Designated funds vs restricted funds

Q: Who creates each type of fund?

PointDesignated fundRestricted fund Created byTrustees' own decisionDonor's terms, an appeal or legal process Can be changed by trusteesYes, by a further decisionNo, only within the legal rules for changing restricted purposes Accounts columnUnrestricted fundsRestricted income funds Counts as reservesCan be excluded if set aside for essential future spendingOutside the definition of reserves Effect on income recognitionNoneNone; a restriction does not delay recognition The last row is often misunderstood. FRS 102 paragraph PBE34.68 says the existence of a restriction does not prevent a resource being recognised as income when received or receivable. Restriction decides which column the income goes in, not when it is recognised. A designation has no effect on income at all, because the money was already unrestricted income when it arrived.

Q: What does a worked example look like?

Illustration only. At its year end a community charity holds: FundAmount Unrestricted funds in total£400,000 of which designated: functional fixed assets£150,000 of which designated: roof replacement planned for 2028£90,000 Restricted fund: grant for a youth project£60,000 Free reserves are £160,000 (£400,000 less £150,000 less £90,000). The £60,000 restricted grant is not part of the calculation at all. If the trustees later decide to repair the roof rather than replace it and need only £40,000, they can release £50,000 back to general funds by a further decision, explaining the change in the next annual report. They could not do the same with an unspent part of the youth grant without following the donor's terms or the rules on changing restricted purposes.

Q: What rules and mistakes should trustees watch?

No designations after the year end. CC19 says designations relate to plans that exist at a point in time, so new designations cannot be set up retrospectively after the year end to disguise the true level of unrestricted funds held. Designations that never get spent. CC19 warns that designations never used, or frequently changed without money being spent, risk bringing the charity into disrepute and may attract regulatory attention if a complaint is made about reserves. Calling restricted money designated. Treating appeal money as a designated fund allows it to be released in error. If an appeal raises more than needed, the Commission's guidance on surplus appeal funds applies. Designating to cover a restricted deficit. Covering a restricted overspend from unrestricted funds is a transfer, not a designation, and a fund in deficit has its own reporting requirement. No minute of the decision. A designation is a trustee decision and should be recorded as one. For how fund reporting fits within the wider accounts, see the Charities SORP explained and changes in the new Charities SORP. Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

A designated fund is money the trustees have chosen to earmark from the charity’s unrestricted funds for a particular project or use; the trustees can change or cancel the designation at any time. A restricted fund is money that must be spent on a specific purpose because of the donor’s terms, an appeal or a legal process, and the trustees cannot simply release it. In the accounts, designated funds sit inside the unrestricted column, while restricted funds have their own column.

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What is the legal difference between designated and restricted funds?

The Charity Commission’s guidance on reserves (CC19) sets out the definitions used in charity accounts:

Designated funds: Part of the unrestricted funds that trustees have earmarked for a particular project or use, without restricting or committing the funds legally. The designation may be cancelled if the trustees later decide the charity should not go ahead with the project.
Restricted funds: Funds subject to specific trusts, declared by the donor or with their authority (for example in a public appeal) or created through legal process, but still within the charity’s wider objects.

CC19 stresses that designation is administrative only and does not legally restrict the trustees’ discretion to spend the fund. That single point drives almost every practical difference: who can change the fund, whether it counts towards reserves and what has to be disclosed. The full family of fund types, including endowment, is explained in restricted, unrestricted and endowment funds.

Who creates each type of fund?

Point	Designated fund	Restricted fund
Created by	Trustees’ own decision	Donor’s terms, an appeal or legal process
Can be changed by trustees	Yes, by a further decision	No, only within the legal rules for changing restricted purposes
Accounts column	Unrestricted funds	Restricted income funds
Counts as reserves	Can be excluded if set aside for essential future spending	Outside the definition of reserves
Effect on income recognition	None	None; a restriction does not delay recognition

The last row is often misunderstood. FRS 102 paragraph PBE34.68 says the existence of a restriction does not prevent a resource being recognised as income when received or receivable. Restriction decides which column the income goes in, not when it is recognised. A designation has no effect on income at all, because the money was already unrestricted income when it arrived.

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How are designated funds shown in the accounts?

The statement of financial activities has columns for unrestricted funds, restricted income funds and endowment funds. Designated funds are part of the unrestricted column, so designating money is a movement within unrestricted funds, not income or expenditure. Under SORP 2026, which applies to reporting periods starting on or after 1 January 2026, Module 2 on fund accounting applies in full to every tier and gives a fuller explanation of fund types. It also adds a requirement to disclose the legal powers used to remove a capital restriction, change the purposes of a restricted fund or allow an endowment to convert to income. Those powers apply to restricted and endowment funds; no legal power is needed to change a designation.

In practice the funds note shows each material designated fund separately within unrestricted funds, with its opening balance, amounts designated or released in the year and the closing balance, together with a short description of its purpose.

What must the trustees’ annual report say?

Regulation 40(3)(p) of the Charities (Accounts and Reports) Regulations 2008 requires the annual report to describe any policies for deciding the appropriate level of reserves, with the amount and purpose of material commitments and planned expenditure not provided for in the balance sheet that have been deducted in calculating reserves, or a statement that no policy has been adopted. The Commission’s guidance on the annual report says the financial review must identify any designated funds when determining the level of reserves. CC19 adds that where material funds have been designated, the reserves statement should quantify and explain the purposes of the designations and, where set aside for future spending, the likely timing of that spending.

How do designated funds affect reserves?

CC19 defines reserves as the part of unrestricted funds that is freely available to spend on any of the charity’s purposes. The items it says should be excluded include tangible fixed assets used in the charity’s work, social investments, designated funds set aside to meet essential future spending, and commitments not provided for as liabilities. Restricted funds are outside the definition entirely.

Two designations are common. A fixed asset fund designates the value of functional fixed assets essential to the charity’s aims, though CC19 asks trustees to consider whether an asset such as a high value administrative office could be sold and replaced with rented space if money were needed. A project or replacement fund builds up money over several years for a planned cost that future income alone could not meet, such as a building repair or matched funding for a capital appeal. CC19 also notes that a defined benefit pension asset is normally designated and not counted as reserves.

What does a worked example look like?

Illustration only. At its year end a community charity holds:

Fund	Amount
Unrestricted funds in total	£400,000
of which designated: functional fixed assets	£150,000
of which designated: roof replacement planned for 2028	£90,000
Restricted fund: grant for a youth project	£60,000

Free reserves are £160,000 (£400,000 less £150,000 less £90,000). The £60,000 restricted grant is not part of the calculation at all. If the trustees later decide to repair the roof rather than replace it and need only £40,000, they can release £50,000 back to general funds by a further decision, explaining the change in the next annual report. They could not do the same with an unspent part of the youth grant without following the donor’s terms or the rules on changing restricted purposes.

What rules and mistakes should trustees watch?

No designations after the year end. CC19 says designations relate to plans that exist at a point in time, so new designations cannot be set up retrospectively after the year end to disguise the true level of unrestricted funds held.
Designations that never get spent. CC19 warns that designations never used, or frequently changed without money being spent, risk bringing the charity into disrepute and may attract regulatory attention if a complaint is made about reserves.
Calling restricted money designated. Treating appeal money as a designated fund allows it to be released in error. If an appeal raises more than needed, the Commission’s guidance on surplus appeal funds applies.
Designating to cover a restricted deficit. Covering a restricted overspend from unrestricted funds is a transfer, not a designation, and a fund in deficit has its own reporting requirement.
No minute of the decision. A designation is a trustee decision and should be recorded as one.

For how fund reporting fits within the wider accounts, see the Charities SORP explained and changes in the new Charities SORP.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.