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Accounting for a charity's restricted funds

Can restricted funds on a charity' balance sheet overstate a charity's overall financial position?

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I am working on preparing the year-end accounts for a small charity. Following other posts/advice on here I have read through the charities SORP (Chapter 5). I have a better understanding of how restricted income is presented in the year-end accounts. However I (still) do not understand how recognising restricted income in Year 1, satisfies the matching concept, when the related expenditure to that restricted income will fall in Year 2.

I understand (now) that I cannot treat such restricted funds year-end balances as deferred income (which had been my initial thought). For the purposes of 'matching' income and expenditure would it be acceptable to net-off the restricted income total by including a contra-entry total in the 'creditors falling with 12 months'?

I am trying to avoid starting a 'famine-and-feast' cycle, showing a high level of restricted income in the B/S in Year 1, and the subsequent high level of expenditure in Year 2. 

Any thoughts on how I can successfully match restricted income and expenditure in the same annual set of accounts would be most welcome. Thanks.        

Replies (16)

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By Paul Crowley
03rd Dec 2021 14:41

Do not think that way
Restricted funds are a bit like a creditor until spent
Recognise the income when the funding is agreed, do not wait for the money

This is not trading
Very different thought process
The accounts for such I do on spreadsheets and Word
Not yet seen a decent accounts package that works

If you have not done this work before, you need to see lots of example accounts as submitted to the charities commision
You are going to need to spend a lot of time on this and will still be at risk of getting it wrong

Do you really want to take the risk?

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By Ged Kennedy
03rd Dec 2021 17:27

Thanks Paul. Maybe I am looking at this entirely from the wrong angle.

Am I right in thinking that in the Yr 1 B/S, if I am reporting (say) a £3ok surplus balance of restricted income (which has already been paid during the financial year), it would make up £30k of the assets reported in the B/S?

With restricted funds being a little like a creditor until spent, shouldn't I be balancing off that year-end £30k figure against something else (in the B/S) which takes that into account?

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Replying to Ged Kennedy:
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By WhichTyler
03rd Dec 2021 18:16

It's not clear what you mean by 'has already been paid during the year'. If you mean 'received and spent during the year' then there is no fund to carry forward. If it has just been 'received during the year' then you have Cr restricted income, Dr bank and no creditor

So yes the restricted fund makes up £30k of the assets of the charity at the year end and no 'balancing off'

If all that had happened in the year was receiving £30k of restricted income then at year end you would have:

SoFA: Restricted Income £30k = Net movement on reserves
BS Assets ('top half'): Cash at Bank £30k (dr balance)
BS Restricted reserve (bottom half): £30k (cr balance)

Hope this makes sense. 'avoiding the famine and feast cycle' means not following the relevant standards...

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Replying to WhichTyler:
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By Paul Crowley
03rd Dec 2021 19:37

I find trying to explain the journals and presentation challenging without a set of such accounts in front of me
Agrreed the balance sheet needs a column to explain where the restricted fund money is, usually one of the bank accounts.
Hope it is not spent on fixed assets, that really adds to confusion
If money not arrived yet it is in the debtors

The understanding issue is that only the designated and unresticted funds really belong to the charity
Definitely not a standard accounting approach

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Replying to Paul Crowley:
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By WhichTyler
04th Dec 2021 07:23

I usually do this in a note (at a summary level, totals for unrestricted, restricted and endowment funds), but a columnar balance sheet is allowed, see para 2.29 of SoRP an Note 24 in the sample accounts https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

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Replying to WhichTyler:
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By Paul Crowley
04th Dec 2021 18:43

That example is exactly my approach on the SOFA and I do the same on balance sheet other than to also have a designated column

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Replying to Paul Crowley:
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By eteb3
31st Dec 2021 10:57

Paul Crowley wrote:

The understanding issue is that only the designated and unresticted funds really belong to the charity


Is this definitely right? Legally the funds do belong to the charity/to the trustees. Misapplication of a grant may be a breach of contract, but the remedy is to claim for damages *out of the property of the defaulter*. Or have I got this wrong?
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Replying to WhichTyler:
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By Ged Kennedy
05th Dec 2021 22:06

Many thanks for your advice. Just to clarify, in my example, I was thinking of restricted income showing a positive year-end balance of £30k.

So, in terms of the matching concept, we would have to live with a year-end B/S that is 'overstated' by £30k.

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Replying to Ged Kennedy:
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By WhichTyler
06th Dec 2021 12:47

From my point of view, it's not overstated. You have an asset (£30k cash) and you do not have a liability. You intend to spend the cash in the future, but that doesn't create a liability at the bs date

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Replying to Ged Kennedy:
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By WhichTyler
06th Dec 2021 12:47

From my point of view, it's not overstated. You have an asset (£30k cash) and you do not have a liability. You intend to spend the cash in the future, but that doesn't create a liability at the bs date

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Replying to WhichTyler:
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By Paul Crowley
06th Dec 2021 15:36

+1
A reserve that must be spent as instructed otherwise could be repayable

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Replying to Paul Crowley:
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By eteb3
31st Dec 2021 10:50

IANAA but am a charity treasurer. Intrigued by this thread and some comments here.

I've understood previously that restricted funds are funds held on special trusts: a grant contract that may result in clawback wouldn't be a trust, so I'd be inclined to put it as designated, not restricted. Is this definitely wrong?

In any case I am completely confident that it's not just restricted grants that become restricted funds: a church that runs an appeal for the roof must spend those funds on the roof (or cy-près): it can't spend them on the Sunday school.

There's no prospect of clawback there, but there is a special trust. I guess conceivably tracing of misapplied trust funds would apply, if the Commission ever had the money to pursue it, so perhaps it all amounts to the same thing in accounting terms?

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By tom123
04th Dec 2021 09:12

I am the trustee of two small charities, and recently moved from commerce to education for the 'day job'.

The whole bottom section of the balance sheet is a special beast. You seem to end up with mini P&L accounts for each fund etc. I am glad to have decent external support on these matters.

Plus, my 'users' ie head teacher, governors etc, all tend to want me to give them one holy grail of a number from the balance sheet that sums everything up.

Of course life isn't really like that..

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Replying to tom123:
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By DJKL
06th Dec 2021 12:59

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Replying to tom123:
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By eteb3
31st Dec 2021 10:39

[quote=tom123]The whole bottom section of the balance sheet is a special beast. You seem to end up with mini P&L accounts for each fund etc.[\quote]
Yes, you do. When I was DIYing as a charity treasurer, I found partnership accounts to be a useful analogy. (And copying the layout was useful.)

This on a charity not subject to SORP (or if such does not exist, so small that no one would ever care). I'm sure there are more 'standard' ways of proceeding.

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By D V Fields
04th Dec 2021 10:49

You would need to show that high level of income one year and high level of expenditure next; unless you can justify the deferral of that income. Whilst SORP (5.10) requires recognition on the three main criteria (5.8) and prevents use of “accruals method” for government grants; consider whether the “performance method” (5.16-5.19) might be applicable. But don’t use it unless the performance conditions really apply.

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