Charities and their trustees are aware that they are required to include a reserves policy within their Trustees’ Annual Report. However, the disclosure can too often be treated as a relatively brief compliance exercise rather than an important explanation of the charity’s financial resilience and risk management approach.

The reserve policy ought to be more than a generic statement, which often suggests something simple such as that trustees “aim to maintain reserves equivalent to between three and six months’ expenditure”.

The Charity Commission’s CC19 guidance on reserves and the Charities SORP guidance both make clear that reserves policies should be tailored, evidence-based and linked directly to the charity’s risks, financial model and future plans.

More than a compliance exercise

The Charity Commission describes reserves as the part of unrestricted funds that is freely available to spend on any of the charity’s purposes. Importantly, not all unrestricted funds are necessarily available reserves. Fixed assets, designated funds and pension deficits may all affect the true level of “free” reserves.

A reserves policy is therefore not simply a statement of a target figure. It should explain:

  • why reserves are needed
  • how the target level has been determined
  • what risks the charity is protecting against
  • how reserves link to future plans and commitments
  • when reserves may be used.

The Charity Commission is explicit that policies should not consist of 'standard form wording' and should clearly explain what reserves are held for and when they are intended to be used.

Section 4 of Charity reserves: building resilience (CC19)

Section 4 of CC19, “Explaining reserves in the annual report”, sets out the expectations for disclosure in the Trustees’ Annual Report.

At a minimum, charities should disclose:

  • the charity’s reserves policy
  • the level of reserves held
  • why those reserves are held.

Where trustees have designated funds for particular purposes, the report should also explain the nature and timing of those designations.

For larger charities, the expectations go further. The Commission encourages more detailed explanations around total funds held, the amount of reserves freely available and how reserves relate to financial risk and future sustainability.

Common weaknesses seen in practice

As auditors we see many draft policies and can assist clients with enhancing their narrative to better meet the requirements. In practice, many reserves disclosures that we see initially fall short of expectations. Common issues include:

  • quoting a reserves target with no explanation of how it was calculated
  • failing to distinguish between unrestricted funds and free reserves
  • boilerplate wording copied year after year
  • no explanation for significant reserve deficits or surpluses
  • designated funds being treated as unavailable without sufficient explanation
  • no clear link between reserves, risk management and going concern.

The Charity Commission has previously highlighted concerns that some charities materially overstate free reserves or do not appear to fully understand the concept.

Linking reserves to going concern

One area that should receive more focus is the connection between reserves and going concern.

Reserves should form a key part of trustees’ assessment of financial resilience alongside cash flow forecasts, funding assumptions and financial risks.

This is particularly relevant in scenarios where a charity faces a difficult financial climate, perhaps where there is uncertainty over grant funding, coupled with rising costs and pressure on cash flows. A reserves policy that has not been revisited for several years may no longer reflect the charity’s actual operating risks.

So, what makes a stronger reserves policy?

A stronger reserves disclosure is usually one that is specific and transparent. For example, rather than simply stating:

“The charity aims to maintain reserves equivalent to six months’ expenditure.”

  • a more meaningful disclosure might explain
  • how expenditure volatility has been assessed
  • reliance on grant income or contracts
  • expected commitments over the next 12–24 months
  • contingency planning for funding delays
  • working capital requirements
  • whether trustees anticipate drawing down or rebuilding reserves.

This demonstrates active financial oversight rather than passive compliance.

Final thoughts

A good reserves policy should help stakeholders understand how trustees are balancing financial resilience with delivery of charitable objectives.

The best disclosures are not necessarily the longest but they are the clearest. Trustees should be able to explain not only how much reserve is held, but why that level is appropriate for their charity’s circumstances.

For many charities, now is a good time to revisit whether their reserves policy genuinely reflects current risks, funding arrangements and future plans, rather than simply repeating historic wording year after year.

The next step

If you would like to learn more, please get in touch with Allan Hickie or your usual UHY charity and not-for-profit adviser.

Let's talk! Send an enquiry to your local UHY expert.

Get in touch