CHARITY INCOME RESERVES Practical example of a reserves policy: OG 43 E2

The Charity Commission for England and Wales

The Regulator for Charities in England and Wales

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OPERATIONAL GUIDANCE CHARITY INCOME RESERVES Practical example of a reserves policy: General justification for maintenance of reserves but rationale for particular level questionable OG 43 E2 - 24 May 2000

Divisional responsibility
For information:	Charity Support Division

Contents
1. Objects of charity 2. Approximated figures from SOFA 3. Stated reserves policy 4. Comment
Meaning of expressions - list of Glossary terms used in this Guidance Index to further related information

	1. Objects of charity
	The advancement of public education in relation to a particular profession.

	2. Approximated figures from SOFA
		Unrestricted	Designated	Total
		£	£	£
	Incoming resources	650 000	10 000	660 000
	Resources expended	550 000	1 000	551 000
	Net incoming resources	100 000	9 000	109 000

	Fund balances carried forward to next year	285 000	165 000	450 000
NB	The charity has unrestricted funds only some of which it has designated. *Includes £50 000 transferred from general fund during current year.

	3. Stated reserves policy
	The financial reserves that we have set aside since the formation of the Association provide financial stability and the means for the development of our principal activity. We intend to maintain our undesignated funds at a level which is at least equivalent to one year's budgeted subscription income [that is £200 000 (from SOFA)].
	Council regularly reviews the amount of funds that the Association requires to ensure that they are adequate to fulfil the Association's continuing obligations. It takes a cautious approach towards investment adopting a short-term low-risk policy.
	In addition to undesignated funds Council has set aside designated funds unless and until expended. Unrestricted funds have been designated for the following purposes.
	Disciplinary procedures - to cover the exceptional future costs of investigations and disciplinary hearings.
	Examination prizes - to finance the purchase of engraved medals for presentation to examination prize winners.
	New premises - to provide for the cost of relocating Head Office on or before the expiry of the existing lease in 10 years time.

	4. Comment
	This is a reasonable explanation of the position in that it provides justification for the maintenance of reserves and explains the purpose of the designated funds.
	However whilst £285 000 may be a reasonable level linking this to subscription income implies great instability in income from that source. This seems unlikely but if true may indicate an operational problem for the charity that we should look into.
	The policy statement also fails to explain what expenditure is intended to be covered by the level of reserves held.
	NB. Some of the designations shown are unusual and very specific to this particular charity. Although probably reasonable in this case they might well not be appropriate to charities operating in a different area.

	The following words and phrases are defined in the Glossary of Terms:
	• • •	designated funds reserves SOFA

Go to:	Other examples
		OG 43 E1	a good explanation but reserves above charity's stated optimum;
		OG 43 E3	purpose and level of reserves explained shortfall identified;
		OG 43 E4	policy clearly explained but reserves currently over planned limit;
		OG 43 E5	purpose and required level of reserves clearly set out; policy has recently been reviewed;
		OG 43 E6	need for and purpose of reserves clearly explained but no comment on level of reserves;
		OG 43 E7	general principles understood and set out but no detail as to how these will be applied;
		OG 43 E8	income apparently being converted into endowment; amount of reserves actually held not clear;
		OG 43 E9	reserves apparently being built up to produce income;
		OG 43 E10	designated fund apparently being used as endowment; unclear why reserves are needed for purposes stated;
		OG 43 E11	danger that building up reserves may become an end it itself.

	Index t o further related information