The past few years have tested the resilience of charities like never before. The effects of the COVID-19 pandemic, geopolitical instability, inflationary pressures, rising energy costs and increases in employer National Insurance contributions have all placed significant strain on charity finances and reserves.

Against this backdrop, trustees are rightly paying greater attention to financial sustainability and the role that reserves play in protecting charitable activities and beneficiaries. As we've said before, a reserves policy should not be viewed as a standalone compliance document but as an integral part of budgeting, forecasting and long-term financial planning – in other words, a useful part of good financial governance.

The introduction of the Charities SORP 2026 builds on this theme by strengthening reserves reporting requirements and placing greater responsibility on trustees to explain the rationale behind their reserves holdings. While the underlying principle of maintaining an appropriate reserves policy is not new, the expectations regarding disclosure and transparency have increased significantly.

From disclosure to demonstration

Under the 2019 Charities SORP, charities were required to disclose their reserves policy within the Trustees' Annual Report and explain the level of reserves held. In practice, however, many charities satisfied this requirement with relatively brief narrative disclosures that often provided limited insight into how the reserves figure had been determined or whether it remained appropriate for the charity's circumstances.

The 2026 SORP seeks to address this by moving the focus away from a simple reporting of a reserves figure and towards a demonstration of a robust trustee-led assessment of financial resilience. Trustees are expected to disclose their reserves position and also explain how reserves have been calculated, the justification of a particular reserves target and how actual reserves compare to the target.

What "reserves" actually means

One of the most important elements within the 2026 SORP is a clearer and more explicit definition of reserves. The new SORP generally uses the term to mean "free reserves", helping to improve consistency across the sector and making comparisons between charities more meaningful.

This may sound straightforward, but many trustees continue to confuse cash balances, total funds and free reserves. A charity may hold substantial cash balances but still have relatively little available for general purposes if funds are restricted by donors, invested in operational assets or earmarked through trustee designations.

Key points for trustees

Trustees should therefore ensure they fully understand:

  • Total funds reported in the accounts
  • Restricted funds that cannot be used for general purposes
  • Designated funds set aside by trustees for specific future purposes
  • Assets employed in delivering charitable services
  • The resulting level of free reserves available to manage financial uncertainty

The quality of trustee decision-making around reserves depends upon clear understanding of these distinctions.

Reconciliation Becomes More Important

Perhaps the most significant practical change introduced by the 2026 SORP is the requirement for consistency between reserves reported in the Trustees' Annual Report and figures disclosed within the financial statements. Where the connection is not obvious, charities must provide a reconciliation explaining how the reported reserves figure has been derived.

This is likely to require additional thought and preparation from many charities.

Key points for trustees

Trustees should be asking:

  • Can we clearly demonstrate how our reserves figure is calculated?
  • Does our reserves disclosure reconcile back to unrestricted funds in the accounts?
  • Have we properly justified the exclusion of designated funds and operational fixed assets?
  • Would an external stakeholder understand the calculation?

A clear reconciliation will improve compliance and increase confidence in the charity's financial reporting.

Moving beyond the "Three-Months Rule"

Historically, many charities adopted reserves targets based on broad rules of thumb, such as holding three to six months of expenditure. While these benchmarks may provide a useful starting point, regulators have repeatedly emphasised that there is no universally correct level of reserves. Reserves should instead reflect the specific circumstances, risks and operating model of each charity.

The 2026 SORP reinforces this principle by encouraging charities to explain the rationale behind their reserves target.

Key points for trustees

Trustees should therefore consider:

  • How reliant is the charity on a small number of funders?
  • How much income is contractually committed versus uncertain?
  • What notice periods apply to staffing and property commitments?
  • What would happen if a major funding source ceased?
  • How quickly could expenditure be reduced if income fell?
  • Are there significant growth or investment plans that may require reserves support?

A reserves policy should ultimately reflect the charity's own risk profile, rather than a generic sector benchmark.

Focus on financial sustainability

The enhanced reserves disclosures should not be viewed solely as a reporting requirement. They can help trustees with their stewardship and long-term planning.

Recent challenges - including inflation, rising payroll costs and funding uncertainty - have reinforced the importance of understanding how resilient a charity is under adverse conditions. 

The revised SORP aligns closely with the principles contained in the Charity reserves: building resilience (CC19) guidance, encouraging trustees to think proactively about both risk management and future viability.

How trustees can benefit

As charities prepare for reporting under the 2026 SORP, trustees should review their reserves policy well before the year-end. This should include revisiting the methodology used to calculate free reserves, reassessing the reserves target in light of current risks and ensuring that appropriate evidence exists to support trustee judgements.

Most importantly, trustees should be prepared to explain how much reserve is held, why that level is appropriate and how it helps the charity in its mission.

Trustees who embrace the broader perspective required by the new SORP will find value in its improvements to governance, and will be better placed to navigate uncertainty and maintain stakeholder confidence in the years ahead.

If you have any questions any the new SORP, charity governance or charity financials in general, please contact us at charities@ct.me.