In an NGO's annual audited financial statements, grant income is commonly accounted for in a variety of ways by different NGOs around the world. There is little global consensus about what is the 'right' or 'best' way.
This page describes the three main methods used, and gives an example of the wording for the accounting policy for the financial statements. It also gives guidance on which policy may be most appropriate for your circumstances.
WARNING! This page contains jargon and is aimed at qualified accountants and auditors.
Method 1 - Receivable basis
- Grant income is recognised when there is: 1) entitlement to the grant, 2) virtual certainty that it will be received and 3) sufficient measurability of the amount. Unspent grants are shown on the balance sheet as restricted funds.
This policy is consistent with UK Charities SORP
Method 2 - Receivable and spent basis
- Grant income is recognised as it is receiveable, to the extent that the grant has been spent by the end of the financial year. Unspent grants are shown on the balance sheet as liabilities.
This policy is consistent with IAS20
Method 3 - Received basis
- Grant income is recognised as it is received.
This is consistent with the cash basis of accounting, but it is commonly seen even on financial statements prepared on an accruals basis. E.g. 'These financial statements are prepared on an accrual basis with the exception of grant income which is recognised on a receipts basis'.
Which method is best for us?
To decide which method is best for you, consider:
- Which accounting standards apply to you?
- What will the users of your financial statements best understand?
- Do your donors require any particular method?
- What have you used in the past?
- What is most commonly used by similar NGOs in your country?
Golden rule - whichever method you use, clearly state your accounting policy.