One of the most common questions we are asked is: “When should income from donations and grants be ‘recognised’”, i.e., included as income.
The rules on this are complex and there is a whole section of FRS102 dealing with income recognition on ‘non-exchange transactions’, and a separate module of The Charities Statement of Recommend Practice (SORP) dealing with income recognition. Although the SORP is designed specifically for charities, it is indicative of how to apply FRS102 to grants and donations, and for non-charitable entities applying FRS102 and receiving donations the SORP is guidance on acceptable accounting treatment.
The general rules for recognising income are as follows:
Donations
For most donations this is relatively straightforward. Income from donations is recognised when there is evidence of entitlement to the gift, receipt is probable, and its amount can be measured reliably.
For donations, entitlement is usually when the gift is received. Circumstances may arise however where there are pledges in advance of the gift, or when the donor has a pattern of making gifts. In these circumstances, it might be that entitlement and probability are evidenced before the gift is received, and therefore meet the criteria for recognition before physical receipt.
Grants
There is a thin dividing line between a “donation” and a “grant”, but grants are usually amounts given by an organisation to another body for specific purposes to advance the objectives of the donor body.
The rules for recognition are very similar, but there can be complexities in relation to establishing entitlement. Sometimes there are conditions that need to be fulfilled before the recipient is entitled to the money, which might include achieving certain targets (“performance related grants”), obtaining matched funding, or where the donor intends that this should be used in future periods. In these circumstances any funds received should be carried forwards as deferred income until such time as the conditions are fulfilled.
However, please note that recognition is not based on whether the money has been spent. There is sometimes a temptation to “manage” results and carry forward unspent money in deferred income to achieve a matching of income and expenditure to simplify the messaging to stakeholders. FRS102, however, is based on legal entitlement and unless one of the above conditions apply it does not permit carrying forward income. This might mean that income is recognised from a different period to which it is spent. It is important to give a full explanation in the accounts, and for charities in the Trustees’ Annual Report (TAR). Where results are complex, it is important to give a proper “executive summary” to explain these to users.
If the grant is for a specified purpose, this doesn’t affect the recognition. It will be shown as restricted income and carried forward in a restricted fund until such time it is spent.
Government Grants
For non-charitable entities there are two possible choices:
- The “accruals” method, which matches income against the related expenditure. Any money received in advance of expenditure is carried forward in deferred income. If the grant is for capital expenditure it should be recognised in line with the depreciation charge, so if the asset is written-off over ten years the income also will be recognised over this period, with any balance not recognised carried forward in deferred income.
- The “performance model”, where income is recognised when the entity is entitled to it under the general rules of income recognition referred to above (probability of receipt, etc.)
For charitable entities only the second model is available. If the income is given for a particular purpose any unused proportion should be carried forward as a restricted fund.
An accounting policy should be included explaining the basis used.
Legacies
Legacies can be particularly problematic with income sometimes being recognised much earlier from when it is actually received or spent.
The basic rules for recognition are the same as for other income, so there must be evidence of entitlement, probability and valuation. For entitlement the SORP suggests you would need evidence that you have received a legacy, and for probability evidence of probate and that there are sufficient funds in the estate to pay the legacy. Valuation might however be an issue, particularly for residual legacies which might depend for instance on selling the property of the deceased.
Where sufficient information regarding valuation is not available at the balance sheet date, the legacy should not be recognised, but a note should be included in the accounts explaining the situation. If, however, funds are received, or more definitive information regarding the size of the legacy becomes available before the accounts are approved, this might be an “adjusting post balance sheet event” as more information is available about the position at the balance sheet date, and the income would then need to be recognised and brought into the accounts.
This is just a whistle stop tour of the rules covering some of the “frequently asked questions.” For more information or for clarification of any issues, there is a detailed explanation in section PBE34 of FRS102 or the relevant module of the Charities SORP. Where the situation is complex and it doesn’t clearly fall within the above scenarios appropriate advice needs to be taken.