The difficult financial environment in which most charities operate has had a big impact on how they view their reserves. During the Covid pandemic, some were unable to deliver services, which meant that in some cases reserves crept up beyond normal levels; likewise, the tough fundraising landscape has led others to dip into their reserves in order to be able to continue to deliver services.
Both situations are problematic for charities: a low level of reserves could indicate that a charity is not viable for the long term, whereas a high level of reserves could discourage funders from coming forward, believing that the charity doesn’t need their support.
On top of this, the new Statement of Recommended Practice (SORP), which came into effect on 1st January 2026, outlines some specific requirements for reporting reserves levels. This follows an earlier Charity Commission study which found that just 22% of charities were correctly disclosing their reserves level, while over a third of larger charities (those with annual incomes over £500,000) did not have an appropriate reserves policy.
All of this once again emphasises how vital it is that every charity has a robust reserves policy, and is in a position to accurately report the level of its reserves annually.
The reporting requirements laid out in the new SORP vary according to a charity’s annual income. However, the SORP makes clear that even the smallest charities must detail their reserves policy, state the amount of reserves they currently hold and why they are held, and explain, where relevant, the steps that the charity is taking to bring the level of reserves it holds in line with its policy.
One key impact of the new SORP is the treatment of leased assets in accounts, which could have a material effect on a charity’s reserves, at least during the transitional period while the new reporting rules work their way through.
Briefly, instead of treating lease payments as expenses, charities must now record leases as an asset (i.e. the right to use the leased item) and a corresponding liability (future payments). This will impact on the reserves position of charities with significant operating leases in place, as their free reserves will essentially be reduced by the current element of the lease liability.
Too Little or Too Much – both a problem
The dangers of holding too little in reserve are obvious: as we have seen over recent years, and continue to see, financial shocks can come out of the blue, and reserves are there to enable a charity to ride out those bumps and remain financially viable.
The problem of holding too high a level of reserves is less evident, but equally serious. With community fundraising still challenging and statutory funding likely to remain under pressure for the foreseeable future, funders such as trusts and foundations are likely to be vital to many charities.
But such funders take considerable account of a charity’s reserves situation when making their funding decisions. Traditionally they have viewed charities which hold significant unrestricted reserves as not being the most deserving of their largesse.
Whilst funders have generally been more flexible since the pandemic, recognising that many charities are opting to hold greater reserves against similar financial shocks and greater investment risks, those charities which do not have a very clear reserves policy are less likely to be on the receiving end of such flexibility.
There will always be a temptation to designate excess reserves to specific projects, in an attempt to reduce the levels of unrestricted reserves and hence fall in line with the charity’s policy.
However, such funds will still form part of the organisation’s unrestricted reserves, so a clear demarcation of how those funds will be spent, on what specific projects and in what timescale, will be important to persuade funders to disregard that portion of the free reserves.
In fact, the Charity Commission expects any designated funds to have a specific purpose with set timescales for future spending.
Trustees are required to ensure that the charity has sufficient funds to be viable (the exact definition of this should be in the reserves policy), so those charities which are reporting reserves levels well below those set out in their reserves policy need to take action. Reconnecting with community fundraisers and volunteers becomes a key task in such situations.
After several financially challenging years, and in the light of the reporting requirements set out in the new SORP, all charities should be reviewing their reserves policy (or if they don’t have one, creating one) as a matter of urgency, to ensure that their organisation is not just sustainable, but also able to attract funding for the future.