One change in the new Charities Statement of Recommended Practice (SORP) deserves a place on every board agenda: charities will generally need to bring their leases onto the balance sheet.
If your charity rents a building, leases vehicles, or has a long-term equipment contract, your next set of accounts could look quite different. Trustees approve those accounts, so it pays to understand the change now rather than at year-end.
In this blog, Johnathan Dight, Director at Bevan Buckland, explains what is changing, how it will affect your accounts, and what trustees can do now to prepare.
What Is Changing
The old split between operating leases and finance leases disappears for charities that lease assets. Under the previous SORP, operating lease rentals simply went through the Statement of Financial Activities (SOFA) as an expense, and the future commitments sat in a note.
Under SORP 2026, a charity that is a lessee will generally recognise two new items on the balance sheet:
- A right-of-use asset, representing the charity’s right to use the building, vehicle or equipment for the lease term. This is depreciated, usually over the lease term.
- A lease liability, representing the present value of the lease payments still to be made. This unwinds over time, with an interest charge each year.
Lease liabilities must be shown as a separate line on the balance sheet.
Two recognition exemptions are available, and using them is an accounting policy choice for trustees. Short-term leases of 12 months or less can be exempted by class of asset, and low-value assets lease by lease. The SORP gives laptops, tablets, phones and small office furniture as typical low-value assets. Cars, vans, lorries, boats and land and buildings can never be low value, however small the payments.
How Your Accounts Will Look Different
The total cost of a lease over its life stays the same, although where and when it appears will change. Trustees should expect movement across every primary statement.
The balance sheet gets bigger. Both fixed assets and liabilities increase. A charity with a long property lease could see its gross assets and liabilities rise substantially overnight, even though nothing about its operations has changed.
The SOFA changes shape and timing. A single rent line is replaced by depreciation and interest. Because interest is highest when the liability is largest, total costs are front-loaded: higher in the early years of a lease and lower towards the end. Charities will also need to allocate these costs across activities (charitable activities, raising funds, support costs) on a sensible basis.
The cash flow statement changes. Cash paid is the same, but payments of the principal portion of the lease liability move into financing activities. Interest payments and payments on exempt short-term or low-value leases stay in operating activities. Operating cash flow will therefore look stronger.
Reserves may look different. Net assets will typically dip slightly in the early years of a lease. The SORP asks charities to consider the implications of leases for their reserves calculation, and the glossary definition of reserves now specifically mentions the impact of lease liabilities. Trustees should check that the reserves policy and free reserves figure treat right-of-use assets and lease liabilities consistently.
Ratios and covenants can move. Cost ratios, gearing measures and any bank or funder covenants based on the accounts may be affected.
A Simple Illustration
Take a five-year office lease at £50,000 a year, paid in arrears, discounted at 5%. On day one the charity recognises a right-of-use asset and a lease liability of about £216,500. The SOFA charge then looks like this:
| Year | Old rent charge (£) | Depreciation (£) | Interest (£) | New total charge (£) |
| 1 | 50,000 | 43,295 | 10,824 | 54,119 |
| 2 | 50,000 | 43,295 | 8,865 | 52,160 |
| 3 | 50,000 | 43,295 | 6,808 | 50,103 |
| 4 | 50,000 | 43,295 | 4,649 | 47,944 |
| 5 | 50,000 | 43,295 | 2,381 | 45,676 |
| Total | 250,000 | 216,475 | 33,527 | 250,002 |
The total over five years is the same (allowing for rounding), but year 1 costs about £4,100 more than before. For a charity with many leases, that timing difference can be material to the reported result.
Areas That Need Particular Care
Beyond the headline changes to the balance sheet and SOFA, there are a number of areas where charities will need to apply particular judgement:
- Peppercorn arrangements
- Social donation leases
- The discount rate
- Lease term judgements
- What sits inside the contract
- Transition
- New disclosures
These areas were covered in detail in our previous webinar on the changes.
How to Prepare
The charities that find this easiest will be the ones that start before their year end. A practical plan looks like this:
- Build a lease register. List every lease and lease-like contract: property, vehicles, equipment, IT and storage. Record start and end dates, payments, break clauses, options and rent reviews.
- Apply the exemptions. Identify which leases are short-term or low-value and can stay off the balance sheet.
- Gather the documents. Make sure you hold signed copies of each agreement. Missing paperwork is one of the most common causes of delay.
- Agree the key judgements. Settle the discount rate, lease terms and treatment of any concessionary leases, and write down the reasoning.
- Model the impact. Run the numbers on your opening balance sheet, the first-year SOFA and your reserves. Compare against budgets, KPIs and any covenants.
- Talk to stakeholders early. Brief funders, lenders and the board so a larger balance sheet or a dip in net assets comes as no surprise.
- Review your reserves policy. Decide how right-of-use assets and lease liabilities feed into free reserves, and update the policy wording if needed.
- Update systems and budgets. Make sure your finance system and future budgets can handle depreciation, interest and lease liability schedules.
- Speak to your auditor or independent examiner. Agree your approach and the transition disclosures well before the accounts are drafted.
Five Questions to Ask at Your Next Board Meeting
Trustees do not need to become lease accounting experts, but they should be confident the charity is ready. These questions are a good place to start:
- Do we have a complete list of our leases, and who owns it?
- Roughly how much will our balance sheet grow, and how will our first-year result change?
- Do we have any peppercorn arrangements or social donation leases, and how will we value any donated element?
- Will our reserves figure, KPIs or any loan or funder covenants be affected?
- Have we agreed our approach with our auditor or independent examiner?
Lease accounting leaves what a charity spends unchanged and alters how the accounts present it. With early preparation, trustees can ensure the picture is clear, accurate, and well explained to funders, supporters, and regulators.
How We Can Help
Every charity’s leases are different, so the effect on your accounts will be too. Johnathan and our charity team can review your lease agreements with you, show you what they would look like on your balance sheet and plan what needs doing before your next year-end. Please email mail@bevanbuckland.co.uk or call 01792 410100, and we will find a time to go through your leases with you.
