Revenue Recognition for Tier 3 Charities
About the Author:
David Goodall
Audit Associate and Not For Profit Expert at Staples Rodway, Taranaki
David oversees the management of assignments and principal areas of work include audit and assurance, internal auditing, forensic accounting, fraud examination and financial reporting under IFRS/IPSAS.
In addition to the other mandatory reporting changes that have taken place for charities with annual expenditure of less than $2m, one of the most notable changes from an accounting treatment perspective is in relation to revenue recognition, particularly grants and donations.
Small Charity Requirements
The Tier 3 standard sets out minimum (compulsory) categories that must be used to report revenue:
Donations, fundraising and other similar revenue
Fees, subscriptions and other revenue from members
Revenue from providing goods or services
Interest, dividends and other investment revenue
Other revenue
They are designed to make it simple for readers of the Performance Report to quickly and easily understand where money came from and where it was spent. Presenting the information in this way helps to tell the charity’s story.
How to Categorise a Grant
Under the new standards, there is no separate category for grants. Instead, the charity must record the grant within the category/categories that best matches the purpose of that grant. The category or categories chosen for recording the grant, will depend on the purpose for which the grant was given to the charity. Grants for the general operation of the charity (including grants for capital items) will often be recorded under “Fundraising, donations and other similar revenue”. Grants for delivering a service, project or programme will be recorded under “Revenue from providing goods or services”.
The standards prohibit a charity from creating a new separate category called “Grants” as it removes the transparency that is created when maintaining minimum categories. As an alternative a charity could include a separate note to the Performance Report listing the specific details of grants received.
The ‘use or return’ Condition
Often grants are received with conditions attached. For example, the money may need to be used for a specific project and if the project changes or there is money left over at the end of the project, then the grant must be returned. This type of condition is known as a “use or return” condition. It’s a good idea to keep track of the spending of grants so that you know how much remains unspent at the end of the financial year. If the grant has a “use or return” condition, then at the end of the financial year, the unspent portion of the grant must be recorded as a liability in the Statement of Financial Position.
Revenue should generally be recorded when the grant is physically received into the charity’s bank account unless grants are received with specific conditions attached. Should a grant be received without any condition or “use or return” condition we recommend monitoring expenditure against this grant separately if the charity has designated that the funds received should be spent on a specific project / purpose.
Audit Associate and Not for profit expert
Staples Rodway Taranaki
06 757 3155
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