In January 2018, the Charity Commission selected a random sample of 106 sets of accounts of charities with an income of over £500,000, for period ends in the year ended 31 December 2016. It reviewed each trustees’ annual report and accounts to assess whether:

• The charity had explained its reserves policy, as required.
• The charity’s stated level of reserves was correct, based on its guidance.

The review found that nearly 97% of charities sampled had included at least a reference to their reserves policy in their trustees’ annual report.  However, more than a third of the charities’ explanations of their reserves policies did not provide all of the basic information required. The level of reserves held was the most common omission.

The review also found that, based upon the calculations of the Charity Commission, less than a quarter of the charities in its sample had stated the correct figure in their trustees’ annual report. The review indicates that this was in part because a third of the charities in the sample did not include a figure for reserves.

The Charity Commission reminds charities that providing a clear explanation of the reasons why reserves are needed, setting out the basis for working out the level of reserves required and stating the level of reserves held is more than just meeting a reporting requirement. It indicates that the process of developing a reserves policy and then explaining it in the trustees’ annual report gives confidence that the trustees have assessed both the risks that their charity faces and the charity’s ability to manage their financial impact.

To help charities, the Charity Commission highlights that it has published guidance (link to Charity Commission website) which explains what reserves are and sets out the steps that trustees should follow in developing and explaining a reserves policy.

A press release and the full review are available on the Charity Commission website.