Guest post: Cake or biscuit? Grants, contracts and muddles in charity accounting

This is a guest post, written by Pete Bass. Pete has been helping us out in the research team over the last few months, particularly with producing our Civil Society Almanac.

I am well aware that most people find charity accounts boring. So here goes an attempt to write an engaging blog post about a technical problem in charity accounting.

During the research for the Almanac, we struggle with inconsistencies in the way that charities report income from grants and contracts in their annual accounts. This affects whether the income is reported as “voluntary income” or “incoming resources from charitable activities” in the accounts, and hence how the income is analysed in the Almanac.

Why is this important?

The data shows that there has been a change move away from grants to contracts, and the experience of many charities backs this up. This presents policy issues for the voluntary sector – particularly around independence and public-service delivery.

We want to be sure that the data reflects the real trend – and that the changes we report are not merely a result of a technical change to accounting policy. So we are sometimes forced to second-guess the way the income is reported in individual charity accounts, and ask “did they really mean to put that there?”

What about the SORP – aren’t all accounts supposed to be the same?

This is a known problem – it was raised by the stakeholders who participated in the Charity Commission’s report: Charity Reporting and Accounting: Taking Stock and Future Reform.

One accountant is quoted as saying:

“Contracts are a nightmare area. You often find agreements vary so you have to review them case by case to distinguish contracts and grants. Some Local Authorities try to insist on contracts being counted as restricted funds.”

The situation can be further muddled when funders or recipient charities refer to a funding stream as a grant for historical reasons, when the income is in fact a contract. A toolkit from the National Audit Office explains that there may be a continuum of grants, ranging from grants in aid that are freely given to support core costs of organisations to project funding.

“In this situation, the term grant may be used to refer to the funding agreement, but in legal and practical terms the funding agreement will be indistinguishable from a contract drawn up following a procurement process.”

This income should properly be recognized in the SOFA under “income from charitable activities”. And for the sake of my sanity, I think it should not be called a grant.

The guidance in the SORP can be unclear so it is difficult for charities and their accountants. Having recognised that some grants are in fact contracts often the problem is in the other direction – if in doubt call it “income from charitable activities”.

Thus a lot of funding from grant making foundations with conditions (but made under trust law – i.e a grant not a contract) is recorded as incoming resources from charitable activities, when it should be recognised as a grant.

It makes the Jaffa cakes cake-or-chocolate-covered-biscuit VAT continuum look positively trivial.

Pete Bass

Pete is a researcher not an accountant, although he does sometimes have nightmares about charity accounting. Pete can be found on twitter @prbass.

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