Low levels of reserves meant some of the UK’s largest charities were “ill-prepared” for the impact of Covid-19, according to analysis by the accountancy firm BDO.
The charities in the review held an average of two months of free reserves going into the pandemic, compared to three months when BDO last conducted the survey in 2017, the research says.
The analysis, which looked at the finances of the 50 largest UK charities by income, also finds that as many as one in three could be breaking regulatory rules by not reporting their level of free reserves in their annual accounts.
BDO’s analysis excludes two of the largest charities, The Wellcome Trust and the Children’s Investment Fund Foundation, to avoid distorting the data.
‘A lack of clarity’ on reporting reserves
BDO says that the charities in its survey reported total unrestricted reserves of £3.8bn, with a total combined income of £19.7bn.
It says that a charity’s calculation of its reserves is “a measure of financial health and good governance”, yet found that around 30% of the charities did not state their free reserves in their annual reports. Charities which do not publish this information are not complying with Statement of Recommended Practice (SORP).
The firm’s research suggests that this may result in part from “a lack of clarity and specific guidance on how to identify and report actual free reserves”, and urges the Charity Commission to address any confusion in its guidance.
BDO’s analysis also looked at the way charities calculated their reserves, and identified a “discrepancy” of more than £2bn.
The research argues that some charities had included large, fixed assets in their reserves, the value of which would be difficult to realise at short notice, or would need to be disposed of at below market value.
Once these fixed assets were excluded, the total value of these charities’ liquid reserves fell from £3.8bn to just £1.5bn.
A wake-up call
Jill Halford, BDO’s national head of charities, 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.”
CFG: Charities getting mixed messages
Roberta Fusco, director of policy and engagement at the Charity Finance Group, agreed that some of the problems identified by BDO may have emerged because of confusion over how charities should measure and present reserves.
Fusco said: “We have been giving charities a lot of mixed messaging in the past five or six years, especially since Kids Company. The legal imperative is to spend, not to hold onto money.
“So it is difficult to criticise charities for not holding enough reserves, when the legal necessity for trustees, and their duty as trustees, is to spend on the cause and not hold back.”
Reserves and risk
Fusco said that the failure of some charities to publish their reserves is “a concern and a worry”, but argued that reserves policy should be based on managing risk rather than counting costs by months.
She said: “CFG has long been advising our members and the wider sector on the importance of setting a robust reserves policy based on risk.
“The intention of reserves is to safeguard against risk. It is trustees’ duty to identify those risks and mitigate against them”.
Fusco also warned against viewing charities’ behaviour “through the lens of Covid-19”, which she called an “unprecedented event”.