Lease accounting is changing: What charities need to know for 2026

Major updates to the 2026 Charity SORP mean charities will soon need to change how they account for leases. Here’s a quick, clear overview of what’s happening and how to prepare.

What’s changing with lease accounting?

Currently, most operating leases are simply expensed through the SOFA. From 2026, many will need to be recognised on the balance sheet, creating:

• A right‑of‑use asset
• A corresponding lease liability

This aligns charity reporting with the recent changes in FRS102.

What this might affect:

• Your charity’s size classification (and therefore accounts disclosures and audit requirement)
• Banking covenants or borrowing arrangements
• How you set and monitor your reserves policy

Key rules you need to know

1. Not all leases go on the balance sheet

Two main exemptions apply:

• Short‑term leases (12 months or less)
• Low‑value assets (judgement required - IT equipment may qualify; vehicles and property will not)

2. Effective dates

• Applies to periods starting on or after 1 January 2026
• No need to restate comparatives
• Only leases identified as leases on the transition date need reviewing

3. Is your contract actually a lease?

A contract contains a lease if it provides:

1. An identified asset
2. Control over that asset
3. For a defined period
4. In exchange for payment

Peppercorn leases often won’t meet this definition and usually continue to be treated as donated use of assets.

How measurement works (simplified)

Once you confirm a lease needs recognising:

• Right‑of‑use asset = present value of lease payments ± adjustments (prepayments, incentives, direct costs, dilapidations, and any donated‑rental element)
• Lease liability = present value of future payments using an appropriate discount rate
• The asset is depreciated; the liability unwinds over time

What can you be doing now

Start preparing by:

• Reviewing all lease agreements
• Identifying exemptions using the SORP decision tree
• Determining lease terms (including extension or break options)
• Calculating lease values and setting up ongoing records
• Considering impacts on reserves, covenants, and internal reporting

Talk to Bishop Fleming's Charity experts

Every lease is unique, and early planning will help ensure a smooth transition. Speak to Bishop Fleming’s Charity team for expert advice on the 2026 SORP lease accounting changes.