OG43 E7 - Practical example of a reserves policy:

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 principles understood and set out but no detail as to how these will be applied OG 43 E7 - 24 May 2000

Divisional responsibility
For information:	Charity Support Division

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

	1. Objects of charity
	The relief of sickness.

2. Approximated figures from SOFA

		Unrestricted	Restricted	Total
		£	£	£
	Incoming resources	10 000	420 000	430 000
	Resources expended	15 000	600 000	615 000
	Net incoming resources	(- 5 000	(- 180 000	(-185 000

	Fund balances carried forward to next year	30 000	1 150 000	1 180 000

	3. Stated policy
	The ######### General Fund is an unrestricted income fund and therefore requires a reserves policy. The General Fund also has ten special trusts linked to it which are all restricted income funds and are excluded from the reserves definition.
	The trustee board has decided to establish an individual reserves policy for each of the special trusts it administers. The board has made this decision on the basis that it will aid them in fulfilling their duty of exercising overall control over the financial affairs of each of the individual trusts concerned.
	The board is very aware of the general legal duty to apply charitable funds within a reasonable time of receiving them and has actively encouraged delegated staff to spend funds on charitable purposes within their charitable objectives and in a manner that as far as possible meets donor's wishes.
	The board considers the needs of each individual trust when determining that trust's reserves policy.
	The board has decided on the following procedure in determining an individual reserves policy:
	(a)	Income and expenditure patterns will be reviewed to establish:
		(i)	Is it necessary for the funds to hold reserves and what benefit will there be in holding such reserves?
		(ii)	If reserves are necessary at what level should they be?
		(iii)	What action will be required to maintain the agreed reserve level?
	(b)	The delegated staff will be required to report back to the board on an annual basis or at any time when requested in order to:
		(i)	Review the reserves levels which may be increased reduced or discontinued.
		(ii)	Receive at each of its meeting a summary of reserves.
	(c)	Monies not needed for immediate use (reserved) will be invested in line with the agreed investment policy.
	(d)	The board will receive at each meeting information on the performance of investments.
	The day to day monitoring of this policy will be the responsibility of the delegated staff who will be expected to bring any issues to the immediate attention of the board.

	4. Comment
	This first part of this explanation of a reserves policy paraphrases parts of paragraphs 24 and 30 of CC19 on the legal duty of trustees to spend funds within a reasonable time and the requirement to apply charitable resources on charitable purposes. It also follows our advice on the formation of individual reserves policies for restricted funds.
	However although the trustees have shown that they are well aware of the principles involved and have set out how they intend to form and monitor the reserves policies for the charities they administer the policies themselves are not spelt out. Detail on the level of reserves and the reason for their retention is needed.

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