News
Charity Accounting Update – What trustees and finance leads need to know
01 Jul 2026
There have been changes to the rules governing how charities report their finances. Between revised income thresholds under the Charities Act, revision to the Charities SORP (Statement of Recommended Practice) published in October 2025, and new regulatory guidance from the Charity Commission, there is a lot for trustees and finance teams to take stock of. This update walks through the key changes and what they mean in practice.
1. New Income Thresholds
From financial years ending on or after 30 September 2026, the income thresholds used to determine the format of accounts and external scrutiny requirements are increasing significantly. For many charities, this will mean a change in what they are required to produce.
The table below sets out the new thresholds alongside the old ones:
| Gross Income (old rules) | Gross Income (new rules, from 30 Sept 2026) | Format of Accounts | External Scrutiny Required |
| Below £250k | Below £500k | Non-company: receipts and payments accounts permitted. Incorporated: fully accrued accounts (SORP). | Under £40k: none required. £40k–£500k: independent examination by person with requisite skills. |
| £250k – £1m | £500k – £1.5m | Fully accrued accounts, SORP. | Independent examination by a qualified person. |
| Above £1m | Above £1.5m | Fully accrued accounts, SORP. | Full audit required. Group accounts may also apply. |
Note: An audit is also required where gross assets exceed £5m and income exceeds £500k (up from £3.26m and £250k under the old rules).
What is not changing
Several thresholds remain unchanged regardless of the new rules:
| Requirement | Income Threshold |
| Registration with the Charity Commission | £5,000 |
| Excepted charity registration | £100,000 |
| Annual return submitted to Charity Commission | £10,000 |
| Annual report submitted to Charity Commission | £25,000 |
| DCMS has also indicated it will work with the Charity Commission to develop a standardised format for receipts and payments accounts and push forward the digitalisation of charity accounts, with the aim of making financial data more accessible and easier to report. |
2. Key Changes in SORP 2026
The new Charities SORP was published in October 2025 and takes effect from 1 January 2026. It introduces a revised structure for reporting, updated requirements around the Trustees’ Report, new lease accounting rules, and clearer guidance on income recognition.
Tiered Reporting
The SORP previously operated a two tier reporting requirement. That structure has now expanded to three, giving more proportionate requirements to mid-sized charities:
- Tier 1: income of £500k or below
- Tier 2: income between £500k and £15m
- Tier 3: income above £15m
Tier 1 and Tier 2 charities that qualify as small entities under FRS 102 will no longer be required to produce a statement of cash flows, though they may do so if they wish. Tier 3 charities must provide one, with no exemption available.
Trustees’ Report: What Has Changed?
The requirements for the Trustees’ Report have been restructured across tiers, with updates in three areas:
| Impact All charities must now explain the impact of their work on individual beneficiaries and on wider society. The SORP describes this as “arguably the ultimate expression of a charity’s performance” and encourages the use of stories and case studies to make that impact meaningful to readers. |
| Volunteers Every tier must now explain the scale and nature of how volunteers contribute to the charity’s work. Charities should also provide volunteer numbers and describe the activities they support, previously a “may”, this is now a “should”. |
| Sustainability Tier 3 charities must summarise how they are responding to environmental, social and governance (ESG) matters. Tier 1 and Tier 2 charities are encouraged to address sustainability, though it is not mandatory for them. |
Reserves Policy: A Tightening of Requirements
The reserves section of the financial review has been strengthened for all charities. Every charity must now explain any policy it holds for reserves, state the amounts held and why. If trustees have decided not to hold reserves, that decision must also be disclosed with the reasoning behind it.
What was previously a recommendation for larger charities is now a universal requirement. All charities must disclose:
- Total funds at year end
- Funds that are restricted, designated or held in fixed assets, and the resulting “free reserves” figure
- The likely timing of any designated expenditure
- A comparison of free reserves against policy and any steps being taken to address a shortfall
Lease Accounting
One of the more technically complex changes in SORP 2026 relates to leases. From 1 January 2026, charities adopting the updated FRS 102 must recognise most leases on the balance sheet, bringing an asset (the right-of-use asset) and a corresponding liability onto the accounts.
Key principles of the new lease accounting approach:
- On initial recognition, a lease liability is measured at the present value of future lease payments, with a corresponding right-of-use asset
- The lease term should include any extension options that are “reasonably certain” to be exercised
- Subsequently, the lease liability is carried at amortised cost with interest charged to the income and expenditure account, and the right-of-use asset is depreciated
- Short-term and low-value leases can continue to be recognised as a straight-line expense
Charities that are unable to determine a market-based discount rate may use the interest rate obtainable on deposits held with financial institutions.
Practical Issues to Watch
Informal arrangements: Verbal or implied arrangements can constitute a lease if there is a demonstrable right to control an asset in exchange for consideration. Charities with informal occupancy arrangements should consider formalising them.
Rolling leases: Where both parties can terminate with short notice, the lease term cannot be assumed to extend beyond that notice period. Judgement is needed where only the lessee holds that right.
Peppercorn rent: Leases at nil or nominal consideration are unlikely to meet the definition of a lease under FRS 102. Where this applies, charities should consider whether the arrangement constitutes a donated asset or service instead.
Transition
On transition to the new lease standard, comparatives do not need to be restated. The cumulative effect is treated as a day-one adjustment. Several practical expedients are available, including the ability to rely on previous assessments of whether a contract contains a lease and to group leases with similar characteristics for the purpose of applying discount rates.
Income Recognition
SORP 2026 introduces a clearer distinction between how exchange and non-exchange transactions are recognised, bringing charity accounting into closer alignment with FRS 102.
Exchange transactions (where the charity provides goods or services in return for payment) now follow a structured five-step approach: identify the contract, identify the performance obligations, determine the transaction price, allocate that price to the obligations, and recognise income as each obligation is satisfied.
Non-exchange transactions (such as grants and donations) broadly follow the existing approach, though with some useful clarification. Income is recognised when received or receivable, unless there are specific performance-related conditions attached, in which case, income is recognised only once those conditions are met.
An important distinction: performance-related grant income is not the same as income from a contract for service. Contract income is almost always unrestricted, carries different consequences for non-compliance, and any surplus is profit, not money to be returned to the donor. The VAT treatment also differs.
3. Regulatory Updates
Charities Act 2022
Changes introduced from 27 November 2025 give charities greater flexibility around ex-gratia payments. Charities can now make small ex-gratia payments without prior approval from the Charity Commission, up to £20,000 depending on the size of the organisation. Trustees remain ultimately responsible, but the decision can be delegated. Charities should update their internal policies to reflect this and ensure any such payments are properly recorded and explained.
Updated Charity Commission Guidance
The Charity Commission has published several updated guidance documents over the past year. The most relevant for trustees and finance leads include:
- CC11 (April 2025): Charities paying a trustee or connected person
- CC30 (May 2025): Finding and appointing new trustees
- CC47 (June 2025): Concerns and complaints about charities
- CC7 (November 2025): How charities can make a moral or ex-gratia payment
- CC30 (February 2026): Guidance for trustees on fundraising from the public
Code of Fundraising Practice
An updated Code of Fundraising Practice came into effect on 1 November 2025, following a six-month transition period. The revised code takes a more principles-based approach and includes several practical changes that fundraising charities should be aware of:
- ID badge requirements for fundraisers have been simplified
- Clarity on how processing fees (including card fees) should be handled and disclosed
- Legacy fundraising providers must now offer donors a choice of provider
- Platform fundraising must include a zero-tipping option for donors
The full code is available at fundraisingregulator.org.uk.
| Need help understanding what these changes mean for your charity? Our specialist charity team is here to help. Get in touch to arrange a conversation with one of our advisers. |
