Giving News

Grant reporting

For those Tier 3 and 4 Not-for-Profits (NFPs) who are first time adopters of the External Reporting Board’s new accounting standards, you would have noticed that grant income is no longer presented as a line item on your statement of financial performance. As grant reporting is an important part of many NFP’s relationships with their funders, it is important to understand the new accounting standards and how they impact your NFP’s financial statements.

Grant income will now be typically recorded in the category of ‘donations, fundraising and other similar revenue’. This category can be broken down further in the notes to the financial statements, or by creating sub-categories on the face of the statement of financial performance. Care should be taken not to create too many revenue lines on the face of the statement of financial performance, as that can make it difficult for users to understand the overall performance of the entity.

When determining how to account for grants, the key matter that requires consideration is whether the grant includes a ‘use or return’ clause, which is a requirement to return funds that have not been used for the purpose specified in the grant agreement.

The table below sets out some guidelines to assist with classification of grant income:

Example		Comments
A grant received with no ‘use or return’ clause.		Revenue should be recognised when the grant is received.
A grant received with a ‘use or return’ clause (i.e. an obligation to return any unspent funds to the granting body).		As there is a requirement to repay unspent funds, the organisation must recognise a portion of the grant received as income in advance at year end. This amount will reflect the extent to which the project’s obligations under the contract have not been satisfied. In practice, it’s usually easier to recognise a liability for the full amount of the grant when it is received, and then recognise revenue (and reduce the liability) as the funds are spent for the purposes specified in the grant.

Example

Comments

A grant received with no ‘use or return’ clause.

Revenue should be recognised when the grant is received.

A grant received with a ‘use or return’ clause (i.e. an obligation to return any unspent funds to the granting body).

As there is a requirement to repay unspent funds, the organisation must recognise a portion of the grant received as income in advance at year end. This amount will reflect the extent to which the project’s obligations under the contract have not been satisfied. In practice, it’s usually easier to recognise a liability for the full amount of the grant when it is received, and then recognise revenue (and reduce the liability) as the funds are spent for the purposes specified in the grant.

Bear in mind that each grant should be analysed separately and that classification is not always straightforward. Funding agreements with a ‘use or return’ clause can also present challenges for year-end reporting, as judgement calls must be made to determine what portion of grant income has been earned.

NFPs may also provide services on a user pays basis. Revenue from those services should be recognised in the category ‘revenue from providing goods or services’, which is a separate line on the face of the statement of financial performance. The revenue must be recognised as the service is performed. At balance date that means determining how much of the contracted service has been provided and recognising that amount of the revenue (for example, if the fee for the service is $500 and 60% of the agreed service has been provided by balance date, $300 revenue should be recognised in revenue for the period).

For assistance with reporting on grants, contact your local BDO adviser.