Many charities rely on lease arrangements to operate, from office space and retail units to vehicles and other equipment. These lease accounting changes apply to incorporated charities that are registered with the Charity Commission and prepare accounts under UK accounting standards.
However, upcoming changes to lease accounting mean these arrangements may soon look very different on your financial statements.
What are some of the key changes?
Under the updated lease accounting rules, most leases will now need to be recognised on the balance sheet, with exemptions for short-term leases and low value assets. The updated lease accounting rules do not apply to charities or companies that prepare their accounts under FRS 105 (micro-entities).
This means charities will record:
- A lease liability (representing future lease payments)
- A right‑of‑use asset (reflecting the use of the leased item)
Previously, many operating leases sat off balance sheet, with costs recognised simply as rental expenses.
Why does this matter for charities?
For affected incorporated charities, bringing leases onto the balance sheet may:
- Increase reported assets and liabilities
- Affect reserves, covenants and key financial ratios
- Change how trustees, funders and stakeholders view the charity’s financial position
While cash flow remains unchanged, the way leases are presented and explained will need careful consideration.
What next steps should charities take?
Charities should start by:
- Reviewing existing lease agreements
- Identifying which leases will be affected
- Considering the impact on accounts, budgets and trustee reporting
How can PM+M help?
The PM+M team can guide you through the latest lease accounting changes and help ensure your business is fully prepared and compliant.
For further information or to discuss your individual circumstances, please contact Dean Rodgers using the button below.
