In an update to our article from November 2025, further updates to The Charity Statement of Recommended Practice (SORP 2026) were officially released on 31 October 2025, followed shortly by the Further and Higher Education SORP (FE/HE SORP 2026) on 3 November 2025.
Both frameworks introduce updated guidance to ensure transparency and consistency in financial reporting. They apply to financial periods beginning on or after 1 January 2026, meaning charities with year ends of 31 December 2026 and institutions with year ends of 30 June 2027 or 31 July 2027 will be among the first fully impacted.
Charity SORP
This is the most significant revision to the SORP in a number of years and replaces our current FRS 102 SORP published in 2019. Many of the changes are driven by the revisions made by the Financial Reporting Council (FRC) to the UK Financial Reporting Standard FRS 102, which continues the alignment of UK GAAP with IFRS.
The most significant accounting changes being in relating to lease accounting and contract revenue accounting. The publication of the final SORP 2026 also coincides with the outcome of the charity threshold consultation.
The SORP committee managed development of the new SORP through a number of working groups, themes and strands and sought to respond to sector feedback for greater transparency and proportionality. One of the most significant changes is the introduction of a tiered reporting framework.
Tiered reporting framework
The new SORP introduces a three-tier system based on a charity’s income, designed to make reporting proportionate to size and complexity:
- Tier 1: Income up to £500,000
- Tier 2: Income between £500,000 and £15 million
- Tier 3: Income over £15 million.
Smaller charities in Tier 1 should benefit from reduced disclosures and are encouraged to consider natural classification as a simplified method of presentation which avoids the complication of allocations.
However, it is not all reliefs, there are some additional requirements for Tier 1 charities, particularly in respect of the trustees report including fuller disclosures around volunteers, reserves, going concern and future plans.
The requirement to prepare a cash flow statement has also been removed from Tier 2 broadly aligning the only Tier 3 requirement to prepare a cash flow statement with the companies act threshold.
Although as charity thresholds are just based on income thresholds, there may be charitable companies in Tier 2 that breach the net assets and employee thresholds and are therefore required by the Companies Act to prepare a cash flow statement.
Expanded narrative reporting requirements
As noted above, the revised SORP requires all charities to provide more information on financial sustainability through linking reporting on reserves, future plans and going concern. However there are also more requirements around impact
and sustainability.
Impact
The SORP challenges all charities, including Tier 1 charities to think about their impact. Tier 1 smaller charities must report a summary of the main achievements of the charity and are challenged to consider 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?
For charities with income over £500,000, more in depth reporting is required. This additional reporting includes linking the achievements to the aims and objectives and explaining the impact the charity is making, including the long-term effect of its activities on individual beneficiaries and on society as a whole.
The SORP suggests that infographics, statistics, beneficiary and volunteer testimonials to communicate this information, as well as measures and indicators to assess performance.
Sustainability
Trustees are encouraged to consider the needs of stakeholders when reporting in this area and reporting is only mandatory for the largest charities, those with income greater than £15m.
Annual reports:
- Must provide a summary of how the charity is responding to and managing environmental, governance and social matters
- Could provide KPIs used to assess progress against targets for climate-related risks
- May include details of:
- Cyber and data security and business ethics
- Engagement and well-being
- Diversity and inclusion
- Should include a link if the charity reports elsewhere.
Income recognition – New five-step model
SORP 2026 introduces a structured five-step approach for income from exchange transactions (e.g., contracts for services), aligning with IFRS 15 principles. We covered some of the principles around contract income recognition in our June webinar on the changes. As a reminder the five steps are:
- Identify the contract
- Identify performance obligations
- Determine transaction price
- Allocate price to obligations
- Recognise income as obligations are satisfied.
However, for many charities a greater proportion of the income is received through non-exchange transactions. There are no specific changes for non-exchange transactions, however the language is changing and the concept of ‘entitlement’ is no longer a key to the recognition decision (except for performance related grants and dividends).
One of the most fundamental judgments going forward is around whether a transaction is in 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, which may either be similar to a donation or an exchange contract, and identifying performance-related grants and contracts.
Accruals accounting for grants is still not permitted under the SORP 2026 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. Although the Trustees’ reporting module now contains a requirement for charities in Tier 2 and above to include information around material legacy judgments in their Trustees’ report.
Changes in judgments and income recognition may mean that income is deferred (or accelerated). This may have an impact on the thresholds, SORP and legal applicable to the charity.
Lease accounting – on-balance sheet recognition
Most operating leases must now be recognised on the balance sheet as a right-of-use asset with a corresponding liability, except for short-term or low-value leases.
This will be a significant change for charities with property or equipment leases and may affect key financial ratios and/or require system updates. For some charities with peppercorn leases, or leases with a nominal value the first decision will be whether the lease is within the scope of the standard, or should be treated as a donation. If a lease is given at below market value, and the charity determines that this means that the lease included a social donation or non-exchange component, then the charity will need to consider whether that social donation is part of the asset or a donated facility or service in relation to the asset and then how that amount may be determined. These judgments may 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
One other area of change is social investments. Previously the SORP has divided social investments into programme related investments and mixed motive investments, now there is only one category, that of social investments. Social investments are made for both a financial return; and to further the investing charity’s purpose.
Comparatives will need to be restated in line with the new terminology and definition.
Any losses on social investments will be shown within charitable expenditure and gains subsequently credited to charitable expenditure to the extent that they match previous losses. Gains should be recognised in other income.
FEHE SORP
As we expected, the most significant changes to the FE/HE SORP 2026 are the revisions to lease accounting and revenue recognition as embedded into FRS 102.
The changes align lease accounting more closely with IFRS16 by removing the distinction between operating and finance leases for most arrangements. Under the revised standard, lessees must now recognise all leases (with limited exemptions) on the balance sheet, recording both a right-of-use (ROU) asset and a lease liability.
With regards to revenue recognition, the changes in FRS 102 are primarily around the recognition of contract income, which adopts a five-step model in line with IFRS 15, as described above. There are detailed examples in the FE/HE SORP 2026 for specific circumstances which supports institutions in applying the five-step income recognition model. A specific change is that fee waivers, bursaries and scholarships are now to be accounted for as a reduction to revenue rather than as expenditure.
At PEM, we have published technical guidance on the accounting impacts in our July article and September article.
The FE/HE SORP 2026 introduces a number of clarifications and minor enhancements throughout the document. Below is a summary of some of the most notable updates.
Government Grants and non-exchange transactions
- The 2026 SORP retains the policy choice for government grants but clarifies definitions and provides enhanced guidance on performance-related conditions and restrictions.
- The new SORP includes more explicit requirements for allocating joint grants between government and non-government sources.
- Guidance on non-exchange transactions is expanded, with clearer instructions on measurement, recognition, and disclosure, including flowcharts to assist in determining the correct treatment.
- Disclosure requirements for both government grants and non-exchange transactions are also enhanced.
Presentation of the Statement of Financial Activity and Annual Report
- The 2026 SORP maintains the requirement for the key primary statements: Statement of Comprehensive Income, a Statement of Changes in Reserves, a Statement of Financial Position, and a Statement of Cash Flows, but updates the illustrative formats in Appendix 1.
- The Statement of Comprehensive Income now includes “Interest and other finance income” as a separate line item, combines “Depreciation and amortisation,” and replaces “Fundamental restructuring costs” with “Restructuring costs.” The Statement of Financial Position adds “Negative goodwill arising from the acquisition of ABC College” as a line item and clarifies the presentation of joint ventures and associate investments.
- There is enhanced guidance on restatements due to changes in accounting policy.
- The annual report now explicitly encourages disclosure of environmental, social, and governance (ESG) practices, reflecting stakeholder feedback.
- The SORP maintains the single-column presentation for the Statement of Comprehensive Income, rather than splitting by fund type, but requires additional note disclosures for material restricted or endowment funds.
Other notable changes
- The 2026 SORP introduces a new Section 2A on Fair Value Measurement, replacing the previous appendix and aligning with IFRS 13 principles.
- Guidance and disclosure requirements for service concession arrangements are enhanced, particularly for student accommodation and PFI-type arrangements.
- The SORP updates guidance on multi-employer pension schemes, with more explicit requirements for recognising liabilities for past service deficits.
- Section 27 and Appendix 2 provide detailed guidance on transition, including practical expedients and exceptions from retrospective application for leases and revenue.
Next steps
Review income and lease arrangements: Prepare for changes in recognition and disclosure.
Assess tier classification: Determine which tier your charity falls under and review the associated requirements, remember to consider companies act threshold and legal thresholds as well to understand all reporting requirements for the entity.
Update narrative reporting: Incorporate impact, sustainability, volunteers, reserves reporting and future plans into the Trustees’ Annual Report, as required or desired.
Consider responsibilities for each section, whether the information is already available, what information needs to be collected and collated.
Engage advisers early: Ensure systems and policies are ready for implementation by January 2026.
Please get in contact with us to discuss how these changes might impact your charity, or institution and how PEM can support your transition to the
new standards.
Please note that this content is not intended to give specific technical advice. It is designed to highlight some of the key changes rather than provide an exhaustive explanation of the topics. Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.
