Financial Reserves Policy
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Revision |
1.0 |
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ADOPTED |
NOVEMBER 2024 |
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Last Reviewed |
First Issue |
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Review period |
Annually |
Management and Control of Reserves
Hemswell Parish Council (PC) (referred to as an ‘authority’ in the context of this policy) must maintain adequate financial reserves to meet its operational needs and ensure financial security. The Joint Panel on Accountability and Governance Practitioners Guide (JPAG) (March 2024 edition)1 advises:
5.31 As with any financial entity, it is essential that authorities have sufficient reserves (general and earmarked) to finance both their day-to-day operations and future plans.
5.32 Smaller authorities have no specific right to accumulate funds via the precept. All reserves should be reviewed and justified regularly (i.e., at least annually). It is good practice to transparently publish both the level and rationale of all reserves.
Sections 32 and 43 of the Local Government Finance Act 19922 require authorities to have regard to the level of reserves needed for meeting estimated future expenditure when calculating the budget requirement.
Determining the minimum level of reserves requires careful consideration of the level of income and expenditure and the risks to that income. However, there is no specified minimum level of reserves that an authority should hold,and it is the responsibility of the Responsible Financial Officer (RFO) to advise the PC on its level of reserves and toensure that there are procedures in place to determine and correctly record expenditure against reserves.
Hemswell PC has no legal powers to hold financial reserves other than those for reasonable working capital needs or for specifically earmarked purposes. If the year-end general reserve is significantly higher than the annual precept or rates and special levies, the PC may be required to give an explanation to its auditor (JPAG, 5.204, pg. 56, see Footnote 1).
This policy sets out how Hemswell PC will determine and review its financial reserves as part of its overall strategy for financial and operational risk management.
Hemswell PC general reserves comprise the cash flow and contingency funds necessary to cover unexpected inflation, unforeseen events and unusual circumstances. General reserves have no restrictions on their use and can be used tosmooth the impact of uneven cash flows, offset the budget requirement if necessary, or be held in case of unexpected events or emergencies.
The primary method of building general reserves is through reallocating funds (e.g., from underspend on a completed project) and allocation from the annual budget. The recommendation for an appropriate minimum level of a smallerauthority's general reserve (as for Hemswell PC) is that it be maintained at between three and twelve months of netrevenue expenditure (NRE) (JPAG, 5.34, pg. 38, see Footnote 1). The smaller the authority, the closer the figure should be to 12 months NRE; the larger the authority, the nearer it is to 3 months.
In line with the JPAG Guidance ((JPAG, 5.34, pg. 38, see Footnote 1), Hemswell PC's general reserve balance will be maintained at a minimum level of four- six months operaBonal costs of the ned revenue expenditure. This may change subject to an annual financial risk management assessment carried out by the RFO. This will be in addiBon to any amounts needed to replenish reserves spent in the previous financial year. Any surplus in general reserves above the required balance may be used to fund capital expenditure, be moved to earmarked reserves, or be used to limit any increase in the precept (in excepBonal circumstances only).
Earmarked reserves (EMRs) can only be held for genuine and intended expenditures that the PC considers likely to be required in the future. EMRs are generally built up over time for expenditure likely to be higher than can be funded from a single year's budget, e.g., repainting of the village Maypole.
EMRs are established on a ‘needs’ basis and Hemswell PC Finance Committee may allocate an EMR for subsequent approval by the PC. EMRs shall be separately identified and recorded in the PC accounting software. Hemswell PC EMRs include the separate identification of all unspent/uncommitted Community Infrastructure Levy (CIL) funds, as per JPAG, 5.155, pg. 51, see Footnote 1).
EMRs shall be subject to annual review and justification as significant levels of EMRs may give rise to enquiries from internal and/or external auditors.
If an EMR is used to meet short-term funding gaps, it must be replenished in the following financial year. Where an EMR's purpose becomes obsolete or there is an over-provision of funds, the excess may be transferred to the General Reserve or one or more other EMRs by approval at a PC meeting.
Management and Control of Reserves
Movements in General Reserves and EMRs shall be reported to the PC as part of the quarterly budget reports and at monthly meetings if required. Expenditure against financial reserves shall be approved by the PC.
The level of General Reserves shall be reviewed on an annual basis during the annual budgetary review by the Finance Committee for approval by the PC. The Finance Committee shall recommend the minimum level of General Reserves for approval by the PC which will form part of the recommendations for the annual budget and precept request by Hemswell PC.
EMRs shall be reviewed individually as part of the annual budgetary review and the Finance Committee will make recommendations for the creation, amendment, cessation or continuation of EMRs for approval by the PC as appropriate.
In line with JPAG section 5.31, Hemswell PC publishes both the rationale and level of its reserves in line with transparency good practice. Details may be found at hdps://hemswell.parish.lincolnshire.gov.uk/
Related Documents
- Financial Regulations
- Asset Register
- Finance Committee Terms of References Business & Risk Management Policy Business & Risk Management Register
1 The Joint Panel on Accountability and Governance Practitioners Guide (JPAG). https://www.slcc.co.uk/site/wp-content/uploads/2024/03/Practitioners-Guide-2024.pdf
2 Local Government Finance Act 1992 https://www.legislation.gov.uk/ukpga/1992/14/contents