Login
The updated version of the Charities SORP (Statement of Recommended Practice) was published in October 2025 with the updated version taking effect for accounting periods starting on or after 1 January 2026.
So, in this, the third and final of our SORP updates, following those on trustee reporting requirements and income recognition changes, Lauren England takes a more detailed look at the changes to lease accounting for charities.
Lease accounting for charities
The requirements of lease accounting (module 10b) applies to all tiers of Charities.
Meaning that the majority of lease transactions will now need to comply with section 20 of FRS102. This – in summary – confirms that as a lessee there is no longer a distinction between finance leases (lease agreements that transfer all the risks and rewards of ownership of the asset) and operating leases (lease agreements that do not).
There is now a single accounting treatment for lessees.
Under the new approach the lessee must recognise, at the commencement of the lease an asset and a liability – with the part of the consideration paid to the lessor (the party renting out the asset), treated as a cost of financing the arrangement.
There are some exemptions available for:
- Short term leases (< 12 months)
- Low value leases
But even if a charity uses these exemptions, it must still disclose the financial commitments.
It’s important to note here that for lessors, the distinction between finance and operating leases still applies.
How do these lease accounting changes affect charities?
Below we’ve focused on some charity specific scenarios to illustrate these changes further.
Peppercorn or nominal amount leases
While these arrangements may have the legal form of a lease, it’s unlikely that they will meet the definition of a lease under FRS 102.
Payments are often very small or there may be no payment due at all, for example a charity may rent a community hall for £1 a year. So, any nominal payments made should be treated as an operating expense.
This means charities need to consider module 6 of the SORP and whether an arrangement actually counts as a donation and if so, how to value it.
Social donation leases
These are lease arrangements where the payments are below market rate (but higher than a nominal amount) because the lessor chooses to accept a lower rent in support of the charity.
For example, a charity might rent some office space at £5,000 a year when the market rate is £15,000.
Charities may enter into a social donation lease either as a lessee or lessor.
Social donation leases have a non-exchange component, meaning the charity receives a benefit beyond what it pays for. Where a charity determines that it is party to a social donation lease, it must consider the nature of the incoming resources as this will determine how to measure them.
So, this could be the donation of an asset, whose fair value the charity is able to fully exploit. Or, as in many cases, the value of a donated service or facility to the charity.
The value of the non-exchange component is then added to the cost of the right of use asset and depreciated accordingly.
Why these lease accounting changes matter
These new rules ensure that charities reflect the true value of assets and obligations on their accounts.
Even small or “free” arrangements may now need careful accounting to show the benefit received.
Common examples within charities where these rules may apply are:
-
- Local charities using donated office or workshop space
- Youth groups renting community halls at reduced rates
- Arts organisations with discounted studio space
- Charities receiving donated IT equipment or vehicles as part of a lease agreement
Charities must refer to Section 1 of FRS 102 for further detail on how to apply the requirements of Section 20 of FRS 102 for the first time to help ease the introduction of these new requirements.
We’re here to help
We’re already working with charity clients to make changes for SORP. Whether it’s reviewing current reporting processes, or advising on the intricacies of lease types, we’re here to help you turn compliance into confidence.
To discuss what the new SORP means for your charity, get in touch with one of the team by calling 0330 058 6559 or by emailing hello@scruttonbland.co.uk
Back