We often see charities with numerous restricted and designated funds that do not move year-on-year, simply being brought forward one year and carried forward to the next. Due to the age of these funds, many people at the charity, including management and trustees, do not fully understand the purpose of these historic balances.

Undertaking a review of historical records (financial, correspondence and any available minutes) should enable management and trustees to establish a clear picture of the original purposes of such funds being held.

A spring clean of the charity’s funds held provides a tidy starting position to articulate your reserves policy.

Designated funds

It is always worthwhile to review the charity’s current designated funds at least annually to assess whether the purpose is still valid.

Funds may have been designated in previous years for a specific project, such as IT transformation or a beneficiary-specific project to further the charity’s objectives. Are these projects now complete, or did plans change with the project not going ahead, or was the designation forgotten and not used?

Trustees can approve these funds to be undesignated and transferred back to general unrestricted funds. The decision should be minuted in the year in which the decision relates, ie not retrospectively.

Restricted funds

Consider these two common scenarios relating to restricted funds:

1. Numerous funds have arisen over the years from donations towards specific capital projects. The donation ‘sits’ in a restricted fund, not moving for years after the project is completed or is gradually reduced over the life of the asset to match the depreciation. This is achieved via a transfer each year to general funds and can be time-consuming without giving a clearer picture of the charity’s position.

Actions for arising donations:

• Conduct a systematic review of funds held for those arising from donations for specific capital projects.
• It is possible to transfer the value of tangible fixed assets from restricted to unrestricted funds when the asset has been purchased from a restricted fund donation but is held for a general and not a restricted purpose.
• The benefit to the charity is a reduction in the number of restricted funds and the need to account for transfers year-on-year over the life of the asset.

2. Funds left over from specific projects or appeals and balances remain unused year after year in restricted funds.

Actions for funds left over:

• On a line-by-line basis, go back through the documentation for each fund to assess the position. The charity cannot just transfer the balance on these funds to unrestricted funds.
• Ascertain whether the funds need to be returned to the donor if there are surplus funds at the end of the project.
• Review the wording of the original appeal. Some charity appeals are worded in a way that any surplus funds not used for the purpose intended by the appeal can then be used for the general purposes of the charity and can therefore legitimately be transferred to unrestricted funds.
• Prove that the amounts have been or should have been spent. It could be that in prior years the allocation of costs to the project were incorrect.
• Obtain proof of legal consent to make a transfer of any balance to general unrestricted funds. A transfer can only be made where the funds have been lawfully released (with the exception of the fixed assets above).
• Review the original purpose of the funds to ensure that they are correctly defined as restricted. If the purpose was defined internally, it may be that the funds are designated not restricted.

The year-end financial statements will need to include disclosures around the rationale for each transfer.

This article is part of our Charity trustee insights hub. It has some great insight pieces for charity trustees to consider on key topics right across the charity sector, including governance, reserves, digital transformation and finance function, to name a few.

If you would like to discuss the importance of reserves for your charity, please contact Nick Sladden, Zoe Longstaff-Tyrrell or your usual RSM contact.