The Charities Statement of Recommended Practice, (SORP) has undergone its first comprehensive rewrite since 2015, following several interim updates in 2016, 2018 and 2019.

Known as Charities SORP 2026, this revision reflects recent updates to UK accounting standards under FRS 102 and introduces a clearer, three-tier reporting framework.

Its goal is to make financial reporting more proportionate to a charity’s size and complexity, reducing administrative pressure on smaller organisations while enhancing clarity and transparency for funders, donors and regulators.

For trustees, the new SORP represents not only a compliance requirement but also an opportunity to strengthen governance and demonstrate accountability.

Understanding the New Three-Tier Framework

SORP 2026 introduces a three-tier system, replacing the previous “one-size-fits-all” model.

Tier 1: Income up to £500,000

Tier 1 charities have the simplest reporting requirements under SORP 2026. They are no longer required to prepare a cash-flow statement and several disclosures can be presented in a shorter, easier-to-understand format.

However, these simplifications don’t remove the need for transparency. Every Tier 1 charity must still include a short section on impact, a summary of reserves and a basic explanation of governance arrangements.

For smaller charities, this means that preparing charity accounts should become more straightforward without compromising transparency.

Tier 2: Income between £500,000 and £15 million

Tier 2 organisations must include more detailed narrative sections on impact, governance and reserves, though requirements remain proportionate to their scale.

These charities often have some in-house financial capacity and the framework aims to balance transparency with practicality.

Tier 3: Income above £15 million

Tier 3 charities face the most comprehensive standards. They must include full cash flow statements, an extensive narrative on outcomes and a detailed analysis of financial performance.

Larger organisations are also expected to report on environmental, social and governance, (ESG) matters, reflecting their wider public accountability.

For these charities, investing in strong reporting systems will be key to maintaining confidence and resilience.

Stronger Expectations for Trustees’ Annual Reports

The Trustees’ Annual Report must now include substantially more narrative on impact, governance, and future plans. This shifts reporting focus from purely financial data to demonstrating outcomes and stewardship in an accessible language.

Impact Reporting Becomes Mandatory

Every charity, regardless of tier, must now include a section on impact. The goal is to show not just what activities took place, but what difference they made to beneficiaries and communities.

Trustees should work with their senior teams to agree on a small set of meaningful measures and examples that demonstrate outcomes in plain English. The narrative should explain how income and effort translate into charitable benefit, without slipping into jargon or internal language.

For charities already focused on demonstrating transparency to donors, these changes will feel like a natural extension of good practice.

Environmental, Social and Governance, (ESG) Disclosures

Under SORP 2026, ESG reporting becomes mandatory only for Tier 3 charities, which are expected to provide detailed disclosures covering sustainability, social impact and governance arrangements.

For Tier 1 and Tier 2 charities, ESG reporting is encouraged but not compulsory. They may include proportionate statements, for example, describing how volunteers are supported, how environmental impact is reduced or how ethical principles guide operations.

The intention is to bring greater consistency across the sector, ensuring that larger charities demonstrate leadership in transparency and accountability, while smaller organisations report in ways that reflect their capacity and scale.

Reserves and Risk Management

SORP 2026 also strengthens reporting on reserves and risk management. Trustees must now explain the rationale behind their reserves policy, not just the figure itself.

This includes how the chosen level supports sustainability, what plans exist for building or using reserves and how this links to long-term strategy.

Risk reporting must clearly outline the charity’s main risks and the steps being taken to mitigate them. These enhanced disclosures reflect the regulator’s ongoing focus on robust governance, prudent financial management and resilience amid a challenging funding environment.

Major Accounting Changes in SORP 2026

SORP 2026 incorporates significant accounting standard updates from FRS 102. These technical changes will materially affect how charities record leases, recognise income and present financial statements.

Lease Accounting – Bringing Leases onto the Balance Sheet

One of the most significant changes is the new approach to lease accounting. Most leases must now appear on the balance sheet, ending the old split between “operating” and “finance” leases.

If your charity leases office space, vehicles or equipment, these arrangements will now be shown as both:

• an asset, (the right to use the leased item) and
• a liability, (the obligation to make lease payments).

Only short-term leases, (twelve months or less) or low-value items can stay off-balance-sheet. For many charities, particularly those with property leases, this will mean visible changes to the balance sheet.

Trustees should ask finance teams to:

• review all existing lease agreements,
• calculate estimated right-of-use assets and lease liabilities, and
• assess how this will affect reported financial health and reserves.

Maintaining accurate accounting records will become even more critical under these rules.

New Income Recognition Model for Contracts and Grants

SORP 2026 introduces a new five-step model for recognising income from contracts with customers and many performance-related grants. Charities must now identify distinct performance obligations in each agreement and recognise income only when each obligation is met.

This is a major shift from simply recognising income when cash arrives or when a grant agreement is signed.

For example:

• A three-year grant with annual milestones might now be recognised gradually as milestones are achieved, not upfront.
• A service contract with defined outcomes will recognise income as each service is delivered, not when the contract starts.

Trustees should discuss with finance leads how this could affect reported income and reserves across multi-year funding arrangements.

Social Investments and Other Technical Changes

Beyond leases and income recognition, SORP 2026 also makes several targeted updates that affect how charities record investments, provisions, legacies and cash flow. While these adjustments may seem technical, they are designed to improve clarity, consistency and trust in how charities present their financial position.

• Social investments: Rules have been simplified and aligned with the Charities Act definition. The term “mixed motive” is gone and investments made for both financial return and social purpose are now treated more consistently with other financial assets. Charities holding social investment portfolios should review classifications and ensure accounting policies reflect the new guidance.
• Provisions and contingent liabilities: A new dedicated module clarifies how to report commitments such as guarantees, legal claims or contractual obligations. Charities must now provide fuller explanations of potential future liabilities, improving transparency and helping trustees oversee risk.
• Legacy income: Updated guidance clarifies when to recognise income from legacies, especially where large or unusual gifts are involved. Tier 2 and 3 charities must now provide a narrative explanation for significant legacies, linking them clearly to future plans and stewardship responsibilities.
• Cash flow statements: These are now only required for Tier 3 charities, easing the burden on smaller organisations. However, some charities that don’t meet the FRS 102 “small entity” definition may still need to produce them. Even where not required, understanding cash flow and bank reconciliation remains essential for trustees.
• Statement of Financial Activities (SoFA): The familiar SoFA format remains largely the same, with minor layout improvements to aid clarity. There’s no need for a complete redesign of financial statements, but trustees should expect a cleaner presentation and clearer alignment between financial and narrative reporting.

Practical Steps: Preparing for SORP 2026

Charity regulators are encouraging organisations to start preparing now. Early action will ease the transition, support good governance and prevent unnecessary pressure on finance teams when the new rules take effect.

Review and Document All Lease Agreements

Begin by creating a clear record of every lease your charity holds: property, vehicles, equipment or other leased assets. For each, note:

• the start date and duration,
• payment schedule and renewal options, and
• any unusual terms or conditions.

Under SORP 2026, most of these leases will move onto the balance sheet, showing both an asset, (the right to use the item) and a liability, (the obligation to pay).

Trustees should understand which leases are affected, how they’ll appear in the accounts, and whether the changes could impact loan covenants, audit thresholds or financial ratios that funders monitor.

Maintaining complete, up-to-date lease documentation is now part of effective fund accounting.

Map Income Streams and Performance Obligations

Review all major grants, contracts, and service agreements. For each one, identify any deliverables, milestones or conditions that must be met.

Under the new income recognition model, funding is recorded when performance obligations are fulfilled, not when the grant is awarded or the cash is received.

Document these obligations clearly and work with your finance team or advisers to confirm the correct recognition approach for each funding stream. This exercise will strengthen both compliance and internal clarity about where income truly supports charitable outcomes.

Update Systems and Processes

Check whether your current accounting systems and bookkeeping processes can handle the new data requirements for leases, income recognition and narrative reporting.

You may need to:

• upgrade software or add new modules,
• track contract progress and lease balances in real time, and
• adjust monthly or quarterly monitoring routines.

If you already use cloud-based platforms, review whether automation could streamline how data flows into reports. Even small system improvements can save time and reduce reporting risk.

Train Trustees and Finance Teams

Hold short, focused briefings for trustees on what SORP 2026 means in practice, the “why” and “so what” – rather than just the technicalities.

Finance staff will need more detailed training on lease calculations, income recognition judgments and disclosure preparation.

Programme staff may also need to contribute more to impact and ESG reporting, so it’s worth introducing these concepts across the organisation.

Consider sector-led training or webinars from ICAEW, CFG or your auditors to build confidence and consistency.

Engage Professional Advisers Early

Reach out to your auditors or independent examiners before year-end. They can:

• model how the new lease and income rules will affect your financial statements,
• confirm appropriate accounting treatments, and
• help establish opening balances for lease assets and liabilities.

Starting early spreads the workload across the year, avoiding last-minute surprises during the audit.

If your charity’s current accounting partner doesn’t specialise in the sector, this is a good time to review whether you have the right level of expertise in place for the transition ahead.

Turning Change into Confidence

With Charities SORP 2026 coming into effect this January, the window for preparation is short but there’s still time to act with confidence.

At Charity Accounting Partners, we’re already guiding boards through their final preparations, from lease reviews and income mapping to system updates and trustee briefings. Our aim is to make the transition seamless, so finance continues to empower, not distract from your purpose.

If you’re unsure how ready your organisation is for the new SORP, now’s the moment to check. Book a free discovery call with one of our charity accounting specialists and start 2026 with clarity and confidence.