May SORP update webinar - Q&A summary

Q: Do all rental operating leases need to be included? 

A: Yes, unless the term is shorter than 12 months (or less than 12 months remains at the date of transition – 1 January 2026, if the year-end is 31 December 2026). The other exemption is for low value items, but land and buildings, motor vehicles, trains, ships, aeroplanes and other heavy plant cannot be classified as a low value lease.

Q: Do you have to do a net present calculation on the lease?   

A: Yes, unless it meets one of the exemption criteria above (low value assets and lease terms less than 12 months).

Q:  How do rent-free periods factor into the new lease accounting rules? Are they reflected via the discounting of the (cash) lease payments, or are they averaged over the life of the lease? 

A: Rent-free periods are factored into the cash payments in arriving at the discounted lease liability (which is then the starting point for determining the right of use asset). There will no longer be an accrual for rent-free periods as it is part of the discounted liability, and instead of the release of the accrual each year the benefit of the incentive will be lower depreciation/ interest charges as the right-of-use asset and the lease liability will both be lower than they would have been without the lease incentive.  

This will effectively spread the benefit over the life of the lease, so same outcome (subject to fluctuations in the interest charge over time) but a slightly different method.

Q: Previously, only lease commitments up to the break clause had to be disclosed. Is there any change to this under the new SORP with discounting future payments? 

A: The SORP states that the lease calculations need to include the ‘non-cancellable period’ which would normally be the period to the first break clause. However, paragraph 10B.39 states that if the organisation is ‘reasonably certain’ that a break clause will not be taken then the full lease term can be included. ‘Reasonably certain’ is a judgemental area and it is difficult to know in advance exactly what decisions are made so this approach is likely to be relatively rare.  

Q: How is the discount rate decided?  

A: The SORP specifies that the default discount rate is the implied rate in the lease but this is not always easy to determine if not stated in the lease. If this is the case the following options are permitted:

• the charity’s incremental borrowing rate which is defined as the rate of interest a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment;  
• the charity’s obtainable borrowing rate which is the rate of interest the charity would have to pay to borrow, over a similar term, an amount similar to the total undiscounted value of the lease payments to be included in the measurement of the lease liability; or  
• the rate of interest that it could otherwise obtain on deposits held with financial institutions.

Q: Would we need to include operating leases which don’t have discount rates (in the lease documentation)?  

A: Yes. You will need to follow the criteria for setting a discount rate set out in the SORP (summarised above).  

Q: Is VAT included in the lease payments?  

A: This is not explicitly stated in the current version of the SORP and we hope for clarification in the final version. Our view is that any irrecoverable VAT incurred on lease payments should be include in the calculations.  

Q: Does the lease liability need to be split between creditors less than one year and creditors more than one year?  

A: Yes. See the example on slide 23 in the presentation which shows this.  

Q: What happens with Lease income disclosure (i.e. a Charity receives rent for investment properties) or are there no proposed changes? 

A: Paragraph 10B.104 states that ‘As a lessor there remains a distinction between an operating lease and finance lease. The lessor must classify the lease to be a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset otherwise it is classified as an operating lease’. In the context of this question where a charity has an investment property which is let, assuming the lease has a fixed term which is not so long that it is an effective disposal then this would continue to be treated as an operating lease and income recognised as received.   

Other useful links: 

• Watch the full webinar here.
• Read the full SORP here.
• Join the consultation here.