Charity reserves already in decline before Covid-19 struck

The accountancy firm BDO finds UK charities also struggle to comply with regulations when reporting their reserves

BDO’s review found significant variations in methodologies for calculating reserves
BDO’s review found significant variations in methodologies for calculating reserves

Reserves held by the UK’s largest charities were already in decline before the coronavirus outbreak hit, new figures show.

Analysis of the latest accounts of the top 50 charities by annual income conducted by the accountancy and advisory firm BDO found the organisations held on average two months of reserves going into the pandemic, down from three months when the firm last carried out its survey in 2017.

Research published last month by the National Council for Voluntary Organisations, the Institute of Fundraising and the Charity Finance Group  found charities were expecting income to fall by almost a quarter this year, equivalent to a £12bn loss. 

This has led to many charities having to rely on reserves at a time when demand for their services has risen.

BDO’s research also found that some charities were struggling to accurately report their reserves and comply with regulations. 

Its analysis of annual reports revealed that about 30 per cent of the charities surveyed made no reference to the level of free reserves held, indicating non-compliance with the Statement of Recommended Practice.

While the charities stated their general free reserves totalled £3.8bn, BDO’s review found significant variations in methodologies for calculating reserves. 

It concluded that the real figure, to reflect actual undesignated, liquid assets, was just £1.5bn, significantly less than reported. This was largely as a result of the exclusion of fixed assets which accounted for £2bn of the discrepancy.

Jill Halford, national head of charities at BDO, said: “The impact of Covid-19 has been a wake-up call for charities, and brought into sharp focus the importance of having sufficient free reserves as a protection from income shocks. The fact that reserves were falling prior to the pandemic should be a particular cause for concern, and will no doubt lead many charities to revisit their reserves policies.

“In our review, we found notable areas of non-compliance, which may partly reflect a lack of clarity and specific guidance on how to identify and report free reserves. We would urge the Charity Commission to address this at the earliest opportunity to help charities to protect themselves both during the current crisis and beyond.”

BDO said two grant-making charities, the Wellcome Trust and the Children’s Investment Fund Foundation UK, were excluded from the research so their size did not distort the overall findings.

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