| |
| |
Recognition of income from Grants | |
One of the most common areas of difficulty that we find during the preparation and audit of financial statements of charities is the treatment of grant income. This area can cause confusion and difficulty both for the preparer of the accounts, trustees and other users of the accounts. It can also lead to some significant year end adjustments if the grant is not initially accounted for correctly. | |
So why is this such a difficult area? Many people will be familiar with the accounting concept of matching income with expenditure. There are many examples of this but at a most basic level, income would often be matched with the relevant expenditure to report a profit or surplus on that income. | | | |
This treatment makes sense to users of the accounts, and an entity does not end up with significant fluctuations in income, expenditure and the entity’s results for the year.
When preparing or reviewing charity accounts many staff and trustees will assume that if they receive a grant to undertake an activity, they should match the grant income with the relevant expenditure. This may involve deferring the grant as deferred income if the activity has not taken place and the related expenditure has not been incurred. Unfortunately, in many cases this is not the correct treatment, and the charity should recognise the income and expenditure in separate periods. To understand why let us consider the requirements of the Charities SORP. | |
Section 5.10 of the SORP states that income from grants is recognised when: - There is evidence of entitlement
- Receipt is probable
- It can be measured reliably
| | | |
In the case of a grant, evidence of entitlement will usually exist when the formal offer of funding is communicated in writing to the charity. However, some grants will contain terms or conditions that must be met before the charity has entitlement to the resources. The terms or conditions might be performance related conditions or other terms that prevent recognition of the income. A performance related condition might be the provision of a certain service. Alternatively, there might be a time related condition included in the grant agreement. For example, the grant agreement might specify that the grant can only be spent in a certain financial period. Where terms and conditions have not been met or uncertainty exists as to whether the recipient charity can meet the terms or conditions, the income should not be recognised but deferred as a liability until it is probable that the terms or conditions imposed can be met. This follows the matching principle that we mentioned earlier. | |
However, when meeting terms or conditions are within the charity’s control and there is sufficient evidence that they have been or will be met, then the income must be recognised. This is often the case with grants and the situation that causes so much difficulty for charities – they want to match the income and expenditure but there is nothing in the grant agreement that allows them to do this.
| | | |
In many cases this can lead to a significant surplus being recorded in the first financial period when the income is recognised only for a significant deficit to be recorded in a later period when the grant is spent. As accountants and auditors, whilst we can understand why charity management and trustees do not like this method of accounting, it is unfortunately often the correct treatment. To avoid significant adjustments at the year end and surprises for charity trustees it is important for management to carefully analyse grants that have been received and consider the accounting treatment at an early stage. This will then allow the treatment of grants to be communicated internally and included in budgets and forecasts in the correct period. It will not avoid the situation where a significant surplus is followed by a large deficit, but at least if this is budgeted it will help management and trustees better understand the situation. For further information on this topic or to discussion a specific case please do get in touch. | |
| |
| |
James Cowper Kreston is a leading firm of accountants and business advisers, with offices across the South of England. We deliver focused, innovative advice to a diverse range of businesses and individuals helping our clients to maximise their potential.
If you would like to discuss any of the topics raised within this newsletter please email us on info@jamescowperkreston.co.uk or call us on 01635 35255.
Kind regards Alex Peal | Joint Managing Partner T: +44 (0)7771826264 | E: apeal@jamescowper.co.uk | |
| |
The information in this newsletter must not be relied on as giving sufficient advice in any specific case. | | | |
| |
| |
| |
| |
| |
| |
.jpeg)
