Understanding, Owning and Sharing a Donor Grant Contract Among Internal Stakeholders

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Session layout


What is a Grant

Exchange transaction vs Grant

  1. Exchange transaction (as per GST Act) involves:
    • Supply of goods and services
    • Consideration
    • In course of furtherance of business
  2. Grant is not exchange transaction since there are
    • No specific beneficiaries
    • Nothing in return from beneficiaries or benefit derived by grantee
    • Not for furtherance of business

Understanding above for grant contract is crucial otherwise contributions maybe considered as exchange transactions inviting GST and TDS implications and also charitable status maybe jeopardised

Grant Management

  1. Involves two key players-
    • Grantmakers-grantor/donor
    • Grantseekers-grantee/donee
  2. Grant management is a system that includes identifying, applying for and securing grants, adhering to grant conditions, evaluating outcomes.
  3. Grant management process in grant management system (GMS) is the grant management lifecycle

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Grant Management Life Cycle

  1. Pre award
    • Planning-need identification, SWOT, due diligence preparatory etc
    • Scout Funding opportunity
    • Grant application & review-eligibility and Qualification
  2. Award
    • Award Negotiation
    • Award Decision
    • Award Notification/Contract
  3. Post Award
    • fund request-advance, reimbursement etc,
    • Implementation
    • Reporting-program and finance
    • Post award amendment-key changes and approval, budget realignment, NCE
    • Performance/impact
    • Closeout
    • Reapplication

Principles of grant management

Pre-requisites for robust grant management system

  1. Policies & Procedures (Finance & HR)-ensuring strong internal control environment
  2. Accounting-ICAI Technical Guide on accounting for NPOs (Jan 2022)-framework
    • Fund based accounting
    • Accrual basis of accounting
    • Maintenance of books of accounts and other records
    • Accounting Standards as framework for recording, reporting and presenting in
      financial statements
  3. Segregation of duties-checks and balances, dedicated finance staff
  4. Encourage audit and assurance-risk mitigation

Fund Accounting

NGOs follow Fund Accounting for managing grants

Features:

Type of funds for NPOs

Grant word is not comprehensively defined in Indian laws, referred to as Voluntary contribution/donation (VC) in Income Tax law. FC under FCRA and CSR fund under CSR law
ICAI has classified funds for NPOs in its Technical Guide on Accounting for NPOs:

  1. Unrestricted funds-Funds with no specific restrictions on use (purpose)/time
    • Corpus (acknowledged in IT law)-non-refundable, non reducible, reinvestment obligation.
      Corpus only
      • when specific donor direction that it be treated as corpus by donor
      • not income but capital per IT Act
      • to be invested in section 11(5) modes of investment
      • considered application when replenished
      • not application if given to another charity.
      • Corpus income shown in I&E
    • Donations i.e. no obligations attached, a gift
    • Designated/earmarked funds-appropriated and set aside for specific purpose/future, self imposed by management and not binding in law
    • General funds-surplus/deficit transferred from I&E which are not designated. Free reserves
  2. Restricted funds: funds with conditions/restrictions
    • Project/program grants-to be utilized as per terms and conditions of award, Restriction-by purpose and by time. There could be other conditions/restrictions. Principle of fund based accounting
    • Endowment: fund amount cannot be utilized, only income utilized for general/specific purpose as per donor stipulation. The recipient owns it but does not control it.
    • Restricted funds maybe:
      • Permanent restriction
      • Temporary restriction: restricts use for a certain period or meeting objectives after which it becomes unrestricted.

Format of financial statements as per ICAI

BALANCE SHEET AS AT______


SOURCES OF FUNDS (LIABILITIES) Schedule Current Year Previous Year
Unrestricted funds


Corpus Fund/General Fund/Designated Funds


- Restricted funds: Unutilised Grants (Deferred Revenue), Endowment


- Loans/Borrowings: Secured/Unsecured


- Current liabilities & provisions


TOTAL


Application of Funds (Assets)


- Fixed assets: Tangible Assets/Intangible Assets/Capital Work-In-Progress


- Investments: Long Term/Short term


- Current assets: Loans, Advances, & deposits. Grant Receivable


TOTAL


Significant Accounting Policies and Notes on Accounts


Net Assets

Format of financial statements as per ICAI

Name of Entity______


Income & expenditure account for the period/year ended______


Income Schedule Schedule Current Year Previous Year
Grants & Donations



Other Income-rent, interest, incidental business Income, Fee & Subscription.


Total (A)


Expenditure


Program Exp


Administrative and General Expenses, Finance costs


Depreciation & Amortisation Expenses


Total (B)


Excess of Income over Expenditure (Surplus) or excess of Exp over Income (Deficit)(A-B) (Net Income in for profit entity)


Balance Being Surplus (Deficit) Carried to Balance Sheet-General Fund, Transfer to Designated fund, Building fund/ Others
(specify)




Accounting for grant recognition by NGOs in India

Practise followed as per convention-no legal directive:

Option 1: Gross grant treated as income

Option 2: Gross grant routed through Balance Sheet only-asset and liability side settled

Option 3: Grant treated as income to the extent of expenditurewhile unutilised grant is a liability--hybrid method

Recipient, Sub-recipient and Vendor

Recipient is the organization receiving the grant. A recipient is sometimes called the Prime recipient because it has full responsibility for grant funds. The document evidencing this arrangement is grant contract

Sub-recipient is involved in substantive activities of the award project. The recipient passes on some or all of its duties to the sub-recipient called sub award. All the terms and conditions from the grant award flow down to sub-recipients through a document evidencing it called sub grant contract

Vendor/service provider provides goods/services to the recipient so the recipient can accomplish the project’s purposes. Selected terms and conditions might be passed through to the vendor. The document evidencing is a goods/service contract

Cost-Key concepts

Classification of expense for NPOs

NPOs should follow functional expense head for presenting reports, that is what is the basis for their constitution and work. Broadly the functional heads are two-Program/service delivery and Support/Admin & General

Costs for a project for NGO

  1. Direct costs (100% direct traceability to a program/support function) to benefit the beneficiary as per project design. No cost if no project.
  2. Common/Shared costs-benefit multiple projects
    • shared cost apportionment based on time, space, no of employees/beneficiaries/no of project locations

Understanding and computing direct and shared cost crucial for correct and realistic budget formulation

Apportionment method and share of common cost included in common cost policy
Common cost be reviewed every year within the purview of common cost policy

  1. Total cost for a project:
    a. Direct cost+
    b. Common Direct cost
    c. Shared cost apportioned to the project
  2. Institutional/Management cost/indirect cost if permitted basis donor
    grant management policy to address contingency/create a reserve

Other types of cost

Capital & Revenue cost:

Capital Costs: Capital costs are one-time fixed assets purchases that will be used for revenue generation over a longer period- more than one year.

Revenue Costs: are referred to as operating expenses are short-term expenses that are used in running the daily business operations.

Fixed and Variable Costs:

Fixed cost is one that does not change in total within a reasonable range of activity. Since the fixed cost remains constant in total, the fixed cost per unit of activity decreases when the volume increases and vice versa.

Variable cost or expense is where the total cost changes in proportion to changes in volume or activity.

Cost Principles in grant budgeting for NPOs

Costs budgeted for a project grant should be

Please note: Information is for reference only. Read our disclaimer here.


Revision #17
Created 21 January 2025 07:00:31 by Pooja
Updated 23 June 2025 16:34:59 by Pooja