SORP 2026 and community assets: practical implications

The SORP Making Body has published a help sheet which provides guidance and examples for implementing the new leasing requirements. The helps sheet is in three parts: an introduction, leases at market rent, and social donation leases, including some community asset leases. 

For charities and community organisations occupying property on favourable terms, SORP 2026 means that leases will need closer attention than in the past. This is particularly relevant to community asset arrangements, where properties are often provided by local authorities for a peppercorn or substantially below-market rent. 

The key message is simple: don’t just look at the rent. Look at the whole agreement.

Is it actually a lease?

Under the revised SORP/FRS 102, arrangements involving nominal or peppercorn payments, may not meet the accounting definition of a lease because the payments are not substantive.

That does not mean they can simply be ignored. Organisations will need to consider whether the benefit of using the property represents a donated asset, facility or service.

Where rent is substantive, the arrangement may be a lease requiring recognition of a right-of-use asset and lease liability. This can significantly increase both assets and liabilities on the balance sheet.

Below-market rent needs further investigation

If an organisation pays £10,000 a year for a property that would normally rent for considerably more, it should ask why.

There may be a social donation element, potentially resulting in additional income being recognised. However, organisations should be cautious about simply comparing the rent with the unrestricted commercial market rent.

Community asset agreements often restrict how buildings can be used. A property restricted to community activities, for example, may have a very different rental value from the same building available for unrestricted commercial use.

Restrictions or performance obligations?

Agreements may also require organisations to maintain facilities, open them for specified periods or provide particular community services.

An important distinction is whether these are simply restrictions on the use of the property or actual performance obligations requiring services to be provided. This could affect when and how associated income is recognised under the new income recognition requirements.

Check the lease term

Finally, don't assume that a 25-year lease automatically means a 25-year accounting liability. Break clauses, termination rights and extension options may affect the lease term used for accounting purposes.

What should organisations do now?

Start by creating a list of property arrangements and obtaining the underlying agreements. For each one, establish:

• whether it meets the accounting definition of a lease;
• whether the rent is peppercorn, below-market or commercial;
• what restrictions apply to use of the asset;
• whether there are obligations to provide services;
• whether there is a donation or grant element; and
• what break, extension and termination clauses exist.

Take professional advice as may be needed. 

Written by: Neal Trup, Adviser and member of the SORP committee