Global Water Initiative, an international NGO, receives a restricted grant of $500,000 specifically for building wells in rural communities over the next two years. According to the conceptual framework and basic accounting principles, how should this grant initially be recognized in the financial statements?

Answer options:

Immediately as revenue in the Statement of Profit or Loss.

As a liability (deferred income) until the performance conditions are met.

Directly in equity as a capital contribution.

It should not be recognized until the wells are completed.

How to approach this question

Consider the matching principle and the definition of a liability. The NGO has an obligation to build the wells; until it does, the money represents a liability.

Full Answer

B.As a liability (deferred income) until the performance conditions are met.✓ Correct

Under accrual accounting, income from grants with specific performance conditions is recognized as deferred income (a liability) upon receipt. It is only recognized as revenue in the Statement of Profit or Loss as the related performance obligations (building the wells) are satisfied.

Common mistakes

Students often confuse cash receipt with revenue recognition, incorrectly choosing option A.

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Practice the full ACCA FA — Financial Accounting Practice Exam 4

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