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How-To Guide GR3
Accounting for Grants: Equity Method.
Use for one-off capital grants only!
The relevant accounting standard, NZIAS 20, is not compulsory for Public Benefit Entities such
as non-profits. While most accountants will use the Liability Method described in How-To Guide
GR1, the Equity Method described here will avoid artificially blowing out your income.
The Principle:
Purchasing a capital asset (a computer, car, appliance etc) has no effect on the Income
Statement of a business, because the asset does not represent an expenditure. Non-profits,
however, may apply for a grant specifically to purchase such an asset, therefore, under the
Liability or Income method, increasing the organisation’s income, but not expenditure.
The equity method for one-off grants (or one-off parts of grants), from which a capital item is
purchased, shows the purchased asset in the Balance Sheet only and has no effect on the
Income Statement.
The Practice:
1. Set up a Liability account for the grant received and record the grant in here.
2. When purchasing the item, do the following journal entry:
Debit account: grant (liability); amount: purchase price
Credit account: accumulated funds (equity); amount: purchase price
[Note: different names are used for ‘accumulated funds’, such as ‘membership funds’,
‘retained earnings’ and others]
3. Add a note to your financial statements: “The purchase of [item] from a grant by
[grantmaker] has been realised directly in equity as it did not affect Financial
Performance”.
4. If any unspent part of the grant is paid back, record this against the grant(liability)
account. Do not create a new account ‘grant refunds’ or some such.
Comparison with Liability Method:
Equity Method
Income Statement:
Income section does not show grant used for
purchase of an asset.
Liability Method
The organisation’s surplus/deficit is not
affected by the purchase of the asset.
The organisation shows a higher surplus
(lower deficit).
Income section shows grant used for purchase
of asset.
Balance Sheet:
The Balance Sheets are identical under both
methods.
Example:
The non-profit organisation Music Unlimited receives a grant by Harpie Trust to buy musical
instruments for $2,500.
On receipt of the grant, Music Unlimited codes it to a liability account ‘Harpie Trust grant’.
Over the next month the organisation full spends the grant on musical instruments.
The expenditure is coded to the asset account ‘Musical Instruments’.
At the end of the year Music Unlimited makes the following journal entry:
Debit Harpie Trust grant
$ 2,500
Credit Accumulated Funds $ 2,500