Legacy income represents a key source of funds for many UK charities, with the latest Legacy Trends Report produced by Smee & Ford estimating that the sector had benefited from £3.9bn of donations left to charities in wills in 2023.

With the level of legacy income so high, and so significant for some organisations, it is obviously important to get the accounting treatment right. However this can be a notoriously challenging area of charity accounting.

Recognition criteria for legacy income

In the UK, all charities preparing accounts under the accrual basis must follow the Charities Statement of Recommended Practice (SORP) when accounting for income, including legacy income. Under the SORP, legacy income should be recognised in the charity’s accounts when the following criteria are met:

Entitlement

The charity must be entitled to the income. This is typically established when:

  • the charity has been informed of its legacy, and
  • there is evidence that the estate will be able to pay the legacy.

Probable

The receipt of the legacy income must be probable. This means that there is a reasonable expectation that the charity will receive the income, which usually becomes more certain once probate has been granted and it is established that sufficient assets exist to meet the bequest.

Measurement

The legacy must be capable of reliable measurement. This includes:

  • Knowing the value of the legacy or being able to make a reasonable estimate of it.
  • Adjusting for any liabilities or costs associated with the estate.

Uncertainty and judgement

In practice applying these criteria is often very difficult due to the sheer number of potential uncertainties: be it the time taken to inform the charity; establishing an estimate of the value of the estate; whether the gift is a specific sum or a residuary interest in the estate; the length and complexity of the probate process; or the need to sell property or realise assets before a distribution can be made. This is before we start to think about restrictions, endowments etc… For larger charities, who are likely to have numerous legacies to assess at various stages of the probate process, this is more challenging still.

The subjectivity and level of judgement involved in accounting for legacy income means that  charities could potentially adopt quite different approaches in their accounts; with a cautious charity possibly just disclosing a contingent asset, where in the same situation another charity may recognise the legacy income and debtor on their balance sheet.

This has led to some to call for the next version of the Charity SORP to provide clearer guidance and instruction (see the recent ICAEW blog post - How can we answer the legacy question in the next Charities SORP? | ICAEW) and so help promote greater consistency across the sector.  We will find out if these requests have been heeded in early 2025, when the new SORP is due to be released for consultation.

Addressing the challenges

Although undoubtedly one of the more challenging aspects of charity accounting, there are various practical steps that charities can take:

  • Establishing a policy: In establishing a policy for recognising legacy income, and applying it consistently, charity trustees and senior management can help provide clarity in how the SORP criteria will be practically applied. This should of course be consistent with the SORP, but should help simplify and standardise the process and so remove a good deal of the subjectivity for the organisation.  
    (The policy should also be set out in the charity’s financial statement as a key source of estimation uncertainty and area of judgement)
     
  • Legacy register: keeping a detailed record of all known legacies, and tracking the stages from notification to receipt, will help with monitoring and forecasting. Key details such as the deceased’s name, estate executors, estimated value, and expected payment dates should be included.
     
  • Communication with executors: Regular and clear communication with the executors of estates to keep informed of the probate process, asset realisation, and any potential changes to the value of the legacy.

Next steps

Should you require any advice regarding accounting for legacy income in your charity, please get in touch with Gareth Burrow on g.burrow@uhy-calvertsmith.com or your usual UHY charity and not-for-profit adviser.

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