What are the key changes?

A key message from the revised guidance is that generic or “boilerplate” reserves disclosures are no longer acceptable. We often see reserves policies that set target reserves at 3-6 months of operating expenses without any reasoning why this is appropriate for that specific charity.

Trustees are expected to develop a reserves policy that is tailored to their charity’s specific circumstances, risks and future plans. The guidance places greater emphasis on explaining not only how much reserves are held, but why that level is appropriate. Factors such as reliance on key funding streams, exposure to economic uncertainty, contractual commitments, redundancy costs and the potential impact of service closure on beneficiaries should all inform reserves decisions.

The updated guidance also provides greater clarity over what constitutes reserves. In particular, reserves generally exclude restricted funds, permanent endowment funds, operational fixed assets and certain designated funds set aside for future expenditure.

Charities with material designated funds are required to provide clear explanations of the purpose of those funds, the amount designated and, where relevant, the anticipated timing of expenditure. The guidance now specifically states that designations relate to future plans that exist at the balance sheet date. It is not possible for trustees to decide post year end that they want to designate funds for a new purpose and that be reflected within the policy included within the Trustees’ Annual Report.

The guidance also highlights that charities with unusually high or low reserves may attract regulatory scrutiny if trustees cannot clearly justify their position.

What is the practical impact on charities?

For many charities, the practical impact will be most visible in the Trustees’ Annual Report. Reserves disclosures will need to move beyond a simple statement of policy and provide stakeholders with a meaningful explanation of the charity’s financial resilience and future funding needs.

But a reserves policy is not just to meet a disclosure requirement. Reserves need to be considered alongside risk management, business planning and operational sustainability.

The guidance includes a simple approach to aid trustees of smaller charities in developing their reserves policy with helpful prompts on why reserves much be needed and how to assess how much is needed. For larger charities with more complex activities a more detailed approach is set out for trustees to consider. It is important to remember that the relative degree of importance of different factors will vary between charities.

Trustees are expected to show how free reserves have been calculated. SORP 2026 specifically states that the reserves figure must be consistent with the accounts and where the figure for reserves in the Trustees’ Annual Report is not evident, the charity must provide a reconciliation.

A reserves policy should be regularly reviewed as the reasoning and estimates of required reserves will change over time.

Actions trustees and management should take now

Trustees and senior management should:

Review and update the charity’s reserves policy to ensure it reflects current activities, risks and strategic objectives.

Reassess the methodology used to calculate free reserves and ensure it aligns with current accounting guidance.

Document the rationale for the target level of reserves, including consideration of financial, operational and reputational risks.

Review all designated funds and ensure their purpose, amount and expected utilisation can be clearly justified and disclosed and any new designations are agreed by the board.

Enhance annual report disclosures to explain variances between actual and target reserve levels and any plans to address shortfalls or surpluses.

Incorporate reserves monitoring into regular financial reporting and board discussions, rather than treating it solely as a year-end reporting exercise.

The updated guidance provides a timely reminder that reserves are not simply an accounting measure. They are a key governance tool that helps charities remain financially resilient, protect beneficiaries and demonstrate responsible stewardship of charitable funds. Trustees who can clearly articulate and evidence their approach to reserves will be better placed to meet both regulatory expectations and stakeholder scrutiny.

If your charity needs support reviewing its reserves policy, our charity specialists can help. Get in touch to discuss how we can support your organisation.