Financial Review: how to report on reserves under the Charities SORP 2026

These changes aim to provide greater transparency and help stakeholders better understand the relationship between a charity’s narrative and its numbers.

In the new SORP, reserves are explicitly defined in the glossary of terms. Unless otherwise indicated, the term refers to free reserves. This shift ensures that charity accounts are more comparable for funders and donors. In addition, any figure for reserves stated in the TAR must be consistent with the figures presented in the accounts. If this consistency is not immediately evident, charities are now required to provide a clear reconciliation, either within the funds note or as a separate note.

Determining your reserves starts with the charity’s total unrestricted funds at the end of the reporting period and then subtracting resources that are not readily available for spending. This includes fixed assets used for the charity’s activities and designated funds that have already been committed for expenditure.

Designated funds are earmarked parts of a charity's unrestricted funds that trustees have voluntarily set aside for specific future projects or commitments, such as planned charitable activities. Importantly, these funds are not legally restricted, and trustees retain full discretion to reallocate them or remove the designation at any time.

To be reported as such at the period end, and therefore deducted from the reserves figure, trustees must approve the designation before the end of the financial period. However, if new information arises after the reporting date that allows for a better estimate of the amount to be designated, this is considered an ‘adjusting event’ according to the SORP (section 13.9). This allows trustees to create a designated fund before the financial year-end and then refine the figure once they have a clearer picture of their year-end financial position.

However, changing the purpose of a designation or creating a brand-new designated fund after the reporting date is not an adjusting event. As a result, designated funds created and approved in board meetings after the charity’s financial year-end mustn’t be reported and deducted from reserves.

Investments held specifically to further the charity's purposes, known as social investments, are also excluded from the calculation of reserves. General (non-endowed) financial investments, which are held primarily to generate a financial return rather than to directly deliver a charitable activity, are not subtracted and remain part of the charity’s reported reserves.

The calculation of reserves may involve other adjustments, such as commitments relating to the charity’s general funds that have not yet been provided for as a liability in the accounts.

The determination of reserves and the charity’s reserves policy involves several other considerations outlined in the SORP glossary:

• Where restricted funds are held, does the nature of the restriction reduce the need for reserves in specific areas of the charity’s work?
• Are expendable endowment funds readily available for spending?
• What is the impact of a pension provision, a long-term mortgage, lease liabilities or a revaluation reserve on reserves?

Under the new SORP, all charities regardless of size must now explain their reserves and reserves policy in the Financial Review section of the TAR:

• Trustees are required to explain the policy for holding reserves, state the actual amount held at the end of the reporting period and explain why they are held.
• If the trustees decide that holding reserves is unnecessary, they must disclose this fact and provide their reasons.
• Trustees must check that the reserves figure in the report is consistent with the accounts. Where the link is not evident, a reconciliation must be provided either in the funds note or a separate note.
• Trustees most compare the actual reserves held against the charity's reserves policy and, if reserves levels are not in line with the policy, explain the steps being taken by the charity to reach the target level based on future planned activities.
• Trustees must also identify and explain any material amounts that have been designated or committed at the end of the period and indicate the likely timing of when these funds will be spent.

The requirements for the Financial Review go beyond reserves reporting. The Financial Review section must also include a review of the charity’s financial position at the end of the period that is consistent with the accounts, identifying any funds or subsidiary undertakings that are materially in deficit, outlining the reasons for these and explaining the steps being taken to address them. Trustees are also required to explain any material uncertainties regarding the charity’s ability to continue as a going concern.

For Tier 2 and Tier 3 charities, trustees must also explain any significant events that have impacted the charity’s financial performance or position during the reporting period. The review must further describe the principal sources of income, how resources were spent to support key objectives and the principal risks and uncertainties facing the charity (including environmental and cyber risks), along with strategies for managing them.

Where applicable, these larger charities must also explain their policies for material investments and provide a narrative on the financial impact of material pension liabilities or the timing effects of material legacy income. Additionally, Tier 3 charities must explain any factors expected to affect their financial performance or position in future periods.

Visit ICAEW’s Charities SORP 2026 hub to access free resources covering key areas of change, including a recording on reserves policies, and to download the Charities SORP 2026.