Recent Changes to Accounting for Charities UK: Is Your Non-Profit Organisation Up to Speed?

The Charity Commission recently published a draft of the new Statement of Recommended Practice (SORP), which is currently under consultation. This set of guidelines will apply to all registered charities in the UK and Ireland, and, for many, it will impact their financial reporting processes.

Having been updated to keep pace with changes to accounting standards, the new SORP is designed to introduce tiered reporting requirements, with less rigorous rules for smaller non-profit organisations and stricter regulations for the largest.

The finalised SORP is due to be available within the next few weeks and is scheduled for implementation for accounting periods from 1st January 2026 onward. We recommend all charities review the changes now to ensure they are fully prepared.

The Reasons Behind Changes to the UK Charity Statement of Recommended Practice (SORP)

FRS 102 is a key piece of accounting legislation here in the UK. Because the Charity Commission has revised the Charities SORP to improve consistency with FRS 102, many charities and not-for-profit entities should already have an idea about whether the updates will impact them or not.

For most, the answer is yes because there are two primary amendments. These relate to how charities record and recognise income and how they report the fair value of their leases.

The former is likely most impactful because once we start thinking about changes to how incomes are recognised, this has a knock-on effect on other aspects of charitable reporting, financial record-keeping and valuations, from charity reserves to the potential need to conduct additional audit procedures or independent examinations.

Our advice is to review the reforms now because these are fairly significant. As always, we welcome new and existing clients to contact our specialist charity accountants, especially if they are unclear about whether the changes apply to them or are unsure about how material the impacts might be.

It is far preferable to take the time to review lease agreements and valuation bases and consider the effects new income recognition rules might have early. This will give charities the time to introduce new systems where necessary or decide how to manage changing reporting requirements.

New Income Recognition Rules in the Charities SORP

The new rules affect charity incomes received in exchange for services or products. That means grant funding, donations, and legacy financial contributions aren’t primarily impacted, but the SORP may contain guidance that will affect reporting.

While the outcomes will be relevant to most charities that offer any type of product or service in exchange for payment, the biggest impacts will likely be on:

• Charitable social care organisations, from hospices to day centres and residential care homes.
• Local council-funded social care organisations that function as charitable entities.
• Charities that operate on a membership basis, where members subscribe or purchase a membership in return for a service.

The updated SORP will instruct all organisations in any relevant category to apply a five-step assessment that will dictate how money received is recognised. 

That means analysing the services or products offered, calculating the income generated by each service, and identifying the correct way to recognise those incomes over each accounting period.

For example, a charity that offers memberships might account for annual membership renewal fees on an accruals basis over each 12 months. However, if services are delivered to members other than on an equally apportioned monthly basis, this will have to change, and charities will need to apply the five-step evaluation regardless.

Preparing for Revised Charity Accounting Processes From 2026 Onward

The SORP will take effect from 1st January 2026, which means any financial period starting on this date or later will be subject to the reforms. Therefore, a charity with a year-end of 31st December 2026 or later must use the new income recognition rules.

Of course, each organisation will be different. Still, the initial steps are to assess every type of product or service being offered and review the incomes linked to those goods or services, applying the SORP guidance as appropriate.

That should enable charities to forecast any changes to their income statements, annual charity accounts, and revisions they might need to make, whether the amended income declared now means the charity falls into a different audit threshold or impacts the charity’s reserves.

Understanding Reforms to the Way UK Charities Account for Leases

The next big inclusion in the updated SORP concerns leases. Many charities have operating leases, where the annual rental expenses paid are declared within their financial statements, but the lease itself is considered an off-balance sheet asset.

From 2026 onward, the majority of leases will need to be shown on the charity’s balance sheet, including a balance sheet line showing the value of the right to use the leased asset, and a liability to account for the financial obligation to pay the agreed rent.

Depending on the value of lease agreements, the change to the balance sheet could be considerable. However, it will also mean the overheads reported in the charity’s profit and loss accounts or income and expenditure statements will change.

Although some charities may be eligible for exemptions and be able to continue accounting for leases as they are now, this only applies to some categories, such as lower-value leases that relate to assets of minimal value or leases that are due to expire within the next 12 months.

Because the new lease valuation rules take effect from 1st January, any charities with a financial year-end date of 31st December are best advised to prepare as soon as possible, given that this affects their starting values for their reporting from the beginning of the next period.

Expert Accountancy Support for Charities Preparing for SORP Changes

Whenever new regulations, tax reforms or legislation are introduced, the biggest issues arise when charities and non-profit organisations haven’t prepared or taken action to identify how major the impacts might be, with sufficient time to update policies or procedures if needed.

The new charities SORP may be complex for some, which means we recommend a proactive approach, getting prepared now, well before the 2026 financial year is on the horizon.

James Todd & Co welcomes organisations to contact us to ensure they understand how the new accounting requirements will affect them and put plans in place to avoid any disruption.