Can a charity treat a grant made as prepaid

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My charity made a donation/grant on 23.12.23, our year end is 31.12.23.

The donation/grant is for the recipients salaries for the period  1.1.24 to 31.3.24

My CEO wants to treat this as a prepayment, as at 31.12.23. I do not think grants can/should be prepaid, as it is not a business expense, more like a distribution - I cannot find anything in  FRS102.

If you think it can be pre-paid does it matter if the payment is made out of restricted versus general funds. There is no formal contract to pay, we have just said we are happy to support them for the next couple of years.

 

Replies (13)

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By SkyBlue22
15th May 2024 13:13

It sounds like the charity needs an accountant... if you don't have one you really should as charities have slightly different rules to companies and other businesses.

In the meantime, a grant is recognised on the three principles:

- Measurable
- Probable
- Have entitlement

You mentioned the grant is for salaries for the period after the year end. If you didn't spend it on those salaries would you have to give it back? If yes, you probably could prepay it because the entitlement sounds like it is attached to the salary payments. HOWEVER, without seeing all the paperwork I couldn't say for sure. Get that accountant (who knows charities).

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Replying to SkyBlue22:
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By WhichTyler
15th May 2024 13:21

Those criteria are more about recognising income than expenditure (though I see your logic)

I'd be asking if the 'agreement to support them for a couple of years' constitutes a commitment that should be recognised as a liability. A grantmaking charity should have accounting policies that cover this sort of thing, and yes, get advice if not sure.

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Replying to WhichTyler:
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By SkyBlue22
15th May 2024 13:31

Sorry you are completely right, I misread the post!

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Replying to SkyBlue22:
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By SkyBlue22
15th May 2024 13:35

As I clearly misread that it was a cost, not income (my fault!), then I would say no, you can't prepay (unless some of the conditions suggest you can, but I don't know what conditions were attached). You made the grant, what the receiving charity does with it is mostly irrelevant.

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By WhichTyler
15th May 2024 13:16

What does charities SoRP say?

In any case, FRS102 might be silent on the specifics, but I'm not sure that the corresponding debit entry on the balance sheet meets the usual definition of an asset (don't have time to look it up rn, but 'from which economic benefits are expected to flow to the entity' rings a bell)

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By accountaholic
15th May 2024 13:29

Let me say at the outset that I am not "that accountant (who knows charities)", so this is just my view as a generalist but happy to chip in on that basis.

I agree with your thoughts that it doesn't sound like a prepayment. The grant was made in 2023, but what the recipient does with it doesn't seem like anything to do with the recognition (or not) in the charity accounts.

On your second point about restricted funds I don't think that makes any difference. The charity has to show in the accounts the income, expenditure, and balances of restricted and unrestricted funds but the prepayment decision would surely be the same either way. In making the grant, it needs to be satisfied that the grant fulfils the restriction criteria. There is a contract between the donor and the charity spelling out the restriction, but no contract between the charity and the recipient, so once the charity has spent the money that's the end of it.

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By Bobbo
15th May 2024 13:38

No, you cannot do this.

The recognition point for making of grants is generally when the offer of a grant is formally communicated to the recipient, which you presumably had done at some point before 23/12/2023.

What specifically do you mean by "we have just said we are happy to support them for the next couple of years"?

You might be looking at needing to recognise more than just one quarter's worth of grant.

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Replying to Bobbo:
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By Paul Crowley
15th May 2024 14:45

+1
Commitments entered into are always a pain

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DougScott
By Dougscott
15th May 2024 14:22

Is it a donation or is it a grant? Normally a donation is freely given with no restrictions or conditions and should certainly be recognised when spent. A grant will normally have grant conditions setting out how the money is spent and when and it would be very silly of your organisation not to have written grant agreements in place before parting with its money if indeed the money is intended as a grant - which it sounds like it is from the fact you have said it is for salaries! Surely you have processess for applying for grants, authorising grants and paying grants and accounting policies etc relating to those grants? In fact I think the Charity Commission would want you to have proper control of your charity's assets.....there is plenty of guidance on the Charity Commission website about the responsibility of trustees. Not sure if the following helps?

https://www.icaew.com/technical/public-sector/public-sector-financial-re...

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By Paul Crowley
15th May 2024 14:52

Why?
Charities are meant to spend their money, so it cannot be because he is looking the hide the 'cost' and it certainly has nothing to do with tax.
I cannot think of any reason for ignoring the payment.

Find out why and then consider it.

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RLI
By lionofludesch
15th May 2024 20:14

Is this grant conditional in any way?

If a project was not completed for some reason, would the grant be repayable to the donor?

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By cpavett
15th May 2024 20:58

Charity accounting is different to company accounting, and as such if you are doing the charity accounts and the charity has received income for a specific purpose, then this income needs to be designated as ‘restricted funds’.

The restricted funds are recognised in the reserves section in the balance sheet (ie., Debit Bank, Credit Restricted Reserves) and then when the funds are paid out the reserves are released:
Credit: Bank
Debit: Salaries
Debit: Reserves
Credit: Grants & Donations Income
(This is very simplified and you’d need to account for PAYE as well).

Hope I’ve read the question properly!

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Replying to cpavett:
DougScott
By Dougscott
15th May 2024 23:05

Yes, you didn't read the question properly!

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