Reserves
What are reserves?
Reserves are:
•Funds belonging to a charity that are unrestricted and freely available to spend.
•Exclusions include; restricted income funds and endowment funds, land, buildings and other assets held for the charities use, as well as amounts designated for future spending (Trustees must identify restricted funds in order to determine what may be spent.)
•A budget identified to meet peaks or troughs in cash flow
•Not static - As circumstances or environment change so should the reserves policy
Why hold reserves?
•To cushion the blow of set backs
•To take advantages of changes and opportunity
•To evidence the project has been forward planned and will be resilient in the future
•To evidence to funders there has been detailed planning and foresight to maintain success in the future.
Reserves held by a charity, whether it is a company, trust or association are in the legal duty of a Trustee to decide, publish, implement and monitor. Commission expect this to be managed by a reserves policy.
Trustees have a legal duty to:
•Act in the charities best interest
•Manage the charity resources responsibly
•Act with reasonable care and skill
This means that the Trustee should implement a reserves policy to:
•Justify/explain keeping or not keeping reserves
•Plan for maintaining essential services to beneficiaries
•Reflect the risk associated with unplanned closure
•Address the risk of unplanned closure on beneficiaries
•Be published showing how and when reserves will be used. Larger charities must publish the risk assessment in the annual report.
•Be assured is in place and operating
•Not just be year-end monitored. Although annual reports will show the monitoring, risk management and effectiveness of reserves; any interim changes need to be reflected efficiently in the policy.
•State how often the policy will be reviewed.
•For those who are preparing accruals accounts, by law must set out a reserve’s policy, or reasons for not holding reserves in the Trustees’ annual report.
Reserves need to be justified
•Income held in reserve needs to be justified by a Trustee. Thus a reserve policy that is failed to be reported is an indication that a Trustee has not exercised their legal power correctly. Good reporting of a charity reserve policy can show a Trustee is acting on legal powers properly.
How much money should be held in reserve?
•Although there are needs to justify reserve funds there is no legally required amount to hold in reserve.
•Reserves should be set on a basis with the best evidence available, i.e. to meet future need, contingency and risk e.g. recession
•In 2010 average reserves held in the voluntary and community sector equated to 14 months expenditure, however it is important to remember that in Rotherham 34% of the voluntary and community sector have less than one month’s expenditure in reserve.
Low, high or zero reserves
•If set at zero or low level there is risk involved e.g. if there is sudden closure or large fees incurred by the charity this could have disastrous implications for vulnerable beneficiaries.
•If the reserves become an unacceptable level the trustee must look to spend or replenish the amount in line with the policy.
•Ways to tackle low reserves may be: fundraising, diversifying the fund base, or migrating risks associated with lack of reserves.
Can reserves be invested?
•A Trustee may decide to invest reserves; this is only acceptable where the investment can be readily realised as cash when needed.
•Charities that are subject to statutory audit are required by Regulations and Charities SORP to set out investment policy, this includes invested reserves.
Tax
•Reserves held should not have any adverse tax implications.
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