OG43 E3 - Practical example of a reserves policy:

The Charity Commission for England and Wales

The Regulator for Charities in England and Wales

In this section...


OPERATIONAL GUIDANCE CHARITY INCOME RESERVES Practical example of a reserves policy: Purpose and level of reserves explained shortfall identified OG 43 E3 - 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
	To provide reading materials to overseas countries.

	2. Approximated figures from SOFA
		Unrestricted	Restricted	Total
		£	£	£
	Incoming resources	3 200 000	1 100 000	4 300 000
	Resources expended	3 100 000	1 100 000	4 200 000
	Net incoming resources	100 000	-	100 000

	Fund balances carried forward to next year	725 000	160 000	885 000
NB	Much of the charity's resources arise from gifts in kind which are distributed.
	*This figure includes tangible fixed assets.

	3. Stated reserves policy
	The Council believes that the charity should hold financial reserves (the "Emergency Operating Reserve" - EOR) because
		(i)	it has no endowment funding and is entirely dependent for income upon donor funding from year to year which is inevitably subject to fluctuation and
		(ii)	it requires protection against and the ability to continue operating despite catastrophic or lesser but damaging events.
	The trustees believe that the minimum level of the EOR should be the equivalent of six months' operating costs calculated and reviewed annually and believe that the EOR should be built up to the desired level in stages consistent with the charity's overall financial position and its need to maintain and develop its charitable activities.
	After the transfer of £25 000 at the end of 199# the level of EOR stands at £165 000 With essential operating costs currently amounting to approximately £60 000 per month this falls short of the above-mentioned target. Efforts to build it up will continue in line with the policy.

	4. Comment
	This is reasonable explanation of the position. The trustees are clear about both :
	the purpose of the reserves; and
	the level needed to achieve this.
	They have identified a shortfall and made a statement of intent about future policy. (They are doing more than simply justifying the level of reserves achieved.)
	It is clear from the accounts that the gifts in kind which are worth several million as incoming and outgoing resources have been left out of the calculation of six months' operating costs. It may have helped the charity to state this in its reserves statement.

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

Go to:	Other examples
		OG 43 E1	a good explanation but reserves above charity's stated optimum;
		OG 43 E2	general justification for maintenance of reserves but rationale for particular level questionable;
		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.

	Inde x to further related information