The new Exposure Draft Statement of Recommended Practice: Accounting and Reporting by Charities (SORP 2026) tops some 300 pages. It was launched on 28 March 2025 and will run for 12 weeks and introduces among other changes an additional charity tier, more required reporting on reserves and reporting on impact and sustainability for the biggest charities. Many of the changes are however driven by the changes made by the Financial Reporting Council (FRC) to the Financial Reporting Standard (FRS 102), in particular in relation to lease accounting and revenue contract accounting and the SORP includes additional guidance to charities on those areas.
As with the threshold consultation it is important that charities express their views and we would encourage everyone to respond to the consultation. This article sets out some areas of discussion around the consultation. Your opinions count and will be considered by the SORP Committee as part of the consultation response, so whether you agree or disagree, please respond to the consultation.
PEM also contribute to consultation responses so please do respond individually but if there are any matters of concern you would like to raise with us, please do reach out.
Some areas of change
Tiering System for Charities
SORP 2026 introduces a tiering system designed to accommodate the diverse sizes of charities within the sector. This system specifies distinct reporting requirements for charities based on their gross income.
Charities must meet the requirements of their respective tiers, ensuring that their reporting is aligned with the complexity and financial scale of their operations. This tiering system aims to improve the relevance, comparability, and understandability of financial and non-financial reporting by charities, thus enhancing accountability and transparency.However, there are a number of challenges. The lack of alignment of the tier 1 threshold with the audit threshold (either the current threshold, proposed threshold, or the Scottish threshold which is soon to be raised to £1 million) will add another level complexity to the accounting requirements for small charities. The thresholds for the tiers are only based on income and therefore a tier 1 charity may fall within the audit requirements due to the level of assets which may create confusion over the reporting required.
Equally a charity which is small in relation to the companies act thresholds may still have to provide a cash flow as it is only the income threshold which is considered in section 14 of the proposed SORP, relating to charity cash-flows.
The Trustees report
The Trustees’ reporting requirements are set out in the three tiers and the requirements are cumulative. The exposure draft continues to differentiate between mandatory ‘must’ requirements and ‘should’ disclosures which are encouraged. The structure of the trustees’ report remains similar, the most significant changes for tier 1 charities will be the mandatory reporting around reserves, with more detail required than previously, and the need to set out their plans for future periods.
In addition, the requirement to report on the nature and scale of volunteers’ activities in the trustees’ report is now a ‘must’ disclosure for all. For tier 2 charities, there is increased focus on impact reporting and for tier 3 charities there is an additional requirement to report on sustainability, as the report must provide a summary of how the charity is responding to and managing environmental, governance and social matters. Disclosures are encouraged for smaller charities.
Reserves
All charities currently must disclose any policy they have for holding reserves and for larger charities, the current SORP sets out a number of steps a larger charity should take to explain its reserves amounts and purposes.
The proposed SORP effectively translates the previous ‘should’ steps into ‘must’ steps for all charities, not just tier 2 and above. The exposure draft still mandates that charities must include a comprehensive financial review in their annual report, detailing the reserves policy. This includes the rationale for holding reserves, specifying the amount held, and explaining why they are maintained. If trustees decide that holding reserves is unnecessary, this decision must be disclosed along with the reasons.
However, all charities must now also explain any discrepancy between the amount of reserves held and the policy, including steps to align reserves with future plans. The amount of reserves should reconcile with the accounts, and any material amounts designated or committed must be identified, including the expected timing of their expenditure. If there are material uncertainties about the charity’s ability to continue as a going concern, these must be disclosed and linked with reserves considerations.
Achievements and impact reporting
Both current and revised SORPs state for all charities that the report must contain a summary of the main achievements of the charity. The proposed SORP also includes some prompt questions to assist tier 1 charities with this, stating that trustees must provide answers to the following questions:
- in what way has the charity’s work made a difference to the circumstances of its beneficiaries?
- has the charity’s work provided any wider benefits to society as a whole?
Noting that use of infographics, statistics, beneficiary and volunteer testimonials may help communicate this information to users, focussing the reporting on the outcomes and impact of the activities.
For tier 2 the report ‘must’ explain the impact the charity is making and must consider the long-term effect of its activities on individual beneficiaries and on society as a whole. The report ‘should’ also include a summary of measures or indicators used to assess performance, outputs achieved, and outcomes or impacts in the context of the charity’s aims. Significant factors affecting the achievement of objectives, such as relationships with stakeholders, should be commented on.
For tier 3 charities, a review of material fundraising activities against objectives and the effect of related expenditure is required. There is no indication in the exposure draft that impact reporting produced separately to the financial statements can be linked (as is the case for sustainability reporting), therefore impact reporting included will need to be sufficient to tell the story without relying on links to other publications.
Sustainability reporting
Charities are encouraged to address how they are responding to and managing environmental, governance, and social matters. For tier 3 charities, this is mandatory. Reporting could include details of key performance indicators related to climate risks and opportunities, as well as governance and social issues like board diversity and business ethics. If the charity is already reporting on these matters outside the annual report, a link may be provided.
Charitable companies (those who are classified as large companies) which fall within the scope of the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) 2018 Regulations (Streamlined Energy and Carbon Reporting regulations, (SECR)) must provide the disclosures required under these regulations.
Legacies
For tiers 2 and 3 there is a new requirement to report on legacies in the financial section of the report, this is designed to improve the understanding of legacy disclosures. However, where accounting policies are clear and material judgments and estimates explained in the notes to the financial statements, it may be that these disclosures are repetitive.
The Trustees’ report is the main area of change driven by the SORP Committee, and perhaps the area where consultation responses can have the most significant influence.
Presentation and financial accounting
Natural presentation
The tone of the extant SORP could be read as encouraging all charities to activity account, with what could be seen as an aside that smaller charities may adopt a different approach. The exposure draft makes an alternative presentation clearer including an example of a natural classification presentation. This effectively exempts smaller charities from having to allocate support costs and may mean that statutory accounts are more reflective of a charity’s
management reporting.
On the one hand this presentation may mean that it becomes harder to assess activities, as the full cost of the charitable activities undertaken may not be so clear to the reader or the trustees, or comparable with other charities. However, the variation in support cost allocation methods may mean that this was already difficult and a natural classification presentation may be potentially more understandable to a lay trustee. For charities who believe that their income is likely to fluctuate between the tier 1 and tier 2 levels there may be issues of year-on-year comparability, so they may not be able to take advantage of this clarity.
As noted in the article on the Department of Media Culture and Sport threshold consultation there is no current proposal for a two year view of threshold changes.
Accounting changes
One of the main changes in FRS 102 is the recognition and accounting for income. The principles of FRS 102 are set out in section 5 of
the SORP.
Recognition of income, including legacies, grants and contract income
The changes in FRS 102 are around the recognition of contract income, there are no specific changes for non-exchange transactions. Therefore, one of the most important judgments is around whether a transaction is an exchange for consideration, or whether there is no direct provision of equal value
in exchange.
These judgments are likely to be most sensitive around memberships and identifying performance-related grants and contracts. Accruals accounting for grants is still not permitted under the exposure draft and a designated reserve is suggested as a way of accounting for capital grants and therefore identifying and separating the depreciation charge in relation to grant funded assets from other unrestricted expenditure. The treatment of legacies is relatively unchanged.
For all of these elements it may be useful if more examples were provided of how the recommended treatment is applied.
Lease accounting
Section 10B sets out the new lease accounting requirements in line with the revisions to FRS 102. The section on lease accounting is broken down by key elements and decisions, and has its own index to aid navigation, some examples are given. As with revenue the initially challenging judgment may be around the identification of a lease for consideration and a non-exchange transaction.
The exposure draft states in its defined terms related to leases:
Peppercorn arrangements – in this SORP such arrangements are considered to have the legal form of a lease, but with nil or nominal consideration and are unlikely to meet the FRS 102 definition of a lease but are considered therefore to be a form of non-exchange transaction.
There is little further definition on what nominal consideration may be in this case and whether that may be relative to the lease or the charity or some other measure. For some charities this may be a key consideration in determining the treatment of a lease. The SORP is clear that a lease may be ‘under-value’ due to specific circumstances around the building, its condition, or specialised nature which mean that though low it may reflect market value. If it is determined that the lease is a donation, the charity then needs to determine how to value the donation, be it an operating cost or an asset. These judgments are going to be difficult for trustees without professional valuation advice.
If an arrangement is identified as a commercial lease then the charity will need to determine a discount rate. There is a hierarchy of rates that the charity should try to obtain starting with the rate implicit in the lease, then the incremental borrowing rate, followed by an obtainable borrowing rate and finally a rate of interest that the charity could otherwise obtain on deposits. This judgment is likely to have a material impact on the valuations included in the financial statements and will form part of the judgments and estimates disclosure.
Social investments
Social investments are defined as investments made for both a financial return and to further the investing charity’s purposes. These can take various forms such as loans, guarantees, or shares in private companies. The previous terminology of mixed motive and programme related investments has been combined to social investments. Prior year comparatives will need to be restated.
Charities making social investments must disclose their social investment policies and explain how these investments contribute to their charitable purposes.
Social investments measured at cost or amortized cost must be assessed for impairment at the end of each reporting period, and any impairment loss must be recognised immediately in the statement of financial activities through the gains and losses disclosure. This is a change from the extant SORP where impairments related to programme related investments would be made through charitable activities.
Next steps
Consultation responses are requested by the 20 June 2025 and can be made online Invitation To Comment – SORP. Respondents can answer all questions but are not required to. Charities can focus just on those questions that most closely impact their reporting or accounting.
Read the latest Charities and Non-profit newsletter to find out more about further changes that will impact the sector.
If you would like to discuss how this guidance might affect you, please get in touch with our team.
This article was correct at the time of publishing.
