Navigating the intricate landscape of accounting for grants can be challenging for many organisations. Proper accounting for grants is crucial not only for compliance with financial regulations but also for maintaining the integrity and transparency of financial statements.
If you are in receipt of grant income, you need to identify whether it is a revenue grant or a capital grant. The accounting treatment is different for these two grant types.
Revenue Grants
Under FRS102, revenue grants are accounted for under the accruals model. This means that these grants are recognised in the Income and Expenditure Account in the same period as the related expenditure. Therefore, if grants are not expended in the year, the grant income needs to be deferred into the following year. This unspent portion of the grant income is deferred and shown in the balance sheet as a liability in creditors amounts falling due within one year.
Capital Grants
These are grants relating to capital expenditure. Under FRS102 these grants are accounted for under the accruals model. Expenditure on tangible fixed assets is credited to the income and expenditure account at the same rate as the depreciation of the asset that was acquired with the grant. For example, you acquired a fixed asset for €10,000 and its estimated economic useful life is 5 years, then €2,000 of the grant will be released in to the Income and expenditure account to match the €2,000 depreciation charge. The balance of the grant of €8,000 will be split between creditors amounts falling due within one year, €2,000 and creditors amounts falling due after more that one year €6,000. The fixed asset in the balance sheet with be carried at a net book value of €8,000 being cost of €10,000 less accumulated depreciation of €2,000.
Other items to consider when accounting for grants:
1. Nominal structure – it is important to review your nominal structure to ensure:
- You are able to track the grant expenditure. This is also vital as when your auditor is carrying out their year-end audit testing they will need to be able to identify the expenditure relating to each grant.
- It is also vital for management to track the expenditure and know at any given time what expenditure has been expended and what if any of the grant remains to be spent.
2. Terms and conditions of the grant – It is imperative to read and and gain an understanding of the rules attaching to the grant and to know:
- If the funding is being is ringfenced for a particular type of expenditure
- The disclosure requirements in the financial statements
- In the case of a capital grant, if permission is required from the awarding body where the organisation wishes to dispose of the fixed asset acquired with a capital grant.
- If auditor’s confirmations are required in relation to grant expenditure
- If permission required in relation to the deferral of grant income
In summary in relation to grants it is vital to:
- Know the type of grant received
- Account for it correctly
- Track expenditure
- Adhere to the terms and conditions attached to the grant and avoid being sin binned or red carded.
If you need advice on the accounting treatment of grants or in relation OSK’s audit and accountancy services please contact, Deirdre McDermott mcdermottd@osk.ie.
OSK is the official Audit and Accounting partner of the Federation of Irish Sport (FIS) and the preferred supplier of these services to the Federation’s members.