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A non-profit organisation rarely has just one grant. In the same month, the accountant may be handling two, three or even ten projects from different donors, each with its own budget, currency, reporting period and cost eligibility rules. If everything is recorded in a single pot, the first donor request for a detailed report turns into several sleepless nights.<\/p>\n
This article explains how to set up project-based grant accounting so that donor reports are generated from accounting data rather than assembled by hand from bank statements and spreadsheets. It draws on the grant audit<\/a> practice MK Audit has built over more than 20 years, since 2000, and on the findings that appear most often in audit reports.<\/p>\n A grant is restricted funding by nature. The money arrives against a specific budget, and the organisation cannot spend it at its own discretion. In Ukrainian accounting, such receipts are recorded as targeted financing on account 48, and income is recognised as the related expenses are incurred. This follows from National Accounting Standard 15 “Income”: income from targeted financing is recognised in the periods in which the expenses that fulfil the funding conditions are recognised.<\/p>\n The practical consequence is that, to recognise income correctly, you must know exactly which expenses belong to which grant. Without project analytics, the accountant either estimates income roughly or cannot demonstrate at all that a particular donor’s money was spent on that donor’s project. For an auditor this is a red flag; for a donor it is grounds to declare part of the expenditure ineligible.<\/p>\n The second reason is that the donor reads the report through the lens of its own budget, not your chart of accounts. It wants to know how much rent or salary was charged to its project, under what rule and on what document.<\/p>\n Direct costs are easy to link to a specific project: a trainer’s fee for a project event, printing materials with the donor’s logo, a coordinator’s business trip. The single most important rule is that the project code must appear on the source document or the payment authorisation before payment, not afterwards, when the accountant is allocating costs just before the report.<\/p>\n Payroll deserves special attention. If an employee works on several projects, the allocation of their salary must be based on timesheets or an order setting the percentage of time. The total across all projects cannot exceed 100 percent, and any change in the split mid-project must be documented.<\/p>\n Office rent, utilities, communications, bookkeeping, the salaries of the director and accountant: these costs serve all projects at once and cannot be charged directly to a single grant. Donors handle this in two ways.<\/p>\n Many donors allow administrative costs to be budgeted as a percentage of direct costs (often 7, 10 or 15 percent, depending on the donor’s rules). The organisation then does not have to document every hryvnia, but it must be able to show that the money really went to running the organisation and not to costs already covered by another donor.<\/p>\n Other donors require actual costs with a justified allocation. The organisation then needs a written indirect cost allocation methodology, approved by an internal order or as part of its accounting policy. Possible bases include:<\/p>\n The auditor’s main requirement for any methodology is that it is approved before the period begins, applied consistently, and does not lead to the same cost being funded twice from two sources.<\/p>\n Most grants arrive in US dollars or euros, while the books are kept in hryvnia. This creates two different tasks that are often confused.<\/p>\n The first is an accounting task. Under National Accounting Standard 21 “Effects of Changes in Foreign Exchange Rates”, foreign currency transactions are recorded in hryvnia at the National Bank of Ukraine rate on the transaction date, and monetary items (foreign currency bank balances, receivables and payables) are retranslated at the balance sheet date and on settlement. The resulting exchange differences are recognised as income or expense of the period.<\/p>\n The second is a reporting task. The donor wants to see expenditure in the grant currency, and the donor sets the conversion rule: the rate on the date the tranche was received, the rate on the date of each expense, the average rate for the period, or a rate fixed in the agreement. Clarify this rule when the agreement is signed and record it in the project’s accounting policy. Where hryvnia expenses “cost” less foreign currency than was received, most donors require the exchange gain to be either returned or used for project purposes with their approval. Exchange losses, on the other hand, are usually charged to the project only when the agreement expressly permits it.<\/p>\n A standard BAS configuration for non-profits allows project accounting to be set up without custom programming. A few decisions at the start are enough.<\/p>\n Once this is in place, a trial balance or dimension analysis filtered by project and grouped by budget line provides a ready basis for the donor financial report. The balance on account 48 for the project shows unspent funds, and the turnover by budget line matches the budget rows.<\/p>\n A donor financial report almost always takes the form of budget versus actual for each budget line. Whatever the donor’s template, it should contain the following columns:<\/p>\n A few rules that prevent audit findings:<\/p>\n If the organisation has no in-house accountant familiar with donor-funded projects, it makes sense to outsource project accounting: accounting services for NGOs<\/a> with separate analytics for each grant cost the organisation far less than refunding ineligible expenditure to a donor.<\/p>\nWhy accounting must be project-based<\/h2>\n
Direct costs: splitting them between projects<\/h2>\n
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Indirect (administrative) costs<\/h2>\n
Flat rate<\/h3>\n
Allocation on a basis<\/h3>\n
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Exchange differences<\/h2>\n
Analytics in BAS<\/h2>\n
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Reporting to the donor in budget format<\/h2>\n
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\n \nBudget line<\/th>\n Budget<\/th>\n Spent this period<\/th>\n Spent to date<\/th>\n Balance<\/th>\n Variance, %<\/th>\n<\/tr>\n<\/thead>\n \n Salaries<\/td>\n 40,000<\/td>\n 9,800<\/td>\n 29,500<\/td>\n 10,500<\/td>\n -26<\/td>\n<\/tr>\n \n Events and training<\/td>\n 25,000<\/td>\n 7,200<\/td>\n 26,100<\/td>\n -1,100<\/td>\n +4<\/td>\n<\/tr>\n \n Administrative costs<\/td>\n 6,500<\/td>\n 1,700<\/td>\n 5,560<\/td>\n 940<\/td>\n -14<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n \n