Financial Reserve Policy
REM REFERENCE TBC
POLICY TYPE Council: adopted by Council resolution
APPROVAL Council
DATE ADOPTED XX May 2026
DIRECTORATE Corporate and Commercial Services
POLICY OWNER Manager Financial and Integrated Planning
NEXT REVIEW May 2030
REVISION RECORD VERSION REVISION DESCRIPTION
1. Purpose
This policy is to ensure sustainable and responsible management of Council’s cash balances and financial reserves through a consistent and transparent approach to the appropriate identification and creation, administration, and usage of statutory and discretionary restricted financial reserve accounts.
The objectives to be achieved under this policy support this aim by ensuring:
• Definitive classifications of Financial Reserve accounts, including cash-on-hand requirements
• Appropriate levels of funds are available at the appropriate time to meet statutory and operating requirements and to prudently manage financial risk
• Council’s reserve activity is in accordance with legislative, governance and prudent financial principles
• Processes are established around the creation and classification of Financial Reserves, as well as requirements of transfers of funds into and from these reserves and
• Processes are established to administer the Financial Reserves, including restrictions of usage of funds in reserve, internal and external reporting of usage of funds in reserve and closure of reserves at end of useful life
2. Scope
This policy is applicable to both Discretionary and Statutory Reserves for Council and includes creation of Reserves, transfers of funds to Reserves and subsequent use of funds from Reserves.
This policy excludes the Asset Revaluation Reserve that arises under the Australian Accounting Standards because it relates to the change in asset values rather than the collection of funds.
This policy applies to Councillors and Council Officers and staff.
3. Governance Principles and Council Plan Alignment
3.1. Governance Principles
A Council must, in the performance of its role, give effect to the overarching governance principles (Local Government Act 2020 (Act) s9). In accordance with the Act, this Policy aligns with the following governance principle/s:
Principle (g) the ongoing financial viability of the Council is to be ensured;
3.2. Council Plan Alignment
Strategic Outcome 4: Council Performance and Leadership – A forward-thinking and responsive council that values community input, committed to optimising services, ensuring robust governance and making sustainable decisions
4. Policy
4.1. Principles
4.1.1. The creation, retention, and use of funds in financial reserves must consider both the need for long-term financial sustainability and the delivery of Council’s services within a single financial year.
4.1.2. The creation, contribution or retention of funds in reserves should not cause Council to forgo key opportunities for growth or improvement or diminish Council’s ability to deliver essential services by diverting, or unnecessarily withholding funds.
4.1.3. Discretionary reserves should be created in a manner that avoids over-stratification, or where the use of funds is tied to extremely limited purposes. It is important to avoid the creation of unnecessary reserves, as reserves tie up financial resources that may be utilised for essential projects, services, or community needs.
4.1.4. Generally, income and expenditure should be budgeted in the financial year in which it occurs and should not be “set aside” in reserves for future use. Financial reserves are created where:
• surplus operating cash and/or income from specific sources are allocated for committed future expenditure.
• it is necessary to stratify monies held by Council that are linked to statutory requirements.
• it is necessary to stratify monies held to deliver on large, long-term organisational objectives or strategies.
• it is necessary to allow for volatility, unforeseen emergences, or other unexpected needs.
4.1.5. As at 30 June each year the recorded cash balance will, at a minimum, be equivalent to the total balance of statutory and discretionary financial reserves. In general, it is not necessary that these funds have bank accounts of their own but are a theoretical split up of the cash surplus that Council has on‐hand.
4.2. Statutory Reserves
4.2.1. Council’s statutory reserves have been established to record revenues received from developers which are to be applied specifically to undertake future capital works for car parking, public open space and recreation, Infrastructure assets (roads, drainage and footpaths), community facilities and development contributions plans.
4.2.2. The use of funds from Statutory Reserves is governed by legislation (or other legal requirements) and records Council’s future expenditure commitments. These are separately accounted for to ensure sound financial management of future operations.
4.2.3. Where statutory funds are collected to fund future infrastructure there are legal requirements that govern how the funds must be spent. This may include expending the funds in accordance with the terms and conditions of the relevant funding agreement, or on projects in the vicinity of the developments that the funds were collected in respect of.
4.2.4. All Statutory reserves are required to be 100% backed by cash and cash equivalents and/or current other financial assets at the end of each financial year
4.2.5. A list of current Statutory Reserves is included in Schedule One.
4.3. Discretionary Reserves
4.3.1. Discretionary Reserves are funds held by Council and segregated from general revenues, based on Council directions, to finance future expenditures or to provide for a specific project to ensure funds are available as required. Discretionary Reserves may be varied from time to time where expenditure commitments may be created and retired.
4.3.2. Council may also create program specific reserves where capital purchases occur across multiple financial years, funded by operational surpluses generated by these assets.
4.3.3. A list of current Discretionary Reserves is included in Schedule One to this policy.
4.4.
4.4.1.
Establishment of Financial Reserves
Statutory Reserves
Statutory Reserves will be established for any value if there is a legislative requirement or a requirement under the Australian Accounting Standards
4.4.2.
Discretionary Reserves
As a general rule, income and expenditure should be budgeted in the financial year in which it occurs and should not be “set aside” in reserves for future use. However, Council does in some instances create financial reserves where:
1. Large expenditure needs to be funded over a period of time; or
2. Funds are collected specifically for funding of a particular capital works project/program(s).
Approval is required via a decision made by resolution at a Council meeting for the creation of new discretionary financial reserves. If a new reserve is required a report will be prepared and submitted for consideration at a Council meeting for endorsement. The report will include details of:
1. Why the financial reserve is required (including any legislative requirements)
2. Where the funds to be transferred to the reserve will come from
3. What the funds will be expended on
4. When the funds will be spent
5. The length of time the reserve will be required;
6. The dollar value of expected Reserve balance and transfer in/to the Reserve.
Discretionary reserves would not be created for a purpose where it is expected that the balance of the reserve would not reach at least $50,000.
4.5. Financial Reserve Transfers – transfer to reserves
Transfers of funds to a reserve must be for the purpose of the reserve.
Statutory Reserves
Discretionary Reserves
Transfers into the reserve account occur monthly on receipt of the funds.
Use of funds can only be in line with the funding agreement or statutory requirement of the reserve and may be endorsed by Council in two manners:
• Upon approving the budget at a Council meeting or
• By resolution at a Council meeting outside of the budget process
Transfer of funds are restricted by the internal purpose of the reserve. All transfers to the reserve account must be endorsed at a Council meeting in the following manner:
• Identified in the budgeting or forecasting process as funds committed to be transferred to the reserve account
• By resolution at a Council meeting outside of the budget process or
• As part of the endorsement of the annual financial statements once the financial year results are completed and surplus funds are identified.
4.6. Financial Reserve Transfers – transfer from reserves
4.6.1. Transfers of funds from a reserve must be for the purpose of the reserve and are overseen by the Manager Financial and Integrated Planning and reported in the quarterly and annual financial statements.
Transfers approved in Annual Budget Works identified in Capital Works program, or as part of service area work plans, are required to detail project funding including planned usage of reserves. The project funding proposal is then endorsed at a Council meeting as part of the Annual Budget process.
Transfers of funds in excess of Approved Budget
Transfers of Funds not approved as Part of the Budget Process
Transfer of funds from the discretionary Unexpended grants reserve
In cases where a transfer of funds from a Reserve was approved in the budget but subsequently a higher level of funding is required from Reserves, approval must be sought before transfers are made. Any such transfer from a Discretionary Reserve for purposes outside of the budget must be approved by the CEO and subsequently reported to Council.
Statutory Reserves are to be dealt with in this regard pursuant to any applicable legislation.
From time to time there may be a requirement to transfer funds from a Reserve for purposes not foreseen when the budget was developed. Any such transfer from a Discretionary Reserve for purposes outside of the budget must be approved by the CEO and subsequently reported to Council.
Statutory Reserves are to be dealt with in this regard pursuant to any applicable legislation.
Transfers from Unexpended grants reserve are approved by the Manager Financial and Integrated Planning for the specific purposes outlined in Appendix Two for this reserve.
Transfer of funds from the discretionary Economic development grants reserve
Transfer of funds from the discretionary Capital projects reserve
Transfers of Funds from Statutory Reserves
4.7. Closure of Reserves
Transfers from Economic development grants reserve are made by Finance staff in accordance specific criteria outlined in Appendix Two for this reserve.
Transfers from Capital projects reserve are approved by the Manager Financial and Integrated Planning for the specific purposes outlined in Appendix Two for this reserve.
Transfers from Statutory Reserves are made by Finance staff in accordance with the relevant legislative and legal requirements.
4.7.1. Reserve accounts will be closed at the end of their useful lives via a decision made by resolution at a Council meeting. The resolution will determine the reallocation of funds from a financial reserve when it becomes obsolete for its initial purpose. This discretionary power enables Council to make informed decisions on directing the remaining balance of the reserve towards alternative initiatives or projects that align with the evolving needs and priorities of the community.
4.7.2. Following the Council resolution to close a reserve account, the Financial and Integrated Planning department will process the necessary journal entries in the Finance system to close the reserve. These journal entries will align with the resolution, directing the balance to a specific project, another reserve, or the allocation of the amount to accumulated surpluses.
4.8. Reporting on Financial Reserves
4.8.1. Reporting on Financial Reserves occurs as part of Quarterly Financial Report which is endorsed at a Council meeting, including:
• creation or closure of Financial Reserves
• transfers into and from Financial Reserves, as stipulated in Section 4.4 and Section 4.5 of the Policy
4.9. Monitoring, Evaluation and Review
4.9.1. Compliance will be evaluated and reviewed on an annual basis.
4.9.2. It is recognised that, from time to time, circumstances may change leading to the need for minor administrative changes to this document. Where an update does not materially alter the effect or purpose of this Policy, such a change may be made administratively. Examples include a changed name of internal roles, a Federal or State Government department, or a minor update to legislation which does not have a material impact. However, any change or update which materially alters this document must be endorsed by resolution at a Council meeting.
5. Roles and Responsibilities
Role Responsibility
Councillors
CEO
Director Corporate and Commercial Services
Manager Financial and Integrated Planning
Responsible for endorsing the creation, closure and transfers to and from the reserve
Responsible for recommending the creation or closure of a new discretionary reserve to Council
Responsible for the overarching responsibility for enforcement and compliance with this policy.
Responsible for the day-to-day management of the Policy, including:
• Ensuring that reserve activity is in accordance with legislative, governance and common law principles.
• Transfers to reserves are in accordance with section 4.5 and section 4.6 of this Policy.
• Oversight of all transfers from reserves.
• Compliance.
6. Policy non-compliance
Non‐compliance with this Policy has the potential to negatively impact on the reputation of Council.
In the event of policy non-compliance, an assessment will be conducted during the Council's next budget or mid-year budget cycle, whichever comes first. This evaluation aims to address any deviations from established policies and enact corrective measures to regain compliance.
7. Definitions
Term Definition
Reserves Are funds that have been set aside from operating and capital incomes for future funding of projects. From an accounting perspective the value of these funds are recorded in equity balance sheet ledger accounts definition
Statutory Reserves: Statutory Reserves are those required by legislation to record Councils future expenditure commitments
Discretionary Reserves
Developer Contributions
Discretionary Reserves are those developed by Council to record Councils future expenditure commitments
Developer contributions are payments made by developers towards costs associated with essential infrastructure.
8. Related documents
8.1. Legislation
• Local Government Act 2020
• Australian Accounting Standards
• Victorian Local Government Act 2020
• Planning and Environment Act 1987
• Subdivision Act 1988
8.2. Documents and resources
• Nil
SCHEDULE ONE
The following list of Statutory Reserves are Reserves Council currently has in place. A summary of each Reserve at Appendix One of the Financial Reserve Policy outlines the purpose of each current statutory reserve and its typical inflows and outflows:
• Public Open Space
• Developer Contribution Plans (DCP)
• Infrastructure Contribution Plans (ICP)
The following list of Discretionary Reserves are those that Council currently has in place. A summary of each Reserve at Appendix Two outlines the purpose of each current Discretionary reserve and its typical inflows and outflows:
Frankston City Council Discretionary Reserves:
• Strategic assets
• Loan Sinking fund
• PARC asset management plan
• Unexpended grants reserve
• Capital projects
• Resource efficiency
• Waste recycling and resource recovery reserve
• Economic development grants reserve
Peninsula Leisure P/L Discretionary Reserves:
• PARC Asset Management Plan
• PARC Strategic