New reporting for grants and government contracts in Tier 3

The new Tier 3 standard has not been as completely re-written as the one for Tier 4, but it has still changed substantially. It provides some much needed clarification around the treatment of grants and investments, for example, but also some more required disclosures that will present a challenge for accountants not as knowledgeable with not-for-profit accounting.

Many of the changes follow recommendations by CCA in the review process. Here’s changes that affects how grants and government contracts are reported:

Grants given for capital purposes must now be reported separately from other grants, and can even be put below the operating surplus line to avoid distortion or an organisation’s surplus by such a grant.

Grants in general can no longer be lumped in with government contracts – these two must now be kept separately.

There is now a mandatory disclosure about unexpended grants, and also other donations given for a specific purpose, required in the Notes. The disclosure requires to give detail about what the money has to be spent on, and, curiously, when it is expected to be spent.

The old ‘use-or-return’ definition of grants, which specified that an unexpended amount from a grant can only be a liability if there is a written agreement that asks for unspent amounts to be returned, has been abolished. Instead, unexpended amounts from grants or donations are now considered liabilities if there is a ‘documented expectation’ that they are being used in a certain way. This definition better follows the actual practice of organisations in managing such grants and donations.

Government contracts can no longer be lumped in with grants and are now in a separate category. The old categories required accountants to make a judgment call on whether a grant is a donation in nature, or income from service provision (government contracts are always considered income from service provision, as there is an agreement about required outputs and outcomes).

The new Tier 3 standard is more prescriptive about the categories that must be used in the Statement of Financial Performance, although they can be renamed. Any breakdown must now be provided in the Notes only, and can no longer be provided in the actual Statement. The old standard did not have any ‘grant’ category, now there are two (capital grants and other grants).

In its submission, CCA had advocated to abolish mandatory or minimum categories altogether and allow organisations to chose categories, within limits, that make the most sense to their stakeholders, in line with internationally accepted financial reporting practice.