Our Charity & Not for Profit Group has recently helped two charity clients with issues they had with reserves:
The first issue related to a client where the trustees had designated funds over the years to deal with changes in technology. The level of the designated fund was reviewed and the trustees decided that it was too high. They turned to us for advice on how to rectify the situation.
Designated funds form part of the unrestricted funds of charities which have been earmarked, by the trustees, for a specific purpose. However it is possible to cancel the designation if it is no longer needed, in fact trustees should regularly review designations to make sure they are still appropriate.
Having decided that the reserve was too high the starting point was to decide what the level of the reserve should be. This review was done by the charity. Not only did we help the charity in determining this, but we were then able to assist with how the reallocation should be dealt with in the accounts and what disclosures were needed.
Treatment of an unrestricted donation.
The second issue relates to a charity client that received a substantial donation. This was an unusual occurrence and the trustees were unsure how to treat it and asked us for advice.
The starting point was to decide whether it was a restricted donation. This was not the case as the donor had not specified how the funds should be used.
The next decision was whether to add the donation to general unrestricted funds, treat as a designated fund or create a restriction over the fund.
We were able to explain the difference between these types of funds and provide example accounts layouts for each type of allocation. In particular the difference between restricted funds and unrestricted funds is significant; with restricted funds only being available to spend on a specific defined purpose. This can be very limiting to charities.
With this information the trustees were able to decide to add the donation into general unrestricted funds as it was to be used for the general purposes of the charity.
If you would like any advice on charity reserves then please contact our charity group who will be more than happy to help.