Adjusting Grant Liability for Payables

September 2021

When accepting a grant, you initially incur a liability, because the grant must be spent in future, or paid back. This means that your financial statements at the end of the year will show a dollar amount for such grant money that has not yet been expended.

Organisations also have to report accounts payable and, if you do accrual accounting, accrued staff annual leave. Chances are that some, or all, of these amounts will be paid from grants. If the grant liability is not adjusted for such items, the organisation will appear to have more liability than they really do. In accrual accounting this will also reduce the surplus, or increase the deficit.

Without an adjustment, it works like this: if you use grant money to pay for an item that is sitting in Accounts Payable, two things will happen: Your accounts payable liability will reduce, and your grant liability will also reduce by the same amount. This would mean that for one dollar paid, you would get a reduction of two dollars of liability, something that should not be possible.

This also applies to the annual leave liability. If a staff member on leave is usually paid out of a grant, we have the same problem of reducing two dollars of liability with one dollar of payment, but the complication is that we do not exactly know when this will occur, and it may even be paid out of a grant that the organisation does not yet have. For this, we generally determine the percentage of staff wages that is usually paid from grants, and adjust for that percentage.

For many organisations, the effect of this on the Financial Position is not big enough to worry about it too much, especially as the effect does not accumulate through the years. But for many highly grant dependent groups, this can make the organisation appear as though they are in debt (more liabilities than assets), when they aren’t.

This is one of those nerdy accounting issues, where traditional accounting doesn’t work for not-for-profits, and which a lot of accountants get wrong for this reason.

Changes to Accounting for Donations and Grants for Tier 3

December 2024

CCA has gradually started implementing the new standards for Tier 3 and Tier 4 organisations (mostly registered Charities) over the last year, where this made sense. For balance dates on or after 31 March 2025, this will now be compulsory.

One of the changes that will affect quite a few Tier 3 organisations is when grants or donations have to be tracked and accounted for as a liability unless used.

The old rule was that there has to be a written agreement between the funder and the donee that any money not used for the specified purpose after the specified time has to be returned to the funder. In all other cases, the money would be treated as an unconditional donation (although unspent amounts were still meant to be reported in the Notes).

This led to sometimes somewhat arbitrary results, and the new rule is that there must be a ‘documented expectation’ that a grant or donation is used for a particular purpose or in a particular way. This means that if the funder or donor has expressed in writing (including emails or simply by using an application process) that they would like to see the money used in a certain way or for a certain purpose, this grant or donation must be tracked, and recorded as a liability until spent.

Generally, this is more in line what most community organisations are doing anyway, however it now also captures donations from private individuals or businesses that are given to support a particular purpose. Let’s say, for example, a private donor (including an estate of a deceased person) gave you a sizeable chunk of money and indicated in an email or letter that they intend this to go towards planting in a nature reserve or working with young people. Under the old rule, unless you have signed some sort of agreement that any unused money has to be returned, this would have been accounted for as a donation, and therefore income at the time it was received. Under the new rule, any funds from this donation not spent at Balance Date would be accounted for as a liability and carried forward.

This counts as a ‘change in accounting policy’ and may lead to some adjustments having to be made to existing funds, that you have accounted for as donations previously, but that are not actually spent at Balance Date.

As always, the ‘materiality’ principle applies, and amounts that are insignificant (in relation to your organisation’s overall financial activity) can always be accounted for as income when received.