New year, new accounting framework for charities.
As planned, discussed, debated, and announced in 2025, the changes to the Charities Statement of Recommended Practice (SORP) are now in effect, as of 1st January 2026.
These new accounting rules will affect all UK charities in some way, as we understand their primary purpose is to make charities’ financial reporting more proportionate and to incorporate the recent changes made to the Financial Reporting Council’s FRS 102 standard.
In a bid to support smaller charities and voluntary organisations, will the new changes to SORP benefit charities as much as they state they will?
Why accounting changes became necessary
The three main charity bodies responsible for reviewing and monitoring charity governance and practice include:
- The Charity Commission (England and Wales)
- The Office of the Scottish Charity Regulator
- The Charity Commission for Northern Ireland.
Following consultation and feedback from charities on how accounting practices could be streamlined and simplified, while still holding charities and their trustees to account for transparency in finances, the three regulators devised changes to the SORP.
Taking all points of view on board, charities have had their opportunity to have their say, voice concerns, and look forward to more effective and easier account administration.
The main reasons for these changes included:
- A need to make financial reporting more proportionate to charity size.
- A need to align accounting frameworks to FRS 102 standards.
- A need for charities to improve their transparency, clarity, and consistency in financial reporting.
- A need to support smaller charities by reducing the financial administration burden.
Changes to the SORP
Changes to reporting
Only charities with an annual turnover of more than £15m will now be required to produce detailed statements of cash flow1. In fact, there is a three-tiered reporting system based on income level in place:
Tier 1 – for charities, whose income is up to £500k, reporting is simplified, and there is potential for cash flow exemption.
Tier 2 – when income is between £500k and £15m, more detailed reporting will be required; however, cash flow exemption is available.
Tier 3 – for larger charities with an income over £15m, reporting must be detailed and include sustainability reporting.
(Note: revenue recognition will also impact the tiering system as charities are now required, as part of changes to FRS 102, to recognise income from exchange contracts.)
Changes to thresholds
(Note: The changes mentioned below are expected to come into effect from September 2026):
To match the lowest tier within the SORP income threshold, the threshold for the production of accrual accounts has increased from £250,000 to £500,000. This is a significant change for charities, as it allows smaller charities the opportunity to produce more streamlined receipts and payments accounts instead.
Financial audits are now required for income over £1.5m, whereas previously the threshold was £1m.
And independent examinations carried out by a professional qualified examiner are now required for charities whose income exceeds £500k – previously £250k.
(Please find updates on changes to Scottish law here.)
Changes to annual reporting requirements for Trustees
Changes in this area are specifically in reference to how charity’s report on their financial reserves with the aim to make provisions and contingencies easier to understand (please check out our post on this HERE). Specific sections are also to be included on public and donor interests, and on how charities must account and show their social investments.
There is much greater emphasis on impact, with mandatory questions requiring responses, alongside further requirements for volunteers and for charities that meet the higher-tier criteria to report on sustainability.
Changes to lease accounting
This is perhaps the biggest change and the one that could cause charities the most problems.
All leases with very few exceptions will now be recorded on the balance sheet as a Right-of-Use (RoU) asset with the corresponding liability.
This will not only be a challenging area of change for charities, but it will also impact balance sheet information, so it’s important to bear this in mind and understand the changes now in effect.
Impact of changes
These changes will affect all charities in some capacity, and we understand they will bring significant changes to reporting.
However, these changes are designed to encourage robust, transparent reporting from charities, clearly showing the impact of your charity work more effectively.
Reducing the administrative burden (as statement of cash flows are now only required for tier 3 charities) and improving consistency, quality, and clarity, these changes aim to support smaller charities by introducing more proportionate reporting for accounts.
The changes to trustees’ reporting will hopefully lead to enhanced impact reporting, extended volunteer information (for certain tiers), and improved reserves reporting, with changes to fund accounting allowing for more information on restricted funds, full disclosure of legal powers, and additional clarification on designated funds.
It’s important for charity managers and trustees to remember that for all governed in the reports you produce, these reports are a great way to show the positive impact you have, to build public trust, and to build stronger relationships with volunteers and donors.
However, we understand that not all change comes without challenge, and for charities with reported income between £500,000 and £15m, these changes could prove more challenging, bringing increased complexity, as more detail will be required around impact, risk, and governance. As a result, tiers may need to be adjusted in the future.
If you are in any doubt, it is always advised that you contact the Charity Commission for further information.
Moving forward
On January 1st, 2026, major changes to charity accounting came into force, and, as we know, further changes are always being considered.
Our advice…
Prepare and plan ahead.
You can also find more information on the Charity Commission’s website here, which outlines changes and also provides support lines for charities with any queries or concerns.
- Tier 1 and Tier 2 charities must meet the definition of a small entity under FRS 102 in order to not produce a cash flow. ↩︎
