Understanding our Reserves Policy
Our financial decisions are made to enable us to effectively deliver our core purpose of ensuring patient safety and maintaining public confidence in the professions we regulate.
We are legally required to manage our finances in line with International Accounting Standards and are required to give full consideration to the public sector financial reporting framework and government's guidance on financial management (set out in HM Treasury's Managing Public Money and Financial Reporting Manual). We are then subject to scrutiny by the National Audit Office in regard to our compliance and regularity of our expenditure around those requirements.
We also want to give dental professionals the greatest certainty we can about the registration fees they will be required to pay. That is made possible by ensuring the overall financial stability of the organisation.
All that means is that we need to have enough money on hand - not just to support our regular activities - but also to cover unexpected financial pressures, either to meet unplanned expenditure, or to cover unexpected shortfalls in income. The second is particularly important, as our income comes almost exclusively from the Annual Retention Fee (ARF) payments.
We hold general reserves to meet costs we are committed to incurring, but which are not yet due for payment, such as the depreciation on capital purchases that we pay off over several years and future lease costs. Because this money is set aside for specific purposes, it’s not available to spend on other things and doesn’t help us manage any wider financial uncertainty. In addition, we have free reserves which is money that has not been allocated for any activity or purpose.
To ensure that we have prudent but not excessive free reserves, Council has decided that we should hold enough money that will allow us to effectively meet our obligations should we encounter any unplanned financial impact. They have set a target of 4.5 months of our expenditure for this, after considering any financial risk we are exposed to, with a minimum level of three months and a maximum level of six months.
At the end of 2020, the total value of our general reserves was £35.9m. This was made up of £16.3m in reserves committed to specific purposes, and £19.6m of free reserves. Our free reserves were equivalent to 5.9 months, before our assessment of risk, which is at the higher level of the range set by Council.
Our Reserves Policy has been set by Council where they have considered a number of factors in deciding our target level of free reserves, including:
- our objectives in pursuit of our statutory and regulatory responsibilities
- the working capital and management of day-to-day cash flows
- any risks to the income and expenditure to the GDC
- planned major capital spending programmes.
Our total reserves, detailed in our Annual Report and Accounts 2020, comprise general reserves (which include free reserves) and pension reserves.
The GDC’s cash, general and free reserves
Identifying and managing risk is an important part of good governance. Certain risks, if they occur, will have a financial impact and will be considered as part of the budgetary process. Identified financial risk will also influence and inform our reserves policy, which forms part of our strategy for managing the impact of any identified risk, should it occur.
General reserves are funds set aside by the GDC to meet both future known and unknown costs and are funded from any excess of income over expenditure during our financial year.
It’s important to be clear that general reserves are not the same as cash held in the bank. Cash, or cash assets, are a measure of our future liquidity. As we receive the majority of our operating income from the dentist ARF, we will always hold the highest level of available cash on 31 December, and that is the level reported in our annual accounts.
The general reserve is an accounting fund, which takes into account the assets and liabilities we hold on our balance sheet.
As part of our strategic planning, Council also look beyond the annual operational plan and annual budget. They need to consider how commitments made in previous and current financial years will impact on cash budgets. For example, where commitments have been made to pay something over a number of years, then reserves may need to be built up to meet these costs if future income streams are uncertain.
General reserves are held to cover any planned expenditure and will include future known financial commitments. This includes items such as prepaid expenditure, or money owed to creditors, as well as depreciation charges for any previous capital expenditure and future operating lease costs. We set out in our Annual Report and Accounts how we apply our accounting policies and principles, which operate alongside our compliance to International Accounting Standards for these types of expenditure.
General reserves also cover any unplanned or unforeseen expenditure. We classify this proportion of the general reserve as our ‘free reserves’.
These are the proportion of the general reserve that is not ringfenced for other commitments and is held to meet any unexpected financial costs that may be incurred. These will include any materialisation of financial risk which is not within our control. For example, the impact of a crash in the financial markets on our investment valuations or a significant unexpected reduction in our income.
It's important to hold the right level of free reserves to ensure we are able to deal with any financial shock and uncertainty, so that we can continue to meet our statutory obligations.
The level of free reserves, set by Council, is the level of reserves we must hold net of any assessment of financial risk. This target is currently set at 4.5 months of operating expenditure, with a minimum and maximum level of three and six months, respectively.
Our financial viability is also tested annually through a 'going concern' assessment, by two independent external auditors, including the National Audit Office. They assess whether our reserves are sufficient to maintain our financial solvency and whether they support our judgement that the GDC is a ‘going concern’. Their opinion is reported to Parliament as part of our Annual Report and Accounts.
Going concern is simply the accounting term which means an organisation is financially stable enough to meet any obligations and able to continue to operate for the foreseeable future.