More than 10% of charities holding at least five years of reserves, Grant Thornton survey shows

Around 11% of charities are holding on to reserves of more than five years, according to a Grant Thornton survey of the sector.

Grant Thornton partner and not-for-profit co-leader, Barry Baker, said charities would face an increasing obligation to justify holding on to large reserve funds if recent charity review recommendations are adopted.

The charities sector is currently undergoing review. The minister for the community and voluntary sector, Priyanca Radhakrishnan, earlier told BusinessDesk that many of New Zealand’s largest charities had significant unexplained accumulated funds.

It was important they were transparent about why they were holding large amounts of funds, including donations, the minister said. 

A non-legislative recommendation is that charities with operating expenses over $140,000 will be required to report the reasons for accumulated funds when they file their annual financial returns to Charities Services. 

Baker urged charities not to be alarmed by the possible change but said they did need to be ready. In a statement aimed at the charity sector, he said charities should consider whether they were getting the most of their reserves.

Grant Thornton’s 2022 survey of the not-for-profit sector found that around 75% of not-for-profits could survive at least six months on their current reserves. 

However, 11% of organisations said they could survive more than five years on their reserves. Without looking at the context, sitting on five years of reserves did seem like a lot, Baker said.

Many charities used six months of reserves as a target. While that was better than nothing, they should develop a structured reserves policy, Baker said. 

He cautioned that a charities reserve was not the same as balance sheet equity. Only those net assets that could be turned into cash reasonably quickly counted as reserves. Assets such as databases, furniture and IT equipment should be excluded because they would raise little cash if sold, Baker said. 

Property check

A charity’s property could form a huge part of its reserves. Baker said buildings should be looked at to make sure they were not underused and that the charity was getting the best use of its assets.

Large cash or term deposits should also be reviewed. An investment adviser could check whether investment returns aligned with the charity’s strategy and its organisational risks, he said. 

Charity reserves were generally used for a range of activities, including a ”rainy day fund”, expected deficits during reorganisations, wind-down costs and large asset purchases. 

A formal reserves policy should include why a certain level of reserves was held and the trigger points for drawing on them. It could have a baseline reserve easily turned into cash and other reserves held in less liquid forms.

The best way to disclose reserves was by adding a supplement to annual financial statements that showed how much they were and explained why the charity had them, Baker said.