be required setting out the value and movements in right of use assets, related lease liabilities, the commitments for short-term and low value leases as well as a number of other disclosures.

Considerations for the charity sector

Appropriate discount rate

The SORP and FRS 102 allow a public benefit entity to use the rate of interest it can obtain on deposits held with financial institutions if they are unable to determine the interest rate implicit in the lease, or the lessee’s incremental or obtainable borrowing rate.

Arrangements below market rate of nominal value

Many charities will have entered into arrangements where the rentals paid are below market value . This is a complex area and trustees will need to consider the substance and terms of the arrangements. The SORP provides some useful guidance and examples to help trustees with these considerations.

How can we help with changes to lease accounting?

Once the consultation period is over, the finalised SORP will be published in the autumn ready to implement for periods beginning on or after 1 January 2026.

If you would like to discuss the updated SORP, find out more about what the changes mean for you and explore ways to improve your in-house processes, get in touch with Sharon Monteith or your usual RSM contact today.