CHARITY INCOME RESERVES Practical example of a reserves policy:Policy clearly explained but reserves currently over planned limit OG 43 E4

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OPERATIONAL GUIDANCE CHARITY INCOME RESERVES Practical example of a reserves policy: Policy clearly explained but reserves currently over planned limit OG 43 E4 - 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 establish a hospice and to promote related research teaching etc.

	2. Approximated figures from SOFA
		Unrestricted	Restricted	Total
		£	£	£
	Incoming resources	8 400 000	400 000	8 800 000
	Resources expended	7 900 000	300 000	8 200 000
	Net incoming resources	500 000	100 000	600 000

	Fund balances carried forward to next year	5 400 000	400 000	5 800 000
NB	Much of the charity's resources arise from gifts in kind which are distributed.

	3. Stated reserves policy
	Council approved a reserves policy during the year. Factors taken into account included the need to cover fluctuations in income (principally legacies approximately £3 million) current liabilities and unplanned expenditure.
	The minimum reserve of 12 weeks is below that of comparable charities and follows the principle adopted by the founder which was to develop services rather than seek financial security.
	* A substantial proportion of the reserves shown in the balance sheet are represented by assets other than cash such as the wards education block and buildings necessary to provide the service. [These included in the designated funds would not in fact fall within our definition of reserves as they could be realised only by disposing of fixed assets held for charity use - see OG 43 B1.]
	At the year end reserves shown in the balance sheet as represented by net current assets covered 19 weeks running costs just over the recommended minimum.

	4. Comment
	This is a good explanation of the position in that:
	a policy on reserves has been established and approved by the trustees which takes into account the wishes of the founder (we are assuming here that the wishes of the founder do not conflict with the legal duties of the trustees);
	the way in which the reserves are held is explained;
	the fact that the reserves are not currently in line with the stated policy is recognised.
	It could be improved by the inclusion of a statement of intent to reduce the reserves level in line with the stated policy and a plan of action to bring this about. Reference could also be made to the designated funds - if only that they exist and are in the notes and explanation of free reserves.
	There is no mention of arrangements for reviewing the policy.

	The following words and phrases are defined in the Glossary of Terms:
	• • • •	designated funds 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 E3	purpose and level of reserves explained shortfall identified;
		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 to further related information