This is the second of two articles featuring responses from RSM to questions posed in a recent webinar on the new SORP which also featured CFG's Head of Policy, Richard Sagar. Here you'll find answers to questions on the tiered reporting framework, lease accounting and more.
Tiered reporting framework
Our income sits just above the £500,000 threshold - what practical changes should we expect when transitioning from Tier 1 to Tier 2?
Tier 2 builds on tier 1 reporting requirements by including more detail in its narrative reporting and disclosures. Risk reporting, for example, must cover environmental and cyber risks. Impact reporting should provide greater evidence and links to strategy than a basic narrative that may be provided by a tier 1 charity. Future plans should include fuller objectives, activities and direction. Number of volunteers and a description of their roles should also be disclosed.
Charities close to a higher tier threshold should monitor their income closely, understand the additional information and disclosures that are required of the higher tier and assess the information they have and need, to meet these requirements.
Are charities allowed to voluntarily adopt a higher tier if their trustees want more transparency?
Yes, a charity can choose to adopt the full disclosures expected of a higher tier. Charities may choose to provide the disclosures of a higher tier to strengthen public trust and donor confidence, or to align with best practice ahead of growth, for example. The new narrative reporting expectations feel more extensive - particularly around impact and volunteers.
What level of detail will regulators expect?
The level of detail expected depends on your tiering. Guidance on when information must, should or may be provided by charities for the reporting by each tier is given in the new SORP.
The SORP wants greater transparency and strategic reporting and does this by requiring more structured and clearer impact reporting, and should not feel more excessive. The expectation from the SORP is that charities provide clear, honest, evidence-backed narrative demonstrating how activities translated into impact. The information should be meaningful and decision useful rather than a full- impact measurement system.
With regards to volunteers, the regulator is looking for an explanation of the significance of volunteers to delivering services or achieving impact. For tiers 2 and 3, information should include a description of the volunteer roles and contributions (for example, number of volunteers, type of activities) and may include hours or number of full time equivalent.
For charities that fluctuate year to year, how will movement between tiers work in practice?
Charities are required to assess their tier each year. There are no grace periods and therefore a charity may have different reporting requirements year on year. Tier fluctuations may require forward planning, so charities should monitor their income carefully. Preparing for all scenarios (ie falling into a higher or lower tier or maintaining a tier) is recommended for those close to the thresholds. This may happen if a charity receives a significant legacy in one year, for example.
It should be noted that the SORP requires charities to also assess the company size limits, for each reporting period, regardless of how they are constituted in respect of the need to provide a cashflow statement. For example, a tier 1 charity may be required to provide a cashflow statement because it exceeds the small company size limits on total assets and employee numbers specified in the Companies Act 2006.
Are there any trustee specific overviews?
A trustees’ annual report in the charity’s annual reporting continues to be a requirement of the SORP. The new SORP puts a greater emphasis on trustees to:
- Explain to stakeholders how it makes a difference (ie the impact the charity is making on its objectives);
- Provide stronger commentary around future plans, risks and sustainability and a description of volunteer contributions; and
- Ensure that the charity’s reserves policy is well explained and meaningful.
Lease accounting
We have several short term property arrangements. How will the new SORP determine whether these count as leases requiring recognition on the balance sheet?
All property lease arrangements require recognition on the balance sheet unless they are short-term leases i.e. for a period of 12 months or less from the commencement date. This will require management to form a judgement on whether any options to break or extend a lease are taken or not in determining the lease term. In forming this judgement, FRS 102 and the SORP expect management to consider:
- The contractual terms and conditions compared with market rents and the life of the asset.
- Significant leasehold improvements expected to have significant economic benefit when the option becomes exercisable.
- The costs and operating implications of terminating the lease.
- The importance of the underlying asset to the lessee’s operations.
- Conditionality associated with exercising the option. The lease is considered a new lease if there is a lease modification, or if the lease term changes.
What are the exemptions available for smaller charities - and when would it be appropriate to apply them?
Charities applying the SORP must comply with the lease accounting module, regardless of their tiering. There are two exemptions in the SORP that allow any charity to continue to expense the lease payments over the lease term: 1) low value assets, and 2) short-term leases.
Short-term leases are arrangements that are for a period of 12 months or less. Leases in which the charity has an option to purchase the asset cannot be short-term leases.
The low value asset exemption is available when the underlying asset is of low value. The SORP does not attribute a monetary value to what is low value, instead FRS 102 list types of assets which do not fall into low value asset exemption, these include motor vehicles, plant and properties. Management will need to use their judgement to determine if other items, such as photocopiers, are low value assets. The judgement applies to each individual asset, not the lease payments, so if you have, for example, a lease for 100 laptops, the lease payments would be material but the underlying value of each laptop may be low. There is no correlation between low value assets and a charity’s capitalisation limit but a charity may look to its capitalisation limit to help form a judgement on ‘low value’ where appropriate.
Charities must disclose when these exemptions are taken. Will bringing more leases onto the balance sheet affect bank covenants or trustee assessments of reserves?
Leases brought onto the balance sheet result in the charity recognising right-of-use assets and lease liabilities. The lease payments, which were previously expensed to the charity’s income statement over the lease term, reduces the lease liability. Bank covenants with gearing measurements will be impacted by the increased debt on the balance sheet and interest charged on the liability.
The lease expense is replaced by the depreciation charged on the right-of-use asset and the interest on the lease liability, impacting the charity’s level of reserves throughout the lease term. Interest is recognised on an effective interest rate basis, which means that interest in a period is higher in the early stages of the lease when the lease liability is higher, therefore reserves are lower during this time compared to the straight-line lease expense recognition.
These changes impact the start of the financial year on or after 1 January 2026 so charities need to understand the impact of the changes to leases for the whole period, not just the end of the period. Early discussions with lenders and trustees are key in understanding how these changes affect bank covenants or assessment of reserves, and whether any changes to agreements or policies are required.
If a property lease includes service charges, should this be excluded and expensed in the usual way?
Service charges are a non-lease component which are separated from the lease component and fall outside the scope of lease accounting. Instead, service charges continue to be expensed as the service is received. The SORP includes a practical expedient allowing charities to not separate non-lease components from lease components and account for them as a single component.
For an organisation with a financial year running from July to June, can recognition begin from June 2026?
The new SORP is effective for accounting periods beginning on or after 1 January 2026. Charities with a June financial year will only apply the new lease accounting requirements from 1 July 2026. On this date, the charity will measure and recognise the right-of-use asset and lease liability, based on the remaining lease, with an adjustment to reserves.
Is it possible to have a management agreement with a housing provider which is not a lease (i.e. we manage one of their properties to provide housing for our service users and they pay a rent)? Is this excluded from the lease accounting requirements?
Lease accounting applies to a contract in which the third party is granted use of an asset. If under your contract to your customer, you are providing management services and are not providing use of the asset, your contract will fall within the five-step model for income recognition and not the lease accounting requirements.
You mention a housing provider, it should be noted that there are some differences in the lease accounting rules between the Charity SORP and the Housing SORP, so housing providers should ensure they are applying the correct accounting rules. That said, the answer above also applies to those applying the Housing SORP.
For lease accounting, should an intercompany lease be added to the balance sheet in a group setting, where one of the companies is a charity and one is not? Would these be eliminated on consolidation?
FRS 102 is going through the same period of change to lease accounting; the changes in FRS 102 being principally the same as those in the new SORP. Lease arrangements between group entities are eliminated on consolidation but each entity will need to account for the lease arrangement in their own financial statements. This means that the lessee will recognise a right-of-use asset and lease liability. Lessor accounting is relatively unchanged in the SORP and FRS 102 with the accounting for the lessor depending on whether the lease is a finance lease or an operating lease.
When consolidating charities and non-charitable companies, ensure that the lease accounting in the consolidated accounts adheres to the lease accounting rules of the parent’s framework, whether this be FRS 102 or the Charity SORP, because there are some nuances between them that may also need adjusting on consolidation. For example, a charity subsidiary may determine the discount rate by reference to the charity’s rate of interest that it could otherwise obtain on deposits held with financial institutions. This method of determining the discount rate is not permitted in FRS 102 and the lease would need to be remeasured for consolidating by a non-charitable company.
Is there any change around arrangements which have previously been classified as a concession agreement not a lease?
The SORP now provides detailed guidance on concession arrangements such as peppercorn leases and below-market-value leases. In summary, peppercorn leases for no or nominal consideration will normally be treated as non-exchange transactions.
Below-market-value leases will need to be broken down into its components. The lease liability is determined by reference to the discounted future lease payments. The right-of-use asset is determined by reference to the fair value to the charity. The difference between the discounted lease payments and the fair value of the right-of-use asset is recognised as income from a nonexchange transaction. This income is recognised when the terms and conditions of the arrangement are reasonably assured to be met.
So, charities will need to reassess whether a concession agreement is a lease or not. The new SORP contains a flowchart to help charities with this assessment.
Are these arrangements where we lease assets to others, or arrangements where we lease assets from others?
The changes to lease accounting concern lessees, i.e. arrangements in which the charity leases an asset from others, bringing the obligation that was previously disclosed in the note to the accounts on to the balance sheet. Lessor accounting is largely unchanged with the accounting determined by the classification of the lease as either a finance lease or an operating lease.
Sector insights
What types of questions are you hearing most often from CFG members about the new SORP?
The main areas CFG are speaking to charities on are leases and income recognition as these are areas that have the most significant changes. Questions particularly arise around legacy income, with members looking for examples and guidance.
It should be noted that changes are not limited to these two areas. CFG have delivered sessions on other changes in the SORP and have had questions on, for example, social investment and the SOFA. So, it’s important that you look at all the changes in the SORP and focus on those that are most relevant to your charity. The SORP website includes a helpful summary of the changes which members are using to identify, on a high level, the areas of impact and focus for their charity.
Which parts of the new SORP do you think charities are most underprepared for? From my experience the most "under prepared" organisations are where time to understand commercial operations, not so much the technical application needed ie those that are yet to understand the nature of contracts (especially where the contracts are less detailed/old as already mentioned) - hence the advice to start now, as this takes time. Would RSM and CFG agree?
The parts of the new SORP that require more preparation are income recognition and lease accounting and, in that sense, charities are most underprepared for. These are areas which can have greater complexities and lack of understanding, areas of judgement, greater data or information gaps, and require discussion with your auditor and internal stakeholders. Whilst these areas will take more time to deal with, it is important to note that there is still time. We consider the lack of detail or information to be a greater issue than time itself.
Are particular types of charities — for example, arts organisations, care providers or grant funded charities — raising more concerns than others?
Concerns are raised more on complexity rather than by sub-sector type. For example, concerns generally come from those that have lower capacity, large volumes of leases, incomplete information, varied income streams, or ‘bundled’ goods and services.
What support does CFG plan to offer as charities move towards 2026?
The new SORP is a main area of focus for CFG and are seeing an increased appetite for worked examples, help sheets and peer learning. CFG offer a range of support to its members in ensuring that members are fully prepared for the change, including:
- SORP training and webinars.
- Interactive, in-depth SORP clinics.
- Written guidance, analysis and policy interpretation.
- Advocacy during SORP consultations and development.
In 2026, CFG will continue to work with stakeholders to launch a suit of learning resources, tools and support programmes.
Do you expect the new reporting tiers to reduce burden for most smaller charities, or create new uncertainties?
The new SORP is a lot longer than its predecessor, mainly due to the introduction of the tiering system, but the SORP includes more examples than before and other useful tools, such as a flowchart for applying lease accounting. The tiered approach was introduced to reduce unnecessary burden by making disclosures and reporting proportionate to a charity’s size.
The biggest area of impact on the tiering is in the front-end reporting. At RSM and CFG, we do not view these changes as a set of additional obligations, we see this as an opportunity for charities to tell their story, to emphasise their impact and value. The trustees’ annual report should really drill down into what your charity does and how it adds value, being clear of clutter and unnecessary information.
The SORP-making body has committed to conduct a focused consultation on the tier approach in the future. This consultation will give charities an opportunity to provide valuable feedback which will help share the future planned work, so whilst these are the requirements now, they may change in the future.
Do you think there will be fewer separate impact reports produced by charities, now that that information is prioritised in the new SORP?
The trustees’ annual report goes beyond impact reporting, so there will be cases where separate impact reports are prepared. Whilst the trustees’ annual report serves a regularity purpose, it should better align with separate impact reports, telling the charity’s story, demonstrating how the charity adds value and the impact it has on those it serves.
Scenario-based questions
If a charity delivers services funded by multiple grants that overlap in purpose, how should they determine separate performance obligations?
Firstly, the charity should gather all its income contracts and determine whether they are exchange transactions or non-exchange transactions. There is little change in the accounting of income from non-exchange transactions, with income being recognised by the charity when the terms and conditions of the contract are met.
The charity should then consider whether any contracts for exchange transactions should be combined when applying the five-step model. Contracts shall be combined when they are entered into at or near the same time with the same third party (or related party of the third party) and either:
- The contracts are negotiated as a package with a single commercial objective. The amount of consideration to be paid in one contract depends on the price or performance of the other contract.
- The goods or services promised in the contracts (or goods or services promised in each of the contracts) are a single performance obligation. Management may need to apply judgement when making this assessment. If the exchange contracts do not meet the criteria to be combined, then the five-step model is applied to each contract on an individual basis.
How should a charity treat income when a funder pays significant amounts upfront for a multi-year project?
Income from an exchange transaction is recognised when or as the charity meets its performance obligations under the contract. Likewise, income from a non-exchange transaction is recognised when the performance related conditions are satisfied, when the income is received or receivable where terms are administrative only and/or when there is reasonable assurance that any other terms of the contract will be met. When funding is received in advance of the performance obligations or terms and conditions being met, the charity recognises a liability for the advanced funds. As or when those performance obligations or terms and conditions are met, the liability is released.
How should charities communicate these changes to trustees who may not have accounting backgrounds?
The discussions with trustees should be framed around governance rather than accounting; this relates the changes in the SORP to their role and responsibilities as trustees, making it easier for them to understand. Start by addressing why the changes have been made, for example, to make reporting clearer and more proportionate to charity size, and strengthen transparency, public trust and accountability. Inform the trustees that this is an opportunity for the charity to tell its story more effectively.
Avoid technical or overly complicated language; be clear and concise. Trustees need to know the impact of the changes, not how the charity gets there.
A briefing pack with all the information trustees need may be useful but ensure you also give trustees an open platform to raise questions and for meaningful discussions. A visual representation of the changes may be easier for the information to be digested, such as a table highlighting the key changes or a real-life example from your own charity, but keep any visualisation and discussions high level and relevant to their role.
Can you explain what is required by way of prior year comparators in respect of the first set of accounts under the new SORP and whether this is the same for both income recognition and leases?
Comparatives are not restated on adoption of the changes to leases. Instead, the opening balance sheet is amended through an adjustment to reserves, meaning the charity shall present the old lease accounting rules in its SOFA and balance sheet for the comparative period and the new accounting rules in the SOFA and balance sheet for the current period.
There is an option to restate comparatives for the changes to income recognition but it is not mandatory. Where prospective application of the changes is applied to income recognition, an adjustment is made to the opening balance sheet through reserves, the same as for leases.
Should you require any further information or assistance regarding SORP, please do not hesitate to contact:
Hannah Catchpool Head of Not for Profit, RSM hannah.catchpool@rsmuk.com
Andy Ka Financial Reporting Partner, RSM andy.ka@rsmuk.com
Read the first part of this article, featuring responses questions around operational readiness, implementation and income recognition.