The Charities SORP 2026 is changing the accounting treatment of leases in line with changes to FRS102.
Except in limited circumstances, all leases are now treated as “Finance Leases” with the value of the asset capitalised and matched with a Lease Liability. The old category of “Operating Leases” has been removed except for low value assets (typically photocopiers etc.) or leases that have less than twelve months to run.
| Old SORP (2019) | New SORP (2026) | |
| Lease classification | Distinguishes finance leases and operating leases, with only finance leases recognised on the balance sheet. | All leases (except in limited circumstances) recognised on the balance sheet as “Right of Use” (ROU) assets and lease liabilities. |
| Initial measurement | Operating lease Dr lease expense Cr Bank Finance lease Dr ROU Asset Cr Lease Liability | All leases Dr ROU Asset Cr Lease liability |
| Subsequent measurement | Operating lease Dr lease expense Cr Bank Finance lease Depreciation on Asset Dr Depreciation expense Cr ROU Asset Interest on Lease Liability Dr Interest expense Cr Lease Liability Lease payments Dr Lease liability Cr Bank | All Leases Depreciation on Asset Dr Depreciation Cr ROU Asset Interest on Lease Liability Dr Interest expense Cr Lease Liability Lease payments Dr Lease liability Cr Bank |
This will keep charities in line with general accounting standards, but there are some special considerations for charities:
Social Donation Leases – What makes them different
Charities often pay below market rent due to philanthropic arrangements or property restrictions. Under SORP 2026, if the discount is clearly for social responsibility reasons, rather than commercial reasons, the lease becomes a “social donation” lease.
For example, if market rent is £150,000; the charity pays £100,000, so the landlord has given a £50k discount; but the charity could afford £110,000 elsewhere.
The calculation involves the following steps:
- Lease Liability based on PV actual rent paid (£100,000)
- Right of use asset based on the PV expectation of the market rate that you would have paid i.e. rent you would reasonably afford (£110,000)
- The difference between these two values is treated as Gift in kind income at inception
Worked Example – Applying the Concept
Using the above scenario for a 5 year lease with 5% obtainable borrowing rate:
| PV of actual payments (£100,000) = £432,948 PV of affordable market rate (£110,000) = £476,242 Gift in kind = £43,295 |
Journal Entry – Initial measurement
| Dr ROU Asset 476,242 Cr Lease Liability 432,948 Cr Gift in kind Income 43,295 Being recognition of a social donation lease |
Peppercorn Rent – Simpler Treatment
The good news is if you pay a peppercorn rental charge you can ignore the above calculations. This arrangement does not constitute a formal lease due to the insignificance of the rent paid. Your rental accounting remains as you would have previously with respect to calculating an appropriate market value of the rent and showing the income as a gift in kind and opposite rental cost.
Impact on Accounts
The overall impact on the SOFA will be nil over the term of the lease but please be aware of following implications:-
The cost of leases in the SOFA will be accelerated compared with the old rules for operating leases. Instead of one rental charge in the expenses you will now have an interest charge and depreciation.
The value of your assets on the balance sheet will increase by the value of the ROU asset. This may tip your charity over thresholds for determining audit thresholds for instance.
Including a new liability in the accounts may have an impact on banking covenants.
The new rules might make preparers more conscious of the need to value discounted facilities as gifts in kind. If significant this could impact audit threshold income levels.
Increases in income and assets may give incorrect picture to users / funders who may consider that your charity doesn’t need their support! Your TAR may well need to give a wider picture for users who may not be able to interpret the accounts following the changes.
There are substantial additional FRS102 disclosure implications which are set out in the SORP at 10B.93 – 103.
Implementation Tips
- Create a lease Register: capture all lease terms, payments and discount rates.
- Evidence Market Value: Document how you determined the alternative rent.
- Discount Rate Justification: Auditors will expect clear justification for key estimates as it could have a significant bearing on the overall calculation. As a charity the SORP allows the rate of interest obtained on deposits to be used.
- Consider Extensions and Covenants: Changes may affect loan agreements—engage funders early. If you have a loan – what are the covenants? We suggest you reach out to your funder sooner if the accounting changes will impact covenants.
- System Readiness: Ensure IT systems can handle new calculations and reporting.
Conclusion
In summary, take time now to understand the new SORP and its impact on your charity’s financial reporting. Don’t wait until audit season to gather key inputs like discount rates—requesting these retrospectively from your bank will cause unnecessary delays. Begin preparing early, and if you need guidance, reach out to your charity team. While we can advise on the process, we cannot make management decisions about finance rates. Early planning will make the transition smoother and stress-free.
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