This guide provides accounting tips on grant management for nonprofits, including information on the requirements and benefits of using different methods and accounting software for grant management. By following these tips, you can ensure proper reporting and tracking while maximizing the potential benefits of your grant.
Topics in this Guide
How this connects to your fund accounting
Table of contents
- What is grant accounting?
- What are the main requirements for grant management for nonprofits?
- Benefits of accounting for grants
- Accounting Tips on Grant Management for Nonprofits
- 1. Make sure to keep track of all the paperwork and requirements for the grant.
- 2. Stay organized and keep good records of all communications and correspondence with the grantor.
- 3. Understand the specific requirements of the grant and what accounting methods and practices are allowed.
- 4. Make sure to follow all the deadlines and reporting requirements.
- 5. Keep good communication with the grantor and be proactive in addressing any issues that may arise.
- Bottom Line
- FAQs (Frequently Asked Questions)
- What’s the difference between grant accounting and fund accounting?
- When do we recognize grant revenue—awarded or spent?
- How should salaries be tracked to grants?
- Can indirect costs be charged to grants?
- What documents are needed for grant reports?
- How do restrictions affect reporting?
- How do audits and Form 990 tie in?
What is grant accounting?
Grant accounting for nonprofits is the method of recording and monitoring government grants in your accounting system. Nonprofits use grant accounting to record and monitor government grants in their accounting systems. They choose either the capital or the income approach. The grant’s nature dictates how they apply grant accounting to track costs and benefits accurately.
Nonprofits recognize a government grant only when they can reasonably assure compliance with the grant’s conditions and receipt of the funds. Recognize the grant over the same period as the related expenses.
Grant accounting links each grant to specific expenses, simplifying tracking and accounting. To manage award finances properly, understand the different grant types and how funders award each one.
What is the difference between a grant and a loan?
- A loan is a financial agreement between two or more people in which money (or something of value) is lent with the hope and expectation that it will be repaid.
- Grant money is money awarded by an organization to a person or group for a specific purpose.
- Grants are not always easy to come by and may require meeting certain conditions before you can receive them.
- Usually the loan funds can be used for wherever the receiving organization needs them. Whereas, a grant can only be used for its designated purpose.
- Typically grants do not pay for ‘non-profit salaries,’ but you may find grants that fund program expenses. If the employees are being paid work for the designated program, the grant fund can include salaries and payroll taxes.
- Understanding which items constitute a grant is integral for determining which is the proper method of recording them to remain compliant.
What are the main types of grants?
There are three types of grants: unconditional, conditional, and matching. Unconditional grants are provided with no conditions attached, while conditional grants have designated usage requirements or other special implementation rules. Matching grants are a type of conditional grant where the donor agrees to provide funds once the organization raises a specific amount of money from other sources.
Funders award reimbursable grants for a specific purpose or project and reimburse you after you incur the expenses or complete the project. They issue grants for many reasons, including energy-efficiency and renewable-energy initiatives. After the award, the funder must approve your reimbursement (or drawdown) before transferring any revenue to the project.
Grants often require an itemized invoice and proof from an independent auditor that there is no performance-related barrier. Grants can have a profound impact on your nonprofit’s financial statements if most of your revenue comes from grants.
There are different types of grants you can receive, and each has its own specific requirements. Make sure to research the relevant standards and procedures before applying for a grant so you don’t have to make an update later. Know the main types of grants: business, technical, and philanthropic. There are a variety of grants available, each with its own specific purposes. Nonprofits use grants to fund research, improve education, and deliver projects that directly benefit communities and the environment.
What are the main principles of grant accounting for nonprofits?
There are three main principles of grant accounting for nonprofits: the capital approach, the deferred income approach, and the income approach.
Capital grants are funds that are provided to assist in the acquisition, construction, renovation, repair of capital assets, or fixed assets. Record capital grants as deferred revenue and recognize the income in step with depreciation of the funded assets. As a nonprofit, there are no tax consequences to receiving a grant, if it is provided to further its mission.
Record government grants under the Income approach since nonprofits do not have to repay the revenue.
When a government grant funds a depreciable asset, apply the deferred income approach. Record the grant as deferred income, then match and allocate it alongside the asset’s depreciation. Recognize the grant as income in the statement of activities throughout the asset’s useful life.
Use the income approach to recognize grant funds as revenue in the Statement of Activities. Match the grant revenue with the related expenses to ensure accurate income recognition.
What are the main requirements for grant management for nonprofits?
The main requirements for grant accounting are as follows:
To comply with nonprofit accounting compliance requirements, government grants must be matched with related expenses. This means that grant income is deferred until the recipient incurs eligible expenditure. Grant income may not meet the definition of a liability, depending on the circumstances.
If an entity does not meet the conditions of a grant, it may be required to return the grant money.
The grant must be used for the purpose for which it was awarded
A grant qualifies as income only when you use it for its awarded purpose. IAS 20 does not require an entity to meet every grant condition before recognizing the grant. However, if the entity fails to meet the conditions, it may have to repay the funds.
The grant must be used in accordance with the terms and conditions of the grant agreement
Classify a grant as income only when you use it according to the terms and conditions of the grant agreement. If you fail to apply the funds for their specified purpose, the grant does not qualify as income and must instead be recorded as a liability.
The grant must be used in a manner that is consistent with the nonprofit organization’s accounting policies and procedures
The requirements for accounting for a grant are that the entity comply with the grant conditions and use the grant in a manner that is consistent with the organization’s accounting policies and procedures. Most costs and expenses related to a government grant are easy to determine, and so the grant is recognized as income in the same period it is incurred. The deferral of income may not comply with IFRS standards, depending on the circumstances.
The grant must be used in a manner that complies with all applicable laws and regulations
An entity must comply with the grant conditions and use the funds in line with all applicable laws and regulations to account for the grant properly. If the entity fails to meet these conditions, it must decide whether to return the grant.
The grant must be used in a manner that complies with all applicable laws and regulations
What are the main challenges of accounting for a grant?
There are many challenges involved in accounting for a grant. These challenges can include calculating the correct amount, ensuring accuracy, and meeting reporting deadlines.
One challenge is calculating the correct amount of the grant. This can be difficult because it must consider all of the expenses related to the grant. Another challenge is ensuring accuracy in the accounting. This is important because any mistakes could lead to the grant being rejected or delayed. Finally, meeting reporting deadlines can also be a challenge. This is because businesses must comply with certain regulations to receive government grants.
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Benefits of accounting for grants
The benefits of fund accounting for government grants include the ability to manage finances and improve organization fiscal health. Additionally, grant accounting provides transparency into the financial status of an organization. Choosing the best accounting software for grant management can help with future decision-making about projects.
- Determining costs and expenses related to a government grant: Mostly, costs and expenses are easily determined with ease. Government grants are treated as income in the same period in which they are recognized.
- Accounting for grants can help you manage your finances and improve your organization’s fiscal health.
- Grant management can help you identify potential funding opportunities and track the progress of projects.
- Grant accounting can provide information about how well a grant is being used, which can help in future decision-making.
- Grant accounting provides transparency into the financial status of an organization.
Drawbacks of accounting for grants
There are a few potential drawbacks to accounting for government grants.Challenges occur when determining the grant’s purpose and handling its accounting. Another is that grants can have a significant impact on financial statements, so accountants need to be aware of this.
Best accounting method for grants
Match government grants with corresponding costs in the same reporting period.
Most costs and expenses related to government grants are easily determinable and recognized over a number of periods.
Worst accounting method for grants
There are two drawbacks of using the accrual accounting method for grants. The first is that it can be difficult to understand the financial position of the nonprofit organization.
Accounting Tips on Grant Management for Nonprofits
1. Make sure to keep track of all the paperwork and requirements for the grant.
Grant accounting is the process of keeping track of the money awarded through grants. Grant money goes as designated.
Grant recipients must meet certain conditions before they can receive the money. Grant recipients must document their actions to ensure proper accountability.
2. Stay organized and keep good records of all communications and correspondence with the grantor.
It is important to always document grants according to the matching principle.
- Recognize funds when stipulations are met.
- Make sure you are in compliance with the terms of the grant.
- Always maintain records of your grants and where they fall categorically. It will help you stay organized and be able to easily track your progress.
3. Understand the specific requirements of the grant and what accounting methods and practices are allowed.
When reviewing grant requirements and determining which accounting methods you can apply, keep specific requirements in mind.
First, grants can come in different types, and each type may have different requirements. It’s important to stay up to date with the latest accounting requirements. Second, the accounting treatment of a government grant depends on the nature of the grant.
Recognize government grants as an expense in the same period you record them, not when you receive the funds.
4. Make sure to follow all the deadlines and reporting requirements.
It is important for grant recipients to follow deadlines and requirements when accounting for grants in order to avoid penalties or delays. Nonprofits must also follow the reporting requirements set forth by GAAP.
5. Keep good communication with the grantor and be proactive in addressing any issues that may arise.
Good communication with the grantor is important for maintaining transparency and accountability.
Categorize grants according to their purpose and document them properly. Maintain clear communication with the grantor to address potential issues proactively.
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Bottom Line
For accurate grant management, treat grants as income and match them with the related costs in the same reporting period.
It is important to be fully transparent with grant organizations about your accounting practices before acquiring any grants.
For more effective grant reporting, make sure your grant management for nonprofits accounting software for grant management has the ability to segregate the grant activity and the purpose of the grant. Your accounting system must be able to track a grant’s budget and actual activity to ensure compliance and proper grant management.
An accounting system not built for grant management creates extra work and fails to provide proper transparency and stewardship of funds.
For more information on nonprofit accounting software for grant management, review the FastFund Online Accounting system.
FAQs (Frequently Asked Questions)
What’s the difference between grant accounting and fund accounting?
Grant accounting tracks revenue/expenses by award terms; fund accounting sets the structure (funds/programs/restrictions). Set up fund structure first, then map grants to it. See Fund Accounting and Restricted Funds.
When do we recognize grant revenue—awarded or spent?
Grant awards are recognized after meeting stipulations. Unconditional awards are have no strings attached.
How should salaries be tracked to grants?
Use time & effort (labor distribution) policies and allocate payroll by activity. Start with Payroll Allocations to Grants; ensure timesheets support reports.
Can indirect costs be charged to grants?
If allowed by the award, use an approved indirect rate and apply it consistently. Start with Cost Allocation methods.
What documents are needed for grant reports?
A schedule of revenue/expenses by line item, supporting invoices/timesheets, and reconciliation to your GL. See Grant Reporting & Compliance.
How do restrictions affect reporting?
Track with/without donor restrictions and record releases when spent on the purpose/time specified. See Restricted Funds and Revenue Recognition (ASC 958).
How do audits and Form 990 tie in?
Audits verify compliance and presentation; Form 990 disclosures reflect grant activity. Link out to Nonprofit Audit and IRS Form 990: Filing Guide.
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