The accounting treatment of grants in accrual accounting has changed for accounting periods ending 31 March 2024 or later (early adoption possible from 30 June 2023).
There is no separate definition of a ‘grant’ as being different from a donation. In the not-for-profit sector, people tend to refer to a ‘grant’ if there is an application process, and if the funds come from some form of Trust, Society or government department. People should not be confused by whether a donor calls their contribution a ‘grant’, ‘donation’, ‘koha’, or something else when deciding on the correct accounting treatment.
From March 2024, the term ‘documented expectation’ replaces ‘use-or-return’ when deciding on whether receipt of a grant creates a liability for the organisation. Grantmakers/donors no longer need to specify in any funding agreement, whether they expect any unused funds to be returned.
The updated standard also requires ‘insignificant’ grants or donations to always be treated as income right away, without any accrual of unexpended amounts. Whether something is ‘significant’ or not is a judgment call, and depends on the size and circumstances of an organisation. Also, while an individual item may be insignificant, a group of related insignificant items may become significant.
Grants that have to be applied for will always meet the 'documented expectation' definition. Such grantmakers all make it known what they want their grant to be used for - through the application process, their web site, or another information source accessible to the applicant when filling out the form. Such usage may be very wide ('general operating costs'), or very narrow, but all grant funders have some priorities about what they want to achieve with their grant. Applying for such a grant would constitute written agreement to use it in the way intended by the giver.
To ensure equal and consistent treatment of all such grants was a core reason for updating this part of the accounting standard.
Any unexpended amounts from any such grants at balance date should be accrued as a liability.
Organisations may ask its members or the general public for donations for a specific purpose, such as the upgrade of a building or the restoration of a specific nature reserve. Such donations do not meet the 'documented expectation' definition. The standard makes it clear that there needs to be something in writing that would be considered an agreement between the two parties.
Unexpended amounts from such donations cannot be accrued as liabilities at balance date. If an entity wants to disclose them, this can be done through an equity reserve.
Private donations, whether solicited or not, will generally not meet the 'documented expectation' meaning, and will often also fall short of being 'significant'. This generally covers all donation boxes, donations through a third party such as 'givealittle' or 'patreon', payroll giving or other instances of individuals making a donation.
In some cases an individual or entity may make a significant donation, accompanied by a letter specifying what they want the donation to be used for. The purpose needs to be more specific than saying 'to support your organisation', or something similar. However, if the donor has made their intention clear in writing, and the organisation accepted the donation, this would also meet the 'documented expectation' definition, and any unexpended amounts from such donations at balance date should be accrued as liabilities.
Bequests are specifically mentioned in the standard. Provided that there is accompanying documentation with the bequest (such as a letter from the lawyer, or the text from the Will) that specifies a purpose for the amount gifted, this meets the 'documented expectation' meaning, and unexpended amounts at Balance Date should be accrued.
If there is no such documentation, or the expectation is not specific enough (i.e. a gift to the organisation rather than a specific way of spending it), no balance date accrual should be made.
Sponsorships may be commercial agreements, for example where the sponsor has been given advertising or naming rights. Such sponsorships would not be considered donations or grants.
Many sponsorships are small business or private individuals, sponsoring a specific event, or an individual's or team's participation in an event, or something similar. Such sponsors may be acknowledged on a board, in newsletters, on a web site or elsewhere, but in nature they would not be considered the sale of an advertising or promotion service. This means such sponsorships would be considered donations and come under the 'documented expectation' rule. An organisation will usually prepare some material to explain the sponsorship to the sponsor, and by making a payment the sponsor will indicate their agreement to this.
Sponsorships for a specific event, or participation in such an event, that has not yet happened at balance date, must therefore be accrued as a liability. In some cases, sponsorship expenditure may have to be tracked like a grant.
Government funding may be in the form of grants, but is more often a purchase agreement. Confusingly, some government purchase agreements even use the word 'grant' in some portions of the text, and 'purchase' in other.
In general, government departments pay sums of money to purchase the delivery of services from the community organisation. This is fundamentally different from a grantmaker, who has philanthropic intentions, i.e. the betterment of society. Government is trying to achieve certain goals, such as fulfilling election promises or meeting coalition agreements, and uses community organisations as well as many private companies to do so. Government does not 'support' the cause of an organisation, it merely strikes an agreement from which (hopefully) both parties benefit.
Advance income from such government agreements is accrued according to how many of the contracted deliverables have been achieved, not according to how much money has been spent.
In some cases government departments do enter into agreements that indicate how the dollars are meant to be spent, and sometimes even that unused amounts must be returned. An example would be some of the hardship funding given to community groups, especially foodbanks, during the COVID crisis.
Accountants also have to consider probabilities when it comes to government contracts. Some government departments have historically never enforced return of unused funds, even if agreements had such a clause, and they were made aware that there are such funds. Occasionally, such return clauses contradict other clauses that only require satisfactory reporting from the funding recipient.
At CCA we generally do not treat government funding as grants or donations for these reasons.