NGOs receive grants from government as well as other national and international agencies. Accounting Standards (AS) 12 _, Accounting for Government Grants provides that Government Grants should not be recognized until there is reasonable assurance that (i) the enterprise will comply with the conditions attached to them, and (ii) the grants will be received. Even if Accounting Standards are not applicable to an NGO, the principles of accounting laid down in AS-12 should be followed. Grants may be of the nature of project based grants, or comprehensive grants not related to a particular project but for the general purposes of the ‘grantee’ organization.
(1) Grants recognized as income: Most of theNGO recognize a grant as income in the year in which it is received. The amount expended out of this amount is shown as expenditure in the Income and Expenditure Account. While the total amount of grant received is shown as income in the Income and Expenditure account, in a strict sense grants are not income as they are given not to accumulate but to spend for a particular project or the core activities of the organization. However recognizing a grant as income may result in showing higher surplus for the year, which is actually unspent grant.
(2) Grants recognized as liability: This is another method of recognition of grants. In correct sense, the grants are money of the donor agencies, which are given to an organization to be spent in a particular manner. This is not the income of the organization, which is freely available for any use. That is why many NGO recognize grants as liabilities in their balance sheet. The expenditure is deducted directly from the balance of the grant and does not form part of the Income and Expenditure account.
(3) Grants recognized as income only to the extent of the expenditure incurred: Under this method, grants are recognized as income but only to the extent of expenditure incurred out of it. The unspent or overspent balance is shown as liability or assets in the Balance Sheet and in the Income and Expenditure account the unspent balance is deducted from the grant received. This matches the amount of the grant (income) and the expenditure exactly. However, the unspent balance can be deducted from the total grant in the Income and Expenditure account but if there is overspent balance it cannot be added to the income. The concept of prudence should always be born in mind whenever accounting for such issues is done. Preferably, it is better not to recognize such income which has not been received or has not become due to be received or until there is reasonable certainty of such receipt.