New lease accounting for charities: key questions trustees and finance teams should be asking now

Many charities are aware that lease accounting is changing under the revised FRS 102 and Charity SORP 2026 requirements, but fewer have started to work through what the changes will mean in practice.

For many charities, this will be one of the most significant changes to financial reporting in recent years. While the technical accounting implications have received significant attention, trustees and finance teams are increasingly focused on the practical questions: what information needs to be gathered, who needs to be involved and where should organisations start?

For an overview of the wider Charity SORP 2026 changes, including trustee responsibilities and implementation considerations, you can refer to our article on Charity SORP 2026: key changes, trustee action and compliance tips. For a more detailed explanation of the technical accounting requirements, see our FRS 102 changes guide.

At a glance

Key takeaways

• Lease accounting is expected to be one of the most significant implementation challenges arising from Charity SORP 2026.
• Many charities are surprised by how much information they need to gather before calculations can begin.
• Peppercorn and social donation leases require separate consideration.
• Organisations that start preparing early are likely to experience a smoother transition.

Who is affected and when?

The requirements apply to accounting periods beginning on or after 1 January 2026.

Charities preparing accounts for a period other than 12 months should take particular care, as this may affect when the new requirements first apply.

Have we identified all our leases?

The biggest challenge is often not the accounting itself but identifying all the arrangements that need to be reviewed.

Charities should not underestimate the work involved in identifying leases, gathering information and considering charity-specific arrangements. Much of the effort sits outside the finance team, particularly where agreements are held across different departments.

Most charities immediately think of property leases. However, the requirements may also apply to vehicles, equipment and some service contracts that give the charity control over the use of a specific asset.

Equally, not every arrangement that looks like a lease will meet the accounting definition of a lease.

This is an area where charities cannot simply rely on their accountants or auditors. Someone within the organisation needs to identify the arrangements, locate the agreements and understand the key commercial terms.

Practical tip

Create a register of lease and lease-like arrangements and gather details of:

• lease terms
• payment schedules
• break clauses
• extension options
• incentives

Do any of our leases qualify for an exemption?

Not every lease will be brought onto the balance sheet.

The revised requirements include exemptions for certain short-term leases and low-value assets. Where an exemption applies, lease payments generally continue to be recognised as expenditure over the lease term.

Short-term leases are broadly those with a lease term of no more than 12 months and no purchase option.

The low-value exemption is more judgemental. FRS 102 does not provide a monetary threshold, and the exemption is not intended for significant assets. Property leases will not generally qualify.

Practical tip

Identify potential exemptions before spending time preparing lease calculations. This can help finance teams focus their efforts on the arrangements most likely to require detailed analysis.

Do we have any peppercorn or nominal rent arrangements?

This is one of the areas where charities differ most from commercial organisations.

Many charities occupy premises for a nominal rent, perhaps paying £1 a year to a local authority, housing association or benefactor. While these arrangements may have the legal form of a lease, they are unlikely to meet the definition of a lease under FRS 102 because the payments due are nominal or nil.

The charity-specific guidance makes clear that, rather than applying the normal lease accounting requirements, charities should consider the benefit being received and whether they are receiving a donated asset, facility or service.

The Charity SORP helpsheets include worked examples to help charities assess these arrangements.

Practical tip

Do not assume that a peppercorn arrangement can simply be put through a lease calculator. Peppercorn arrangements are generally outside the scope of Section 20 and should instead be considered under the charity-specific guidance on donated assets, facilities and services.

Are we receiving a below-market rent because we are a charity?

The revised SORP introduces the concept of a social donation lease.

These arise where a landlord accepts less than market rent because it wishes to support the charity’s activities. Unlike peppercorn arrangements, the charity pays more than a nominal amount but still receives a benefit because of its charitable status.

A useful question to ask is whether the landlord would offer the same terms to a commercial tenant. If the answer is no, the arrangement may require further analysis.

These arrangements can result in both lease accounting entries and donation income being recognised.

Practical tip

Identify subsidised or below-market property arrangements early. They often require more judgement than standard commercial leases.

What discount rate will we use?

For many charities, this is likely to be one of the most challenging areas of judgement.

The lease liability is measured using discounted future lease payments. Commercial organisations can often look to existing borrowing arrangements for evidence of borrowing rates. Many charities, however, borrow infrequently or not at all.

The charity-specific guidance recognises this and may allow charities, in some circumstances, to use deposit-based rates as a starting point where borrowing rates are not readily available.

Ultimately, the rate remains a management judgement that must be supported by appropriate evidence.

Where Saffery is the auditor, we can explain the requirements and discuss relevant guidance, but independence requirements mean that the charity must determine its own assumptions and calculations.

Practical tip

Document the evidence supporting the chosen discount rate before the audit begins.

What happens on transition?

This is one of the questions we are hearing most frequently from charities beginning to assess the impact of the changes.

A common area of confusion is whether prior year figures must be restated.

The answer is no.

The new requirements use a modified retrospective approach. Comparatives are not restated. Instead, charities calculate lease liabilities and right-of-use assets at the transition date, being the first day of the first accounting period under the new requirements, and recognise any resulting difference through opening reserves.

The first set of accounts under the new rules may therefore include new right-of-use assets, lease liabilities and an opening reserves adjustment, but no restatement of the comparative year.

Trustees should also consider whether the transition adjustment could affect reserves, ratios or covenant calculations.

Practical tip

Do not wait until the year end. The transition calculation is performed at the start of the first accounting period under the new rules, meaning information will need to be gathered well before the first accounts are prepared.

What could this mean for reserves and other financial metrics?

For many charities, the most visible impact will be the appearance of new assets and liabilities on the balance sheet.

Although lease accounting does not usually change the underlying economics of an organisation, it may affect reported reserves, balance sheet totals, financial ratios and banking covenants.

The Charity SORP helpsheets also note that right-of-use assets used in the charity’s activities may need to be excluded from unrestricted funds when calculating free reserves.

Where key metrics are reported to trustees, funders, regulators or lenders, charities should consider whether additional explanations will be needed when the first accounts under the new rules are prepared.

Practical tip

Model the potential impact early and brief trustees before the first draft accounts are produced.

Have we thought about disclosures as well as calculations?

Calculations often receive most of the attention, but gathering information for disclosures can be equally time-consuming.

The changes are not simply a balance sheet exercise. Charities will need additional disclosures about lease arrangements, right-of-use assets, lease liabilities and certain charity-specific transactions.

The Charity SORP helpsheets also cover areas such as social donation leases and contracts containing both lease and non-lease elements.

In practice, gathering the information needed for disclosures can sometimes take longer than preparing the calculations themselves, particularly where information is held across multiple teams.

Practical tip

Consider disclosure requirements alongside the calculations from the outset.

Where can charities find further guidance?

The Charity SORP-making body has issued three lease accounting helpsheets covering topics including identifying leases, available exemptions, peppercorn arrangements, social donation leases, discount rates, lease calculations and illustrative disclosures.

The helpsheets include practical examples and are likely to be one of the most useful resources for charities working through a specific issue.

How Saffery can help

Preparing for the lease accounting changes is about more than understanding the technical requirements. For many charities, the biggest challenge will be identifying lease arrangements, gathering the necessary information and determining how the new requirements apply to their specific circumstances.

Our charities specialists are already helping organisations assess the practical implications of the revised FRS 102 and Charity SORP requirements, including reviewing lease arrangements, identifying areas requiring further consideration and supporting implementation planning.

If you’d like to discuss how the lease accounting changes could affect your charity, please get in touch.