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Community Shares Finance Guide
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2.7 Treatment of grants

Government and non-government grants

The following sections refer to government grants. For non-government grants, the accruals model is not permitted for Public Benefit Entities. Community benefit societies are public benefit entities. 

Revenue grants 

Under FRS102, unless the society is charitable, there is a choice about the treatment of government grants; the performance model or the accruals model. Under the performance model the grant income is recognised in the profit and loss account, when any performance-related conditions are met. Under the accruals model the grant is spread over the period in which the related expenditure is incurred. 

In some instances, grants may have certain conditions attached which affect the accounting treatment. If a grant is repayable if the society does not meet certain conditions, it may be classed as a liability until such conditions are met or the grant is repaid. If the grant has clawback clause or takes security over an asset, it should not be classed as a liability. In this case the accrual method is recommended, but the performance method would also be allowed.

This is illustrated in the example below.

Example (Co-operative or Community Benefit Societies)

A society with a December year end receives a revenue grant of £20,000 on 1 July 2017 to employ someone for the year ended 30 June 2018. 

  • Under the performance model, the grant conditions might be met when the employment contract is signed. The society could include the whole £20,000 in income in its accounts for the year ended 31 December 2017.
  • Under the accruals model the grant should be spread over the period of employment, so the society would include £10,000 in income in the year ended 31 December 2017, and £10,000 in income in the year ended 31 December 2018. As at 31 December 2017, the society would have deferred grant income of £10,000 on its balance sheet.

Capital Grants (Co-operative and Community Benefit Societies)

As with revenue government grants, capital government grants must follow either the accruals model or the performance model. This is illustrated in the example below. 

Example (Co-operative and Community Benefit Societies)

A society receives a grant to buy a building for £100,000 in 2017. The useful economic life of the building is 50 years. 

  • Under the performance model the grant conditions are satisfied when the society buys the building in 2017. In its 2017 accounts it recognises £100,000 of grant income. The building is depreciated over 50 years at £2,000 per annum.
  • Under the accruals model the grant income is spread over the useful economic life of the building. The grant is kept in deferred income (creditors) and released to income over the 50 year life of the asset. This means that £2,000 is taken to income each year. At the same time the building is depreciated by £2,000 each year.
  • If a society wishes to use surpluses from capital grants to enable withdrawals of share capital, it is recommended to use the performance model rather than the  accrual model. 

The society should choose which accounting policy it is going to follow and should disclose this in its accounts. The policy should be applied consistently to all grants.

Charitable Community Benefit Societies

Unspent grants are accounted for as part of restricted funds. 

Charitable CBSs must comply with the Charities SORP which only permits the performance model for the recognition of both revenue and capital grants (government and non-government). Unless there is a reasonable assumption that the grant will need to be repaid and there no “evidence of the entitlement to the gift”, then a charity must use the performance model. 

See excerpt below from the Charities SORP:

5.10. Income from donations or grants is recognised when there is evidence of entitlement to the gift, receipt is probable and its amount can be measured reliably. The use of the ‘accrual model’ option (section 24 of FRS 102) for the recognition of income from government grants is not permitted by this SORP. 

5.11. In the case of a grant, evidence of entitlement will usually exist when the formal offer of funding is communicated in writing to the charity. However some grants will contain terms or conditions that must be met before the charity has entitlement to the resources.