Writing a reserves policy

The charity sector is unique in its reporting of reserves, and this is one of the most important policies included within your annual financial statements.

The aim of the reserves policy is to explain to users why the charity has reserves, and what they are held for. The Charity SORP is a good place to start when writing your policy. It has the following reporting requirements (see SORP 1.48):

1. State the total level of reserves at the period end
2. Identify any which are restricted and not available for general use
3. Identify and explain material amounts that have been designated/otherwise committed
4. Indicate the likely timing of those amounts designated/otherwise committed
5. Identify the amounts that can only be realised by the disposal of tangible fixed assets/programme related investments
6. State the amount of reserves the charity holds after making an allowance for designated and restricted funds, and the carry amount of functional assets and commitments (the free reserves)
7. Compare the free reserves with the target amount set by the Trustees

I wanted to pick up on why following this guidance is so important and how it helps users of your accounts to understand your charity. Often a charity may have a high value of reserves, indeed a balance sheet that is in the millions, but that does not mean that the charity has millions available to spend. Users of the accounts can easily misinterpret your accounts, and it is for this reason that you must set a clear policy.

Following the requirements above, you need to decide why you are holding funds, and what your plans for them are. You need to identify those funds that are restricted/in permanent endowment funds or tied up in the carrying value of functional assets. This will leave a balance that the Trustees can choose how to present in the accounts. The two classifications these will be presented in will be designated funds, or unrestricted general funds.

If your business plans have specific projects earmarked, or there is an intention to put money aside for a specific purpose, you may consider designating these funds. Designations are at the charities discretion, and are not legally binding, but a useful tool to explain your plans for reserves. Examples could include:

• A designated fund for increased PPE costs under COVID conditions
• A fund for fixed asset repairs and maintenance/future replacement
• A fund to cover shortfalls in uncertain income streams – for instance legacy income that can vary year to year

Designated funds can be undesignated if it is required in future years should plans and needs change.

After you have designated funds, you will be left with your unrestricted general funds. These are the funds held in reserves in the charity for general use. You need to be careful to not hold too much (and therefore not spending on your beneficiaries), or too little (not having enough for unforeseen events threatening the future of the charity).

A good tip when setting your target level, is to consider the risks that your charity faces, and risks factored into you budgets and forecasts, and base the target on this. For instance, you may be a charity that relies heavily on fundraising events, and so you may consider given the uncertainty of the events happening, it is prudent to hold a higher level of reserves to be able to cover fluctuations in funding. On the other hand, you may be a charity that largely provides services to the public under a long-term contract (with the local authority for example), and the risks and uncertainty surrounding your income is lower. Your risk may therefore be more around cost pressures, which if the contact has a defined and predictable delivery level, may result in a lower level of reserves needing to be held due to less uncertainty.

It is important to read your policy through from the viewpoint of third parties, especially those who could be providing you with funding, and to make sure that any concerns that they may have are addressed as part of this policy.

If you would like help preparing your policy, please contact a member of Bishop Fleming’s Charity and NFP team, who would be more than happy to help.