The accounting treatment of government funding is largely dependent on the conditions stipulated by each funding provider. A common example is the requirement to acquit all funding in full at the end of each year, with any unspent amounts to be repaid or withheld from the next year’s allocation. In this situation, only the portion of the funding spent during the financial year should be recognised as income to the organisation. The remaining portion is then set aside as unearned income in the balance sheet, where it will be recognised as income in the following financial year when spent (or the liability is extinguished when unspent funds are repaid to the funding provider).
Other providers will allow the recipient to keep these funds on the condition they continue to be used for approved purposes. In this situation, the funding should be recognised as income in full upon receipt.
The following flowchart provides a summary of this common treatment:
There may be specific situations where there is no formal requirement to repay unspent funds however you may wish to spread the recognition of the income out over an extended period (i.e. if a lump sum was received for the construction of a new building that will take 18 months to complete). In this situation, it is important to talk to your accountant to ensure that this treatment is appropriate for your specific financial reporting obligations.