Capital Grants Fund

This briefing note is aimed at users, preparers and auditors of NGO financial statements. It assumes that the reader understands the concepts of fixed asset capitalisation and depreciation.

It answers the following questions:

What is a capital grants fund?
When is a capital grants fund used?
What are the alternatives to using a capital grants fund?
How does a capital grants fund work? (explanation for accountants)
What do the financial statements look like?
Is use of a capital grants fund compliant with International Financial Reporting Standards?

What is a capital grants fund?

The capital grants fund may be found on the bottom half of the balance sheet. It is equal to the net book value of grant funded fixed assets included within the fixed asset figure found on the top half of the balance sheet.

When is a capital grants fund used?

It is used when organisations need to show capital expenditure in full against a donor fund, whilst also capitalising assets on their balance sheet to comply with International Financial Reporting Standards (IFRS). It is not explained in any accounting standards, but has become common practice in many developing countries.

What are the alternatives to using a capital fund?

There are three basic choices when a local NGO is accounting for donor funded fixed assets in their year-end financial statements:

1)Expense the asset and do not capitalise it (Receipts and Payments basis). This is simple accounting, but not suitable for organisations preparing accounts on an accrual basis in accordance with IFRS. (Some organisations argue that the assets belong to the donor or the project and therefore do not need to be capitalised).

2)Capitalise the asset, but keep the net book value of the asset in the restricted fund (as required by the UK Charities Statement Of Recommended Practice). This is complicated accounting for local NGOs,and then requires separate reports to be prepared for donors on a cash basis.

3)Expense the asset through the donor fund (on a cash basis) but capitalise it on the balance sheet using a capital fund. This is not standard accounting practice in profit oriented businesses or the developed world but it is a pragmatic solution that has been implemented on many financial statements.

How does a capital grants fund work? (explanation for accountants)

Consider the following steps:

Step 1: A donor gives a grant (10,000), including money for an asset purchase

Step 2: An asset is purchased with donor funds (4,000)

Step 3: The asset is transferred from the donor fund to the capital fund (4,000)

Step 4: The asset is depreciated (1,000)

Step 5:The general fund is replenished from the capital fund for the value of depreciation (1,000)

The following descriptions show the double entry effect of the five steps on the various accounts that form the basis for the financial statements.

Step1: 10,000 is received into the bank, recorded as donor grant income. The value in the donor fund increases.

Dr Bank, Cr Donor grant income

Step2: 4,000 is paid from the bank to buy an asset, recorded as a fixed asset on the balance sheet. The bank balance reduces.

Dr Fixed asset, Cr Bank

Step3: The asset is transferred from the donor fund to the capital fund. The transfer out of the donor fund is done by charging an expense account called Capital Expenditure.

Dr Capital expenditure (Donor fund), Cr Capital grants fund

Step4: The asset is depreciated at 25%. 1,000 is charged as depreciation expense through the

general fund, which reduces the value in the general fund. The Net Book Value of the asset on the top of the balance sheet is also reduced by 1,000 to 3,000. Note that this leaves the fixed asset and capital fund accounts with different balances, so another step is needed.

Dr Depreciation exp (Gen fund), Cr Accumulated depreciation (Balance Sheet)

Step5:The General fund is replenished from the capital fund for depreciation charged. This brings

the capital fund balance on the bottom of the balance sheet down to 3,000 to match the fixed asset value of 3,000 on the top of the balance sheet. There is a nil net effect on the general fund, which is correct since the asset was purchased by a donor.

Dr Capital grants fund, Cr General fund

What do the financial statements look like?

Accounting policy wording

Capital Grants Fund

When fixed assets are purchased with donor grants, the capital expenditure is charged to the donor fund and transferred to the capital grants fund. Depreciation of donor funded assets is charged through the general fund which is replenished by an equal transfer from the capital grants fund. The value on the capital grants fund represents the net book value of donor funded fixed assets.

NB: There is still a need for a separate accounting policy note on fixed assets.

Income and Expenditure (either presented on different pages orin columns)

Donor fund
Donor income / 10,000
Total income / 10,000
Capital expenditure / 4,000
Total expenditure / 4,000
Surplus / 6,000
General Fund
Revenue release (from capital fund) / 1,000
Total income / 1,000
Depreciation / 1,000
Total expenditure / 1,000
Surplus / -
Capital grants fund / 1 / © Mango 2010

Balance sheet

Fixed assets / 3,000
Bank / 6,000
Total net assets / 9,000
Represented by:
Donor fund / 6,000
Capital grants fund / 3,000
General fund / -
Total funds / 9,000
Capital grants fund / 1 / © Mango 2010

Movement in funds note

Capital grants fund / 1 / © Mango 2010
Donor fund / General fund / Capitalgrants fund / Total funds
Opening balance / - / - / - / -
Income / 10,000 / 10,000
Expenditure / (1,000) / (1,000)
Transfer: Asset capitalisation / (4,000) / 4,000 / -
Transfer: Depreciation / 1,000 / (1,000) / -
Closing balance / 6,000 / - / 3,000 / 9,000

Is use of a capital fund compliant with IFRS?

International Financial Reporting Standards (IFRS) describe how profit-oriented businesses ought to present their general purpose financial statements. Given that there is no international equivalent for non-profit oriented entities, it is recommended that NGO accounts comply with IFRS, or an individual country’s Accounting Standards if they exist. This adds a great deal of credibility to the audited financial statements.

The IFRS acknowledge in IAS 1p5 that entities with not-for-profit activities may need to amend descriptions used for particular line items in the financial statements. Even though the IAS does not refer to a ‘capital grants fund’ it allows for the use of amended terms.

Both full IFRS (IAS 1p80)and IFRS for SMEs (4.13) say that an entity without share capital shall disclose equivalent information and show "changes in each category of equity". The equivalent of equity for an NGO is the closing balances on its restricted and unrestricted funds, including the capital grants fund.

In conclusion, provided that the accounting policy and the movements on all funds are properly explained and disclosed, it is possible for financial statements using a capital grants fund to give a true and fair view in accordance with IFRS.

With grateful thanks to Simon Fisher of RSM Ashvir for his help with the question of compliance.