Recognising income in accounts is the phrase used to determine the point at which the conditions of any grant or contract income have been met by the charity and is liable for payment by the funder. This will include
- Contracts (and long term contracts) and grants with specific performance conditions (both recognised on performance as the activities are provided),
- Grants with conditions that are not performance-related (recognised when conditions are met or fall within the control of the charity) and
- Unconditional grants (recognised when receivable).
A grant can be recorded as income once all conditions (specified in their contract) have been met and it is due to be paid by the funder or has already been paid by the funder. If all conditions have not been met or activities have not been completed by the end of the financial year, this may result in some of the grant being unspent. These funds therefore can be carried forward into next year accounts as a restricted fund balance but only in agreement with the funder. This should always be explained further in the ‘notes to the accounts’ in the organisations year-end accounts.
Contract fees are only due when the charity has delivered the service in line with the contract terms, so the charity is only entitled to the income when it has earned it i.e. when it has completed that part of the contract. If the charity has received funding in advance, either a grant or contract fee, then this will be deferred and shown as a current liability on the balance sheet. Performance related grants are treated in a similar way to contracts in the accounts.
There is information available that outlines the practices in accounting specifically for charitable organisations and this is known as SORP. This is a Statement of Recommended Practice and while requirements of the law and accounting standards exist irrespective of the SORP, it provides recommendations for accounting and reporting, in particular, how accounting standards should be applied in the context of particular sectors and how to account for sector specific transactions. However the reporting and accountability of a charity is a complex area and as such may require professional advice.
