Charities should begin preparing for a number of important developments that will affect financial reporting, governance and external scrutiny over the coming years. New accounting requirements and proposed regulatory changes are expected to reshape how charities prepare their accounts and communicate financial information to stakeholders.
Although the impact will differ depending on the size and activities of each organisation, trustees should start assessing the implications early to avoid unnecessary compliance challenges.
Two major developments are driving the changes:
- updates to UK accounting standards under FRS 102; and
- proposed increases to charity reporting and audit thresholds.
As charities apply sector-specific accounting guidance through the Charities Statement of Recommended Practice (SORP) rather than FRS 102 directly, changes to accounting standards have resulted in updates to charity reporting requirements. The revised Charities SORP is expected to apply to accounting periods beginning on or after 1 January 2026.
The updated guidance introduces a more structured approach to recognising income, particularly where charities receive income through contracts, trading activities, or service arrangements. Traditional charitable income streams — such as donations, grants and legacies — are already well addressed under existing guidance and are therefore expected to see limited practical change.
However, charities undertaking more commercial activities may need to reassess:
- when income is recognised;
- how contractual obligations are measured; and
- whether current accounting policies remain appropriate.
Trustees should ensure finance teams understand how income arrangements operate in practice before the first year of adoption.
One of the most noticeable accounting changes relates to lease arrangements. At present, many lease costs are recognised as annual expenditure with future commitments disclosed in the notes to the accounts. Under the revised rules, most leases will instead require:
- recognition of a right-of-use asset; and
- recognition of a corresponding lease liability.
This means charities may report materially higher asset and liability balances than under existing accounting policies.
Charities with office leases, equipment leases or property arrangements should consider:
- gathering lease data now;
- assessing system requirements; and
- modelling the financial statement impact before transition.
Limited exemptions will continue to apply to certain short-term and lower-value arrangements.
The revised SORP also introduces a more proportionate approach to narrative reporting through a tiered disclosure model. The proposed categories are:
- Tier 1: income below £500,000 – streamlined reporting requirements;
- Tier 2: income between £500,000 and £15 million – expanded disclosure expectations;
- Tier 3: income above £15 million – enhanced reporting and transparency requirements.
The intention is to improve the usefulness of charity reporting while reducing unnecessary burden for smaller organisations.
Separately, proposed legislative changes may increase the thresholds determining the level of independent review required. Current proposals include:
- increasing the independent examination threshold from £25,000 to £40,000; and
- increasing the statutory audit threshold from £1 million to £1.5 million.
If implemented, some charities may become eligible to move away from statutory audit, potentially reducing compliance costs.
However, trustees should consider more than the legal minimum. Audit can continue to provide value through:
- stronger governance;
- increased confidence for grant funders;
- lender requirements; and
- enhanced assurance for donors and stakeholders.
These developments should not be considered in isolation. Accounting changes may affect reported balances and could influence whether audit thresholds are met. Although implementation dates may appear some way off, charities that begin planning now will be better positioned to manage the transition effectively and maintain strong financial governance.
Trustees and finance teams should review the likely impact early and obtain professional advice where changes are expected to be material.
