SORP 2026 lease accounting changes – be prepared!

Charities which prepare accounts on an accruals basis will soon have to take account of changes implemented by the new SORP.  

These changes will not apply to charities which prepare ‘receipts and payments’ accounts.

One of the major changes required by the SORP is around how leases are disclosed in the accounts. The new SORP takes effect for accounting periods beginning on or after 1 January 2026 so for most churches and charities that will be the accounts that are being prepared during 2027. (If the accounting period is less than twelve months, the changes will be implemented sooner). However, there will be a lot of additional detail required, so it is important that the preparation work begins as soon as possible.

The change in lease accounting

The key change in the new SORP is the removal of the distinction between operating and finance leases in lessee’s accounts. The new SORP requires lessees to recognise most leases on the balance sheet as a right-of-use asset with a corresponding lease liability.

This means that lessees will recognise the asset at the commencement date of the lease, measured at the initial lease liability amount, adjusted for any lease incentives received, initial direct costs and restoration costs.

The lessee will also recognise the corresponding liability which will be measured by discounting at an appropriate interest rate.

The asset will then be depreciated over the lease term, and the lease liability is reduced by lease payments and the final costs of restoration.

It’s worth noting that short term leases (those for less than twelve months) and low value assets (for example laptops or franking machines) are exempt from the new arrangements . Certain items (like land, buildings and motor vehicles) should always be included.

Gathering the information required

It will already be clear that a good deal of additional detail will be required in advance in order to make the calculations at the year end. This will include the commencement date of the lease, the term of the lease (along with any break clauses or options to extend), any rent-free period (or other incentives), the amount of any rental to be paid and an estimate of the costs of final restorations, along with the timing of those payments.

The SORP goes on to say that where there is reasonable certainty that an option to extend the lease might be exercised then the full extended term of the lease should be included.

Clearly, each lease will have to be looked at individually. There will be a great deal of judgement involved, particularly around whether options to extend or to invoke a break clause are likely to be exercised.

Extending leases

There are, according to the SORP, five factors which should be considered when deciding whether there is reasonable certainty that the lease will be extended. These five factors are:

1. the contractual terms and conditions compared with market rents (a lessee is more likely to extend a current lease if it would be much more expensive to lease elsewhere)
2. significant leasehold improvements expected to have significant economic benefit when the option becomes exercisable (in other words if the lessee has spent high sums on improving the property they are unlikely to want to leave and go elsewhere)
3. the costs relating to the termination of the lease (there might be high removal or restoration costs for example)
4. the importance of the underlying asset to the lessee’s operations (it might be important for the lessee to be based in a particular geographical location, for example)
5. conditionality associated with exercising the option (this would cover other external factors affecting the decision – perhaps personal circumstances, for example)

A further complication is that while assets provided rent free or at a nominal rent are not covered by the SORP changes (although such arrangements might have to be included in the accounts as donations in kind) those arrangements which give a discount on the market rate (when more than a nominal amount is payable) are covered. They will have to be included at the market value.

Conclusion

This is going to be a significant challenge for those charities which will be affected. We will be returning to this topic, and in particular to the accounting treatment, later in the year.

In the meantime, in order to help trustees and others involved in the accounting process to gather the required information in advance we have included what will hopefully be a helpful template as an appendix to this blog. When complete, these details should be shared with the charity’s auditor or independent examiner.

APPENDIX – Lease information summary (separate form to be completed for each leased asset)