How do I account for a grant that must be spent on something specific?

England and Wales: This page sets out the position in full. Scotland: the same SORP treatment applies, but OSCR expressly excludes agency pass-through income from gross income — see below. Northern Ireland: the same SORP treatment applies, with no difference.

When is a restricted grant recognised as income?

A restricted grant is recognised as income when it is received or receivable. A restriction on how the money may be spent does not, by itself, delay that. A performance-related condition does. So does a term the charity cannot satisfy on its own, such as a requirement to obtain matched funding or planning consent: the SORP says income under such a term should not be recognised until there is reasonable assurance that it will be received.

The treasurer applies the same rule in England and Wales, Scotland and Northern Ireland. It is the same whichever regulator the charity reports to: the Charity Commission, OSCR or the Charity Commission for Northern Ireland. This page assumes the chart of accounts already carries fund codes; if not, build your chart of accounts first.

A performance-related condition is something the charity has to do before it is entitled to the money. Examples are filling a post or providing a service. Where a grant sets a specified future performance-related condition, income is recognised only as that condition is met. A liability sits on the balance sheet in the meantime for the part not yet earned.

Recognising the whole grant on receipt, because the cash has arrived, overstates income for the year. It can also distort any threshold test that depends on that figure. The restriction itself decides which fund the money belongs in — see the difference between restricted and unrestricted funds. For keeping that fund’s records, see How do I keep track of a restricted grant?

What does the award letter decide?

Every grant’s treatment starts with what the funder’s own documents say, not with a general idea of how grants usually work.

Grants are usually taught as non-exchange transactions, and the SORP does start from that position. But some grant income is received in exchange for goods or services under a contract between the parties. The SORP requires that income to be accounted for as an exchange transaction, under a different revenue model.

The award letter tells you which one you have. It is not a default you can apply without reading the letter.

The recognition point also matters beyond this grant’s own entry. Gross income, the figure behind every threshold test in this hub, is measured on what is recognised in the year, not on cash received. What it includes is set out when you determine which accounts to prepare.

A grant recognised in the wrong year moves that year’s gross income the wrong way. That can in turn move a threshold decision based on it.

For grants, note one difference: Scotland’s definition is worded differently from the one shared by England and Wales and Northern Ireland, and OSCR adds an express exclusion for agency pass-through income.

So getting the recognition timing right is more than an accounting nicety for this grant. It feeds decisions made elsewhere.

Is a grant an exchange or a non-exchange transaction?

Whether a grant is an exchange or a non-exchange transaction is decided by its substance, not by what the award letter calls it. The SORP sets a two-limb test.

Where the charity receives the grant in exchange for goods or services, under a contract between the parties, the SORP requires exchange accounting. A local authority paying under contract for residential care is the SORP’s own example.

Where the grant-maker does not directly receive equal value in exchange, the SORP requires non-exchange accounting. A grant to run an activity for the public, where the funder gets nothing back beyond the charity doing its work, sits here. A grant paid to secure particular goods or services may still be shown as income from charitable activities.

A government grant “to carry out certain activities” can fall on either side, depending on who receives the value. Apply the substance test to your own grant and record the reasoning in your working papers.

The performance model: required for every grant

The SORP requires the performance model for all grants: recognise income as conditions are met, and carry the rest as a liability. The SORP does not allow the FRS 102 Section 24 accrual model for government grants, whatever the answer to the classification question. You do not get to choose between two acceptable methods.

A charity’s SORP tier is also reassessed every year on that year’s gross income alone, with no smoothing across years. That matters if the grant you are recording spans more than one reporting period. The charity’s own tier can change while the grant is still running.

With the grant in its own restricted fund, the next step is to build your first annual budget around it.

Common mistake: recognising the whole grant on receipt because the cash has arrived

Cash in the bank feels like income. Where the grant sets specified future performance-related conditions, income is recognised only as those conditions are met. A liability is recognised in the meantime. Recognising it all up front overstates income and distorts the threshold tests that depend on it.

Common mistake: treating a restriction on use as if it prevented recognition

A restriction and a condition sound like the same thing. They are not. A restriction on how money may be spent does not, by itself, delay recognition. A performance-related condition does, and so does a term the charity cannot satisfy on its own, such as matched funding.

Common mistake: assuming every grant is non-exchange

Grants are usually taught as non-exchange, and the SORP does start from that position. But a grant received in exchange for goods or services under a contract is an exchange transaction. Then a different revenue model applies. This is a real judgement area, not a bright line.

Worked example

A two-year grant for a named post is paid in advance in a single instalment. The award requires the post to be filled and quarterly reports submitted. The quarterly reports are an administrative term, which does not by itself delay recognition; the performance-related condition is filling the post and providing the service.

Income is recognised as the service is provided. The unearned balance is carried as a liability, not as a restricted fund balance. So income is recognised across the full two years, not all at once. At the first year end, a liability sits on the books, not a fund balance.