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:
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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.
Capital grants fund
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© Mango 2010
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
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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 or in columns)
Donor
fund
Donor income
Total income
10,000
10,000
Capital expenditure
Total expenditure
4,000
4,000
Surplus
6,000
General
Fund
Revenue release (from capital fund)
Total income
1,000
1,000
Depreciation
Total expenditure
1,000
1,000
Surplus
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Balance sheet
Fixed assets
Bank
Total net assets
3,000
6,000
9,000
Represented by:
Donor fund
Capital grants fund
General fund
Total funds
6,000
3,000
9,000
Movement in funds note
Donor
fund
Opening balance
Income
Expenditure
Transfer: Asset capitalisation
Transfer: Depreciation
Closing balance
10,000
(4,000)
General Capital
fund
grants
fund
10,000
(1,000)
(1,000)
4,000
1,000 (1,000)
-
6,000
-
-
-
3,000
Total
funds
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.
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© Mango 2010