The SORP sets out that the decision to award a grant may create a funding commitment, this is recognised as a liability when the recognition criteria have been met:
- the criteria for an obligation are met;
- payment of the grant is probable;
- the liability can be measured reliably (which for approved grants is straight forward); and
- there are no performance-related conditions that limit the recognition.
Where you approve a multi-year grant that is subject to performance-related conditions (or the donor charity may be able to legitimately withdraw from its commitment) the recognition of a liability is not required. The SORP clearly states “Provided the performance-related condition and review process has been communicated to the recipient as part of the funding agreement and the review process has substance (i.e. the review has a potential impact on future payments), then the criteria for recognition of a liability are unlikely to be met.” Equally if there are no performance-related conditions attached to a grant that allows the done charity to realistically avoid the commitment, a liability for the full funding should be recognised (if this funding was for a number of years then you would also have to consider, if material, the time value of money and discounting the liability to the present value).
If you are providing a grant, the payment of which is dependent on say matched funding, the matched element is outside of your control. In this situation, a liability arises and the expenditure must be recognised, if the payment of the grant is probable.
Where you have funding commitments, so future grant payments that are considered to be possible, these should be disclosed as a contingent liability, and the note should explain how these unrecognised funding commitments will be funded (this element is a new disclosure requirement).