Our recent webinar, Mastering Income Recognition & Lease Accounting with Confidence, unpacked the most significant updates in the new Charities SORP – with practical insight on what charities need to do now to prepare.
Led by myself and Andy Jones, Associate Partner and Head of Education, the session focused on two areas set to have the biggest accounting and operational impact: income recognition and lease accounting.
The new SORP, published on 31 October 2025, applies to accounting periods beginning on or after 1 January 2026.
While the modular structure remains familiar, several modules have been overhauled – particularly Module 5 (income recognition) and the new Module 10B (lease accounting).
Income recognition: a sharper, more structured approach
A key change is the clear distinction between exchange and non-exchange transactions, which now underpins how charities recognise income.
- Exchange transactions involve income earned in return for goods or services delivered under a contract
- Non-exchange transactions are where value is received without directly providing equal value in return, such as donations or most grants
For exchange transactions, the SORP introduces a five-step revenue recognition model:
- Identify the contract
- Identify performance obligations
- Determine the transaction price
- Allocate that price
- Recognise income as obligations are met
This brings a more consistent and structured approach, aligning charity reporting more closely with wider accounting standards.
A practical example shared in the session highlighted membership income. Where the main benefit is ongoing access, income should be recognised over time, not upfront – for example, spreading an annual fee evenly across the membership period.
Non-exchange income remains more familiar but with clearer guidance. Income is typically recognised when received or receivable, unless there are performance-related conditions, in which case recognition is delayed until those conditions are met.
Importantly, restrictions alone do not delay recognition. A donation restricted to a specific purpose can still be recognised immediately if no conditions are attached.
For grants with output requirements, income must be recognised in line with delivery. For example, if 40% of a programme has been delivered, only 40% of the income should be recognised.
There is also greater clarity around legacy income, which should only be recognised when it is both probable and can be measured reliably – helping drive consistency across the sector.
Lease accounting: a fundamental shift
The introduction of Module 10B marks a major change in lease accounting. The longstanding distinction between operating and finance leases effectively disappears.
Instead, most leases will now be brought onto the balance sheet, with charities recognising:
- a right-of-use asset, and
- a corresponding lease liability
This replaces the traditional rental expense model. Going forward, charities will record:
- depreciation on the asset, and
- an interest charge on the liability
The result is a shift in how financial performance is presented, often increasing EBITDA and changing reserve profiles.
There are some important exemptions, including:
- low-value assets such as laptops or small office equipment
- short-term leases (under 12 months)
The SORP also addresses sector-specific scenarios, such as peppercorn leases and social value leases, where below-market rents include a donation element. In these cases, charities may need to account for both a lease and a donation within their financial statements.
Transition: what charities need to do now
For leases, organisations must apply a modified retrospective approach, adjusting opening reserves at the transition date without restating comparatives.
For income recognition, charities can choose between:
- a modified retrospective approach, or
- full retrospective restatement
Either way, preparation is key. As highlighted in the webinar, a strong action plan should include:
- reviewing all existing contracts and lease agreements
- identifying where the new rules apply
- assessing exemptions and key judgements
- understanding the impact on reserves, reporting and covenants
- updating internal processes and management reporting
Getting ready for 2026
The new SORP introduces greater clarity and consistency – but it also brings complexity, particularly around judgement areas like income classification and lease terms.
Starting early will make all the difference.
If you’d like to talk through what these changes mean for your organisation, or sense-check your approach ahead of implementation, get in touch with either myself or Andy or your usual Cooper Parry contact. We’re here to help you navigate the transition with confidence.
Missed the webinar? Watch the full recording below and catch up on all the key insights and updates.
