Grant Accounting Policy Template for Startups: Practical Revenue Recognition and Expense Tracking

Foundational Understanding: The Core Challenge of Grant Accounting

Receiving a significant grant is a major milestone for any Biotech, Deeptech, or SaaS startup. The cash is in the bank, but the work hasn’t started. This creates an immediate and often underestimated challenge: the money is an obligation, not yet revenue. Mismanaging this distinction can lead to misstated financials, difficult conversations with investors, and serious compliance issues down the line.

Creating a formal grant policy is not about adding bureaucracy. It is about building a reliable system for financial reporting and runway management, which is essential for understanding how to track government grant funding for startups. This framework ensures that as your company grows, your financial operations scale with it, providing clarity to both internal teams and external stakeholders. See the Government Grants & Contract Accounting hub for project-based accounting guidance.

The most common mistake founders make is thinking cash received equals revenue earned. When a grantor provides funds, that cash is not yet your company’s income. It’s a liability on your balance sheet, typically recorded in an account called 'Deferred Revenue'. This account represents an obligation to perform research, deliver on milestones, or incur specific expenses as outlined in the grant agreement. The revenue is only 'earned' and moved from the balance sheet to the profit and loss statement (P&L) as you satisfy those obligations.

Most grants for early-stage startups are conditional. They come with strings attached, requiring you to meet certain requirements before you can recognize the income. The critical question becomes, when does this actually matter? A formal grant policy is typically triggered by a major grant (e.g., over $50,000 or more than 10% of your operating budget), multiple active grants, receiving any government grant, or preparing for your first financial audit.

For startups with significant government funding, the stakes are higher. For example, US federal grants exceeding $750,000 in a fiscal year can trigger a formal 'Single Audit', a detailed review of financial controls and compliance. Properly managing government funding accounting from day one is not optional; it is a core operational requirement for sustainable growth and future funding eligibility.

The Accounting Rulebooks That Matter for Startups

Accounting standards provide the framework for how to recognize grant revenue. Which set of rules your startup follows depends primarily on your company's location and incorporation. For most technology and life science companies, the choice is between US GAAP and IFRS.

US GAAP for American Companies

For US companies, US GAAP (Generally Accepted Accounting Principles) is the primary standard. The specific rule, ASC 958, focuses on whether the grantor has imposed 'barriers to entitlement'. A barrier is a measurable hurdle that must be overcome to earn the funds. Think of it as a specific, tangible achievement. For instance, if a biotech grant requires hiring a scientist with a specific qualification, that is a barrier. You can only recognize the associated revenue after that person is hired and starts work. Other common barriers include achieving a specific research milestone, submitting a technical report, or obtaining regulatory approval.

IFRS and FRS 102 for International and UK Companies

For companies outside the US, IFRS (International Financial Reporting Standards) is a common standard. The relevant rule, IAS 20, focuses on 'conditions'. The principle is similar: you must have reasonable assurance that you will meet the conditions attached to the grant before recognizing income. In the UK, companies often apply FRS 102, which is closely aligned with IFRS on this topic. While the terminology differs slightly between standards, the practical outcome is often the same, requiring a clear and auditable link between your activities and revenue recognition.

One key difference under IFRS and FRS 102 is the treatment of grants related to assets, such as funding to purchase a key piece of lab equipment. These standards provide a choice: a startup can record the grant as deferred income and recognize it over the asset's useful life, or it can deduct the grant amount directly from the asset's carrying value on the balance sheet. The latter approach reduces future depreciation expense but also shows a lower asset value.

Building Your Policy: The Two Sides of the Grant Ledger

A robust policy requires a system that manages both revenue recognition and expense tracking. This is how to track government grant funding for startups in practice, using the tools you already have like QuickBooks or Xero.

1. Managing the Revenue Side: Deferred Revenue

First, address the revenue side. In your accounting software, create a new current liability account named 'Deferred Grant Revenue'. When you receive grant cash, the funds are booked here, keeping them off your P&L statement until earned. This correctly reflects that the cash is an obligation, not income. Your policy must define the revenue recognition trigger. For many research and development grants, the trigger is expense-based: you recognize revenue in direct proportion to the allowable expenses you incur. This is the most common and straightforward method for early-stage companies.

2. Managing the Expense Side: Grant Expense Tracking

Second, focus on grant expense tracking. This involves meticulously tagging every related cost to ensure startup grant compliance. The grant agreement is the single source of truth, defining what qualifies as an 'Allowable Cost'. In your bookkeeping system, you must create a way to segregate these costs.

• In QuickBooks, use the 'Classes' feature to create a distinct class for each grant (e.g., 'Grant ABC', 'Grant XYZ').
• In Xero, use 'Tracking Categories' for the same purpose.

This simple setup allows you to run reports showing every expense associated with a specific grant, which is critical for reporting and audits.

Costs must be separated into two types: Direct and Indirect.

• Direct Costs: These are expenses tied specifically to the grant project. Examples include the salary of a dedicated researcher, the purchase of specialized lab materials, or software licenses used exclusively for the project.
• Indirect Costs: Also known as Facilities & Administrative (F&A) costs, these are shared operational expenses like rent, utilities, or administrative salaries. Your grant agreement will specify how to handle these. A common approach for US federal grants is to use a pre-approved '10% de minimis' rate, which allows you to claim 10% of your Modified Total Direct Costs (MTDC) as indirect costs. Alternatively, you may have a specific negotiated indirect cost rate (e.g., '45% of MTDC').

Example in Action

Consider a deeptech startup that receives a $250,000 grant for a one-year project.

1. Cash Received: The initial entry is Debit Cash for $250,000 and Credit Deferred Grant Revenue for $250,000. The P&L is unaffected.
2. Expenses Incurred: In the first month, the startup incurs $30,000 in direct salaries and $5,000 in direct materials. Each transaction is coded to its proper expense account (e.g., 'Salaries', 'Lab Supplies') and tagged with the 'Grant ABC' Class in QuickBooks.
3. Revenue Recognized: At month-end, because the grant is expense-based, the startup recognizes $35,000 of revenue. The accounting entry is Debit Deferred Grant Revenue for $35,000 and Credit Grant Revenue for $35,000.
4. Financial Impact: The P&L now accurately reflects $35,000 in income and $35,000 in expenses for the month, showing a net-zero impact from the grant activity. The balance sheet shows the remaining liability of $215,000 in Deferred Grant Revenue.

This systematic approach is fundamental to research grant management and provides the documentation needed for any grant audit preparation.

The Grant Accounting Policy Template

You do not need a 50-page document. A simple, clear policy that your team can follow is what matters. It should be written down, approved by management, and include these four sections.

1. Purpose and Scope

State the policy's objective clearly. For example: "This policy's purpose is to ensure accurate and consistent accounting for all grant funding in compliance with US GAAP or IFRS." Define which awards it applies to (e.g., 'This policy applies to all government and foundation grants exceeding $10,000').

2. Revenue Recognition

This section defines the rules of the game. Specify your accounting standard (e.g., 'This company follows US GAAP, specifically ASC 958, for grant revenue recognition'). Clearly state the recognition method. Example: 'Grant revenue is recognized as allowable, qualifying expenses are incurred. Funds received in advance of expenses being incurred will be recorded as Deferred Grant Revenue on the company's balance sheet.'

3. Expense Tracking and Allocation

Detail the operational process for grant expense tracking. Define direct and indirect costs with examples relevant to your business. Mandate the use of your accounting software's tagging feature (e.g., 'All direct expenses related to a grant must be coded to the appropriate project-specific Class in QuickBooks.'). Specify the indirect cost rate used, referencing the grant agreement (e.g., 'Indirect costs are allocated using the 10% de minimis rate of MTDC, as allowed by the grant agreement.'). This section should also cover requirements for time tracking for employees who split their time between grant and non-grant activities. This directly supports grant reporting requirements.

4. Reporting and Reconciliation

Establish a cadence for review and oversight. Example: 'On a monthly basis, the finance lead will reconcile all grant-related expenses and recognized revenue against the grant budget. A report detailing spend versus budget will be shared with the management team quarterly.' This discipline is vital for proactive grant management and is a common feature in nonprofit grant policies.

Practical Takeaways for Founders

For founders and operations leads at pre-seed to Series B startups, navigating grant accounting can feel daunting. The lesson that emerges across cases we see is that proactive setup prevents painful, expensive clean-up projects during an audit or due diligence process. The reality for most startups at this stage is more pragmatic: focus on building a simple, scalable system from the start.

Here are the three most important actions to take:

1. Treat Your Grant Agreement as Gospel: This document is the single source of truth for allowable costs, reporting deadlines, and recognition conditions. Read it carefully, and have your accountant or legal counsel review it. Do not make assumptions about what is permitted.
2. Configure Your Software Immediately: Set up your chart of accounts, Deferred Revenue liability account, and tracking categories in QuickBooks or Xero before you spend the first dollar of the grant. Retroactively tagging thousands of transactions is a time-consuming and error-prone task.
3. Implement a Monthly Reconciliation: Schedule time each month to tag expenses, recognize the appropriate revenue, and compare your actual spending to the grant budget. This 30-minute process makes official reporting straightforward and keeps your financials accurate for internal and external stakeholders.

Getting this right isn't just about avoiding clawbacks or passing an audit. It’s about maintaining accurate financial visibility, which is fundamental to managing your cash runway and making informed strategic decisions. Continue your learning at the Government Grants & Contract Accounting hub for broader guidance.

Frequently Asked Questions

Q: What is the difference between deferred revenue and earned revenue for a startup grant?

A: Deferred revenue is cash received from a grantor that your company has not yet earned. It is recorded as a liability on your balance sheet. Earned revenue is the portion of the grant you have recognized as income on your profit and loss statement, which typically happens as you incur qualifying project expenses.

Q: How should we handle payroll in our government funding accounting?

A: Payroll for employees working on the grant is a direct cost. It requires diligent time tracking. Employees who split their time must maintain timesheets that document the hours spent on grant activities versus other company work. This documentation is essential for grant reporting requirements and audit preparation.

Q: Can I use grant money to pay for general business expenses like rent?

A: Yes, but only as an indirect cost according to the rules in your grant agreement. You cannot simply pay your rent from the grant fund. Instead, you typically apply an approved indirect cost rate (like the 10% de minimis rate) to your direct costs to cover a portion of shared expenses like rent and utilities.

Q: What happens if my startup spends grant money on unallowed costs?

A: Spending grant funds on costs not permitted by the agreement can have serious consequences. The grantor may demand repayment (a clawback) of the ineligible funds, which can create a sudden cash flow problem. It can also damage your reputation and jeopardize your eligibility for future funding from that source.