Not long ago, we received an email with a “programs-vs-finance” question….
“Finance is telling me that once a grant is approved it should be listed in the GL immediately, because it becomes a liability not to do so.
“We have always waited for the grant award letter to be returned before actually marking the grant “approved,” in case a donor has an issue with something in the letter.
“Since most people want their money, I get the letters back within a week and pay out within two to four weeks.
“How would an auditor look at a grant that was approved on May 1 but not posted to the GL until July 1… This grant would probably have a start date of June 1.”
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The accounting rules state that gifts must be recorded as soon as you know about them and they are unconditional (not contingent on something else happening). When approved by the funder, the grant is recorded as income in restricted funds and a receivable. As the money is sent to the organization, the receivable is relieved. As the money is actually spent on funded expenses, the income is released from restricted to unrestricted. This transfer is usually done at the end of each month in a lump amount for the month, rather than with each transaction. After the transfer, the income and expense report for the grant should show net income of zero because the recognized income will equal the expenses. This continues until the grant is used up or you return funds.
Many people outside the nonprofit world have a hard time understanding this concept – that you have to spend money in order to recognize income.
Sometimes this leads to strange looking results. If the grant is approved in May 2011 and your fiscal year begins in July 2011, it is completely against audit rules not to record that grant in the fiscal year ending 30 June 2011. That leaves you with a large source of income in one year and a large expenditure in the next year. The classified Balance Sheet (one with columns for unrestricted, temporarily restricted, and permanently funds) makes it clear when restricted funds have been received and spent. It’s the total column that you are likely to see in your day-to-day accounting software that looks extra good in one year and extra bad in the next.
Back before SFAS 116 (1993), the restricted funds would be shown as a liability called Deferred Income. Now the funds are shown in the equity section as Restricted Net Assets.
There are some segments of SAFS 116 (www.fasb.org) that govern the financial statement presentation of restricted funds.
To obtain a full understanding of the subject look at the PPC Guide to Nonprofit Contributions
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Christine L. Manor, CPA, wrote QuickBooks for Not-for-Profit Organizations, available from The Sleeter Group … at www.sleeterstore.com. Christine can be reached at clm@clmanor.com
Hank Lewis with Development Consultant Associates has over thirty years as a fundraising consultant and is a specialist in Board and Leadership Development, Capital Campaign, Bequest Program and Major Gifts.