Finance News: Advice line

Pesh Framjee on finance and governance - We are reviewing our reserves policy - should we be considering all our reserves or just free reserves?

Some confusion may be created by the Charity Commission references to free reserves (total reserves excluding permanent endowment, expendable endowment, restricted funds, designated funds and income funds, which could only be realised by disposing of fixed assets held for charity use).

The new accounting Sorp clarifies that "individual charities may have more or less reserves available to them than this simple calculation (free reserves) suggests." For example:

- Expendable endowments may be readily available for spending, or

- Unrestricted funds may be earmarked or designated for essential future spending and reduce the amount readily available

Although the Commission's guidance excludes restricted funds from free reserves, the Sorp clarifies: "The legal principles on the retention of income apply to restricted income funds, as do the principles of justifying and explaining any retention. It is suggested that trustees treat each restricted income fund as if it were a separate charity."

All reserves should be considered, as restrictions may be so wide as to mean that although they are legally restricted, the practicalities would mean that they are available to fund everyday activities. Similarly, designated funds often include funds 'put aside' for times of need.

Therefore, consider your income and expenditure streams, the nature of your reserves and the demands of your operating environment.You need to think about more than the oversimplified concept of free reserves.

Pesh Framjee is head of the non profit unit at Deloitte and special adviser to the CFDG. No liability arises to the author, his firm or Third Sector. Send your questions to

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