Risks and reserves management
Risks and reserves management
The Financial Reporting Council has repeatedly emphasised the need for Annual Reports to have consistency, and for elements to link up well. For instance in the 2022 publication “What makes a good annual report” it recommends “highlighting and explaining the linkages between… principal risks and uncertainties and … the business model and the financial performance, position and the future prospects of the company…”
We looked at how this worked in the top 20 operational charities out of the 50 we researched for our recent report into Charities and Reserves.
Those 20 charities reported 145 individual risks, an average of 7.25. We investigated how often reserves were referred to as part of managing those risks, since reserves often contribute to risk mitigation.
The Charity Commission recognize this in their guidance which states that: “Whilst risk is broader than just financial risk, in working through the guidance on risk management, trustees should consider the financial impact on the charity of the identified [risk] occurring and ask whether reserves are needed to help manage the financial impact.”
Out of the 145 risks reported, only 32 (22%) cross referenced reserves as part of the risk management approach. Looking in the other direction, that apparent gap is more marked when one turns to the reserves statements, where only 12 (8%) refer to any related risk.
There is an obvious link between specifically financial risks, and reserves. Three charities did not refer to any financial risk at all, though rather oddly two of those did justify holding reserves due to some sort of finance risk! Of the 17 who were left - specifically mentioning some sort of financial risk - only six referred to this in some way in their reserves policies, albeit somewhat obliquely.
Since annual reports by nature should focus only on the major, strategic risk, one might expect a much higher degree of linkage in risk and reserve reporting, reflecting a joined up approach to financial and risk management.
It seems that many charities are addressing the obvious: that financial risk has some sort of financial consequence, justifying the need for reserves. However, they are not always considering the financial impact of other risks.
This perhaps indicates a lack of joined up thinking generally between risk and reserves. We tried to explore this further using our own risk categories derived from the limited selection of charities. In the table below some charities may have multiple risks per category.
| Risk Type | Number of risks | How often reserves policy mentions a related risk? | How often risk statement mentions reserves? |
| Cyber/systems | 32 | 0 | 2 |
| External | 19 | 0 | 2 |
| People | 21 | 0 | 1 |
| Reputation | 5 | 0 | 0 |
| Safety | 14 | 0 | 1 |
| Strategic | 27 | 1 | 4 |
| Total | 118 | 1 | 10 |
Strategic risks seem to have the greatest connection between reserves and risk: this is not surprising since they overlap so much with financial matters. Elsewhere there is little suggestion that reserves are being used to manage the impact of risk.
We observe:
- There is an apparent disconnect between non-financial risk management and reserves.
- This disconnect may be due to the financial materiality of the risk. However, since annual reports should focus on material items, it is surprising that so many do not appear to have a significant financial impact.
- Apart from where there is a blindingly obvious link, reserves policies are not being used as part of risk management strategy.
We recommend that trustees consider risk and reserves policies more holistically, and that this is reflected in annual reports, resulting in greater linkage in reporting and better strategic management of resources.