Article

Reserves

Some years ago there was a considerable fuss in the charity world when it emerged that a well known national charity was continuing to conduct a vigorous fundraising campaign while it had very substantial cash reserves. There was something wrong, it was suggested, in such a rich charity continuing to seek donations from the public, perhaps diverting funding from other less well-heeled charities . This story gave rise to considerable discussion and eventually the Charity Commission brought out a guidance leaflet (Charities' Reserves CC19) and issued a regulatory study on the subject in 2003. Despite this, considerable confusion surrounds the subject. Reserves must be distinguished from designated funds. Designated funds are assets which must be used for particular purposes within the overall objects of the charity, such as a gift to a charity specifically for the purchase of equipment or to help a particular group of beneficiaries. Reserves are not limited in this way. The assets may be used for any of the charity's purposes and represent cash or investments which the trustees have decided to retain for the time being rather than spend them on the charity's work. The income of a charity should usually be spent on its charitable purposes within a reasonable time and trustees may commit a breach of trust if they fail to do so and in theory the charity's entitlement to tax relief could be put in jeopardy. But if the charity has some surplus cash the trustees may retain as much as is not needed for immediate expenditure as a reserve if they have a good reason for doing so. But what is a good reason? The trustees must consider that it is in the best interests of the charity to put income into a reserve fund rather than spend it and this implies that they have formulated a policy as to the purpose of the reserves, what proportion of the charity's assets should be retained and the overall financial strategy which should be followed. For example it is reasonable for a charitable trust, which makes grants to individuals or organisations, to build up a reserve fund which will avoid it having to cancel promised payments because of a downturn in its income. If it usually undertakes to pay grants for a two or three year period it would be sensible for the trustees to ensure that it has sufficient reserves to cover expected payments for this length of time. Another example might be a charity which is about to embark on a building programme - rebuilding its headquarters or providing a new hostel. A policy to create a reserve fund for this purpose would be entirely reasonable. The Statement of Recommended Accountancy Practice for Charities (SORP 2005) requires charities to include a statement of their reserves policy in their accounts and the Charity Commission believes that even charities which are not able to build up reserves should give thought to whether they should have a policy. A reserves policy should include the reasons why reserves are needed, the appropriate level of reserves, how the reserve fund will be established and maintained and arrangements for reviewing the policy. Some of the considerations the policy should be based upon are income forecasts, assessments of the reliability of the income, forecasts of likely expenditure, possible future risks which cannot be protected against out of income, possible future opportunities which the charity may wish to take advantage of and the effect on the charity of failure to meet risks or opportunities.

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