OG43 E8 - 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: Income apparently being converted into endowment; amount of reserves actually held not clear OG 43 E8 - 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
	To relieve need and provide assistance to members.

2. Approximated figures from SOFA

		Unrestricted	Restricted	Total
		£	£	£
	Incoming resources	725 000	25 000	750 000
	Resources expended	660 000	25 000	685 000
	Net incoming resources	65 000	-	65 000

	Fund balances carried forward to next year	2 600 000	300 000	2 900 000

	3. Stated policy
	The charity needs increasing reserves:
		(a)	To provide for the maintenance and enlargement of the society's housing estate.
		(b)	For current and further provision of charitable grants.
	The present reserve level is considered realistic in order to maintain liquid reserves to cover up to a two-year expenditure period.
	At each annual budget meeting a review of the current level of reserves will be undertaken against budget predictions. In order to maintain the present reserves level a carefully budgeted performance is being forecast mindful of fundraising income donations/membership subscriptions and rental income from the society's property.
	Professional advice is provided in the management of the society's investments. Council is mindful that reserves could be realised to cover financial outgoing commitments although their preferred policy is to build reserves to enhance income returns and decrease reliability on fundraising and subscription streams.

	4. Comment
	The first few paragraphs start well but do not explain what is meant by reserves and exactly what expenditure is covered. There is no explanation as to why two years' cover is considered appropriate and no indication as to how much is actually held as free reserves.
	Building up funds to "enhance income returns" is unlikely to satisfy the trustees' general legal duty "to apply charitable funds within a reasonable time of receiving them". In effect the policy appears to be to convert a proportion of income into endowment.

	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 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 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