The new SORP (Statement of Recommended Practice), applicable in the UK to financial years commencing 1 January 2026 onwards, has two changes for accounting methods. These are:

• Revenue Recognition
• Lease Liabilities

The guidance for revenue recognition is available in this document: FRS 102 Factsheet 10. The guidance for lease liabilities is in this document: FRS 102 Factsheet 11.

Revenue Recognition

The revenue recognition methodology is reasonably straightforward. It applies to revenue which is restricted and implies a deliverable in some sense to the benefit of the grantor. One could classify grants or funding from grantors which are restricted as follows:

1. A straightforward sales contract with payment points linked to performance.
2. A payment referred to as a grant but for a restricted project which in fact implies a set of deliverables to the grantor.
3. Payments from the grantor for a service which is identifiable as belonging to the grantor or exclusively provided to 3^rd parties by the grantor. For example, which is branded or at least co-branded with the grantor’s logo, intended to communicate some kind of ownership of the service by the grantor.
4. Funding which is restricted by the grantor but which is for the kind of thing the charity does anyway and is simply restricted to types of expenditure or particular activities.

Cases A, B, and C (but not D) are all cases where there is a contractual deliverable for the benefit of the grantor. So in these cases there is a need to recognize revenue only when those deliverables are delivered, just as if they were all cases of type A. This means that, regardless of when you receive the money, the revenue can only be recognized when deliverables are made and to the appropriate value for that deliverable. I would recommend that you create invoices associated with these deliverables dated on the delivery date. Code as either sales or grant income as you intend to report it.

If you receive money in advance of these deliverables, you will need to account for that as income in advance (prepayment) and then follow the procedure: Apply a customer’s credit to an invoice – Xero Central .

Lease Liabilities

Charities are already expected to indicate in their annual report the extent to which they have a future liability for lease payments for long term leases. That is for those leases which go beyond 12 months. That liability is simply recorded but is not on the balance sheet and hence affecting the net reserves of the organisation.

SOAP 2026 now requires us to put that liability on the balance sheet. As a liability it reduces the net value of the organisation but it is balanced (at the start) by the right of use of the property which is being leased, which is entered as an asset. Over time both of these are reduced. The way this is done is a bit complicated and to my mind is a bit unfair to impose on small charities, who probably have not the most expert people doing the bookkeeping and accounting. Nevertheless, it has to be done.

So you have to look at what significant items, that is of sufficient value, you are leasing over a period of more than 12 months. And you have to look at the guidance on what is the period which in practice you are regarded as committing yourself for. This can be more than the legal contractual minimum if there is a strong likelihood that you will go beyond that. That determines the total amount of lease payments that you are liable for over that time horizon. Then these are discounted by a discount factor to give what is called their present value. And to do this discounting you need an interest rate. You should see the guidance on what that interest rate could be, but note that as a charity which may not be borrowing money you are permitted to use your savings rate as the discount rate.

And then you attribute lease payments not to direct rental cost but split between so called interest on your outstanding lease liability and reduction of that lease liability. i.e., it is just like a mortgage payment. The asset value of this so called “right to use” also starts off as the present value of all the lease payments you are liable to make in the future. But then like other assets this is depreciated according to your depreciation policy, most probably straight-line depreciation to the end of the lease.

It’s a bit complicated and I don’t pretend to try and explain here how exactly to do it. You probably want to get your examiner, auditor, or well-trained accountant to do it. There is guidance here on the actual mechanics of doing a building lease, which at any rate I can follow.

If one were permitted a 0% discount factor, then there would be no practical impact on reserves or net income. Since one has to use a positive discount factor, the initial reduction in the lease liability is less that the depreciation of the asset value. This consequently reduces net income and hence reserves but the phenomenon reverses as the lease progresses so that we are back to no net effect on reserves at the end of the lease.