In the UK, FRS 102 is the key financial reporting standard for small and medium sized organisations.
The Financial Reporting Council issued amendments to FRS 102 in March 2024.
The Charity SORP is based on the underlying accounting standard FRS 102, and therefore these changes are also within the new SORP, effective for periods beginning on or after 1 January 2026.
The revised FRS 102 and the new Charity SORP include changes that will alter the way lessees treat leases in their accounts.
Finance & operating leases
A finance lease is where an asset (vehicle, machinery, etc.) is loaned long-term and transfers most ownership risks/rewards to the lessee, who makes payments covering the asset’s full value plus interest. These leases often include an option to buy the asset at the end for a reduced fee.
An operating lease is where an asset is rented for a set period, where the lessor keeps most ownership risks/rewards. The lessee pays to use it, returning when the lease expires, not buying it.
Currently, finance leases are recognised on the balance sheet as an asset and a liability. Operating leases are not included on the balance sheet, and lease payments are recorded as an expense within the Statement of Financial Activities.
What’s changing?
The revisions to FRS 102 will now mean most operating leases must be recorded on the balance sheet, with exemptions for short leases (less than twelve months) and low value assets.
Lessees will now need to recognise both a right of use asset and a lease liability on their balance sheet, as well as accounting for depreciation and interest on each of these elements through the Statement of Financial Activities.
This will have the effect of increasing the value of assets and liabilities on the balance sheet compared to the existing rules. Consequently, this will alter balance sheet metrics, affecting how the charity’s financial position appears. Initially, this may raise some questions from grant funders or other third parties, until the treatment is understood more universally.
Another effect of the changes will be that recognising right-of-use assets will increase the gross assets of a charity that leases assets. This could impact the charity’s audit or examination obligations.
How should your charity act?
Document all your lease agreements consistently in one place. Ensure you are detailing terms, payment schedules, options and index clauses. Check non-lease contracts to see if they contain any hidden leases. When it’s relevant to your financial statements, it will be helpful to have all the information together.
Lease agreements might include assets such as:
- Buildings/facilities
- Vehicles
- IT equipment
- Office equipment
If you think that the change to your balance sheet will be significant, you may wish to communicate with key stakeholders (donors, lenders, staff) to explain.
If your organisation is an unincorporated charity or a Charitable Incorporated Organisation and has income below £500,000, it is possible to avoid these lease changes by adopting receipts and payments accounts instead.
Need some guidance?
Are you concerned by how these changes might affect your organisation? Please contact us and member of our team will be happy to explain what could happen and determine appropriate actions for you to take.
