CHARITY RESERVES

WHAT CHARITIES SHOULD BE DOING

CC19 Charities Reserves

1.                  To provide reliable services or funding over the longer term, charities must be able to absorb setbacks and to take advantage of change and opportunity.

2.                  Responsibility for establishing an appropriate reserves policy lies with the trustees of each charity, as does the responsibility for justifying and explaining what the charity is doing in that respect.

3.                  There is no specific legal rule about the amount or proportion of a charity's income funds which it is allowed to hold as a reserve.

4.                  Trustees are under a general legal duty to apply charity funds within a reasonable time of receiving them.

5.                  People who give or leave money to charities do not usually specify whether their donation or legacy should be treated as income or as expendable endowment.  Unless there is evidence to the contrary, the donation should be treated as income.

6.                  Policy should cover as a minimum:

-         the reasons why a charity needs reserves

-         the level (or range) of reserves the trustees believe the charity needs

-         what steps the charity is going to take to establish or maintain reserves at the agreed level (or range)

-         arrangements for monitoring and reviewing the policy.

7.                  A charity's reserve policy should be informed by:

-         its forecasts for levels of income in future years, taking into account the reliability of each source of income and the prospects for opening up new sources

-         its forecasts for expenditure in future years on the basis of planned activity

-         its analysis of any future needs, opportunities, contingencies or risks, the effects of which are not likely to be able to be met out of income if and when they arise

-         its assessment, on the best evidence reasonably available, of the likelihood of each of these needs arising and the potential consequences for the charity of not being able to meet them.

RS13 - The extent of charity reserves and reserve policies

1.   Confirms SORP 2005 and CC19.

2.                  Best practice:

-         state the level or range of reserves trustees believe the charity needs

-         explain how the charity establishes or maintains reserves at the agreed level or range

-         explain how the policy will be monitored and reviewed

3.                  Set the policy:

-         no universal formula can be applied

-         each charity must consider its own circumstances

-         the time spent and the resultant policy should be proportionate to the scale and complexity of the charity's affairs

-         will be determined by:

-         steps

4.                  Monitor the policy

-         short-term

-         medium-term

-         long-term

-         if reserves are significantly below or above the level or range required, it may take a few years to bring them to the appropriate level or range

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5.                  Disclose the policy's 5 points

-         reasons need reserves

-         level held

-         level or range needed and why

-         steps being taken to establish or maintain the level

-         arrangements for monitoring and reviewing         

SORP 2005

Trustees' annual report - this should explain the charity's policy on reserves, stating the level of reserves held and why they are held.