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January 28, 2022

Grant Accounting

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Organizations that depend on grants should consider grant accounting to register financial statements properly. Grant accounting is a method used to record government grants and other types of assistance.

Businesses use the grant accounting method to keep track of grant or assistance-related expenses and profits. This accounting method is used to record non-dilutive equity funding (when a business owner doesn’t give up entity or ownership of the company), SBIR grants, and other help used by profit organizations.

Methods of Grant Accounting

AS 12 Accounting for Government Grants is a standard that determines all the rules for recording government grants. According to this standard, government grants are also called subsidies, duty drawbacks, or cash incentives. The AS 12 standard recognized two methods of grants accounting:

  • Revenue or income approach.
  • Capital approach.

The decision about what specific method to choose depends on the type of grant the government guarantees to the company. The organization should add the grant to the profit and loss account under the category “Other Income”, or separately. Businesses shouldn’t add grants to the turnover category.

Revenue Approach

Subsidies that relate to profit are recorded in the profit and loss account as a type of other income. The company can get subsidies for related expenses and add them to the profit and loss account. As an example, the company can get subsidies for electricity expenses.

Grant Accounting

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Capital Approach

If a company uses this approach, then the grant is treated as part of the company’s capital or shareholder’s fund. Startup companies receive these grants as a proportion of total investment in a project.

Governments usually give such subsidies with no requirement to pay back. That’s why such subsidies are recorded as capital funds. AS 12 standard recognizes three types of grants:

  • Non-monetary grants are given as resources, e.g., land or a building. As a rule, the Government provides non-monetary subsidies either free of charge or at a preferential price.
  • Grants that a company uses as a proportion of capital in a company. These grants are to record in a company’s balance sheet as Capital Reserves. That way, the grant does not affect income statements, so the company can’t distribute the money as dividends.
  • Grants with certain fixed assets. If a grant is with a fixed asset, the government gives it under certain conditions.

The business should make sure that all these types of grants are recorded correctly in the company’s documentation.

What Type of Work does a Grant Accountant do?

The accounting process alone is difficult and often tedious.

That’s why most businesses hire accountants or delegate accounting responsibilities to contractor companies. A grant accountant can properly keep and record all financial operations of the organization or a company. Grant accountants are responsible for the following tasks:

  • Record financial statements, such as programs level and entity level P&L.
  • Create and keep budgets.
  • Aid with audits.
  • Prepare documentation for taxes.
  • Prepare documentation for a fair distribution of reimbursable expenses among employees.
  • Manage funds.
  • Take care of grant reconciliation.

The company shouldn’t forget about submitting grant reports. A standard grant report should include the following:

  • Financial restricted and unrestricted statements.
  • Specific financial statements, e.g., a balance sheet, income statements.
  • Related program activities.
  • Results and impact.
  • Future plans.
  • Sustainability.

The accountant can also take care of this aspect. Grant accountant’s services can relieve the company management of the stress of proper grant accounting.

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Author: Charles Lutwidge

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