Charity accounting and assurance are entering a new period of significant change, with a new SORP with revised thresholds for audit and independent examination. These reforms are designed to reduce unnecessary burden on smaller charities whilst sharpening the focus on clarity, proportionality and narrative reporting. The Charities Statement of Recommended Practice (SORP) 2026 introduces significant updates aligned with changes to FRS 102. These apply to financial periods starting on or after 1 January 2026. We examine these changes in detail within this article.
Independent examination vs audit – what is the real difference?
Both an audit and an independent examination involve an external review of your accounts by an independent person, but they are not interchangeable. The crucial distinction is the level of assurance and the exact wording that ends up in your financial statements. An independent examination is a lighter-touch approach, minimising costs and does not have to be performed by a regulated audit firm, although it is sometimes required to be completed by an accountant of a professional body. An audit on the other hand is the more intensive approach, but this higher level of financial assurance is often preferred or required by funders, banks and some governing documents.
Here at Counterculture, our finance team offers a wide range of strategic and technical support, wrapped up in a flexible and tailored approach. We bring extensive experience from working with a wide range of charitable organisations, from small to household names, and in multiple sectors. Whilst Counterculture is not an audit firm we are able to undertake independent examinations for charities within the thresholds (see below) and can assist you with your audit tendering process as needed. We work closely with associate firms – including auditors – who we can introduce you to as needed.
SORP 2026 – towards more proportional reporting
- New Three-Tier Reporting Framework
Charities will now report under one of three tiers based on income:
- Tier 1: Income up to £500,000
- Tier 2: Income between £500,000 and £15 million
- Tier 3: Income over £15 million
Only Tier 3 charities must prepare a Statement of Cash Flows, so many organisations will actually see a reduction in mandatory reporting. However, charitable organisations will still need to adhere to the regulatory laws when deciding how to reorganise their financial reporting obligations. If the charity is a charitable company, the requirements of FRS 102 must still be followed and exemption from the preparation of a Statement of Cashflows can only be claimed if the charitable company is a small company.
- Lease Accounting
Charities must now recognise most operating leases on the balance sheet as right-of-use assets with corresponding liabilities. This change may significantly affect reported assets and liabilities.
- Income Recognition – New Five-Step Model
The previous “entitlement, probable, measurement” approach has been replaced with a five-step model for exchange transactions:
- Identify the contract with the third party
- Identify the performance obligations
- Determine the transaction price
- Allocate the price to the obligations
- Recognise income as obligations are satisfied
Charities must assess whether obligations are fulfilled over time or at a point in time and, apply consistent measurement methods. It is our recommendation that a grant register is used so this assessment can be done and applied consistently during the course of each grant agreement.
- Trustees’ Annual Report – Expanded Requirements
All charities must now ensure the narrative links clearly to the financial statements and is fair, balanced, and understandable.
- Tier 1: Must align activity reviews with expenditure analysis.
- Tier 2 & 3: Must provide more detail on short- and long-term objectives; volunteer contributions (including hours or staff equivalents); environmental, governance and social matters/impact reporting; and legacy recognition. These changes aim to improve relevance and accessibility for stakeholders.
These changes are less about adding red tape and more about helping trustees present a coherent, decision-useful story about performance and impact.
- Social Investments, Provisions & Contingencies
- Social investments: Simplified definitions and disclosures aligned with the Charities Act 2011.
- Provisions and contingencies: Revised guidance to improve clarity and consistency across the sector.
- Other disclosure points
The updated SORP also includes a number of additional disclosure and presentation changes. These have been made with a view to assist the users understanding of the financial statements; which we will delve into when assisting our clients as part of the year end accounts preparation process.
- Threshold Changes – On the Horizon
From 1 October 2026, subject to final confirmation, to assist smaller charities reduce the regulatory burden, the thresholds applicable to the financial statements will be changing:
| Requirement | Current threshold | New threshold (from 30 September 2026) |
| Accounts must be independently examined | Income over £25,000 | Income over £40,000 |
| Examination must be by a professionally qualified Independent Examiner | Income over £250,000 | Income over £500,000 |
| Non-company charities can choose to produce receipts and payments accounts | Income below £250,000 | Income below £500,000 |
| Accounts must be audited | Income over £1,000,000 Assets over £3,260,000 |
Income over £1,500,000 Assets over £5,000,000 |
Practical next steps
Begin reviewing leases, income streams, and reporting practices now to prepare for the transition.
How our consultants and finance team can help
Our consultants and finance specialists work with charities of all sizes and complexity, from small community organisations to large national providers. We can:
- explain the new SORP, thresholds and assurance options in plain language for trustees and senior leaders;
- review your current audit or independent examination position and model the options open to you under the new thresholds;
- assess the likely impact of lease and income recognition changes on your balance sheet and reserves;
- support you in redesigning your Trustees’ Annual Report so that the narrative and numbers tell a coherent, compelling story;
- provide hands‑on help with year‑end accounts preparation, including training for your finance team and project managers.
Whether you are considering moving from audit to independent examination, preparing for your first audit, or transitioning to using the new SORP, our team can guide you through the detail and help you make confident, well‑informed decisions.