The charity sector is about to experience one of its most significant reporting changes in recent years. The final Charities SORP 2026, published in October 2025, introduces a new framework designed to improve transparency while recognising the diversity of charities in terms of size and complexity. At the same time, the Department for Culture, Media and Sport (DCMS) has confirmed new financial thresholds that will affect audit and reporting requirements from October 2026.
This article explains what these changes mean, why they matter, and how charities can prepare.
A Tiered Approach to Reporting
One of the most notable developments is the introduction of a three-tier reporting structure. This approach aims to make reporting more proportionate by tailoring requirements to the size of the charity.
- Tier 1 applies to charities with income up to £500,000 and offers simplified reporting obligations.
- Tier 2 covers those with income between £500,001 and £15 million, requiring more detailed disclosures on governance and financial sustainability.
- Tier 3 for charities with income above £15 million, demands the most comprehensive reporting, including enhanced transparency on reserves, risk management and social impact.
A key simplification is that cash flow statements will now only be mandatory for Tier 3 charities and those that do not qualify as “small entities” under FRS 102. This change will significantly reduce the administrative burden for smaller organisations.
Key Differences in Trustees’ Annual Report by Tier
The trustees’ annual report requirements vary significantly across the tiers, reflecting the principle of proportionality:
- Tier 1 charities are expected to provide a clear but concise explanation of their charitable aims, activities, and public benefit. Narrative reporting on reserves and risk is encouraged, but not as detailed as for larger charities.
- Tier 2 charities must go further by including a more robust discussion of financial sustainability, governance arrangements, and reserves policy. They should explain how reserves align with the charity’s risk profile and strategic objectives.
- Tier 3 charities face the most extensive requirements. In addition to the above, they must provide detailed disclosures on risk management strategies, performance metrics, and forward-looking financial sustainability. Social and environmental impact reporting becomes mandatory at this level, and trustees are expected to demonstrate how governance structures support accountability and diversity.
This tiered approach ensures smaller charities are not overburdened while larger organisations provide the level of transparency stakeholders expect.
Exchange vs Non-Exchange Transactions
An exchange transaction occurs when a charity provides goods or services of approximately equal value to what it receives in return. For example, delivering a contracted service for a fee or selling merchandise in a charity shop.
A non-exchange transaction, on the other hand, involves resources given without receiving goods or services of equal value in return, such as donations or grants. These are typically driven by generosity rather than a contractual obligation.
The distinction matters because income recognition rules differ: exchange transactions follow the five-step model under the new SORP. In contrast, non-exchange transactions continue to be recognised under existing recognition principles.
Income Recognition: Moving to a Five-Step Model
The final SORP confirms the adoption of an IFRS 15-style five-step model for recognising income from contracts. This means charities delivering services under contractual arrangements will need to:
- Identify the contract and its performance obligations
- Determine the transaction price
- Allocate that price to the obligations
- Recognise income as those obligations are fulfilled
For example, a charity providing care under a local authority contract must decide whether income should be recognised gradually over the life of the contract or at specific delivery points.
This change introduces more complexity but also ensures income is reported in a way that reflects the substance of the arrangement.
Income example: Social Care Contract
A charity signs a 12-month contract with a local authority worth £240,000 to provide:
- Home care visits throughout the year
- Two specialist training sessions for carers (months 3 and 9)
- Emergency response service available 24 hours a day
Contract details:
- Total price: £240,000
- Payment schedule: £120,000 upfront in January, £120,000 in July
- Estimated standalone values:
- Home care visits: £180,000
- Training sessions: £40,000
- Emergency response: £20,000
Allocation and recognition:
- Home care: £180,000 spread evenly → recognise income of £15,000 per month
- Training: recognise income of £20,000 in month 3 and £20,000 in month 9
- Emergency response: £20,000 spread evenly → recognise income of £1,667 per month
Lease Accounting and Social Donation Leases
Another major change relates to leases.
Most leases will now appear on the balance sheet as a right-of-use asset with a corresponding liability, following IFRS 16 principles. This will affect charities with property or retail leases and may influence financial ratios and covenant compliance.
The SORP also introduces guidance for social donation leases, which are arrangements where a charity occupies property at a peppercorn or below-market rent. Under the new rules, these leases should be recognised at fair value, where practicable, with the difference between the fair value and the nominal rent treated as a donation.
Leases Example: Social Donation Lease with Discounted Rent
A charity is granted the use of a property for five years by a corporate donor at a discounted rent of £10,000 per year, instead of the market rental value of £60,000 per year.
- Market rental value: £60,000 per year
- Discounted rent payable: £10,000 per year
- Lease term: 5 years
- Discount rate: 3%
Calculation under the new SORP:
- Present value of market rent: £60,000 × 5 years at 3% ≈ £272,000
- Present value of discounted rent: £10,000 × 5 years at 3% ≈ £45,000
- Donation element: £272,000 – £45,000 = £227,000
Accounting treatment:
- Recognise a right-of-use asset and lease liability based on the discounted rent (£45,000)
- Recognise the donation element (£227,000) as income in the Statement of Financial Activities (SoFA) when the lease begins
- Provide narrative disclosure explaining the nature of the arrangement, valuation assumptions, and donor relationship
Impact:
The charity benefits from a significant in-kind contribution, which must be reflected in both the financial statements and the trustees’ report for transparency.
Threshold Changes from DCMS
Alongside the SORP reforms, the DCMS has confirmed new financial thresholds that will apply from October 2026. These changes will reduce the number of charities required to undergo a statutory audit and simplify reporting for smaller organisations.
- The threshold for an independent examination will rise from £25,000 to £40,000.
- Charities will only need a professionally qualified examiner once income exceeds £500,000, up from £250,000.
- The requirement for accrual accounts for non-company charities will also increase to £500,000.
- Most significantly, the audit threshold will rise from £1 million to £1.5 million for income and from £3.26 million to £5 million for assets.
These changes are expected to save the sector an estimated £47 million annually, freeing up resources for charitable activities.
What Should Charities Do Now?
With these changes on the horizon, charities should start preparing. Review your contracts and leases to understand how the new income recognition and lease accounting rules will affect your financial statements. Update your trustees’ report templates to include enhanced narrative disclosures and consider how you will capture information on social donation leases.
For those close to the new audit thresholds, plan ahead for the transition and speak to your auditors about what this means for your compliance obligations.
Training and adequate resources for finance teams will be essential to ensure a smooth implementation.
Effective Dates
- SORP 2026 applies to accounting periods starting on or after 1 January 2026
- Threshold changes apply to periods ending on or after 30 September 2026
Need support?
The BHP Charity and Not-For-Profit team will work closely with charities to provide training, templates, and practical guidance throughout this transition.
