Legacy Income – Key Points for Charities to Know
Legacy income can be a vital source of income for charities. As well as providing charities with funds that enable them to achieve their aims, leaving a legacy donation to a charity can be a heart-warming way of saying thank you to a charity that may have helped you or means a lot to you.
The recognition of legacy income often causes charities a number of issues and raises many queries. The Statement of Recommended Practice (SORP) for Charities, updated in October 2019, states that income from legacies is recognised when the following criteria are met:
- Entitlement – This means that control over the rights or other access to the economic benefits of the legacy has passed to the charity.
- Probable – it is more likely than not that the economic benefits associated with the transaction or gift will now flow to the charity.
- Measurement – the monetary value or amount of the income can be measured reliably and any costs incurred to receive the legacy can be measured reliably.
The criteria of entitlement is not met until the death of the benefactor has actually occurred with a valid will in place which leaves the legacy to the charity.
Once the entitlement of the legacy has been identified, the charity cannot recognise the income until it is both probable that the income will be received and can be estimated with sufficient accuracy. A legacy receipt is normally classed as probable when there has been a grant of probate and the executors of the will are satisfied there are sufficient assets after settling any liabilities to pay the legacy, plus any conditions attached to the legacy are met.
Estimating the income to be received by the charity can be difficult depending on the complexity of the legacy donation. Commonly, executors of a will notify a charity when a legacy payment is due to them. At this point, the executors may also be able to provide an estimate of the value the charity is likely to receive. However, in some cases, an estimate of the value may not be available until probate has been completed and the executors have established there are sufficient assets to pay the legacy.
In some instances, charities may have a large amount of immaterial (small) legacies. By using a ‘portfolio approach’, the charity may estimate the monetary value of the income that may be received from legacies to which they are entitled by applying a formula or mathematical model. It is worth noting however that the portfolio approach should not be used for material legacies or when the charity receives legacy income infrequently.
If entitlement of the legacy has been established, but uncertainty remains over the amount and the charity is unable to reliably estimate the income, then the income cannot be recognised within the financial statements. In this situation, details of the legacy should however be disclosed as a contingent asset (i.e. an asset that may arise in the future but is not yet certain) until the criteria for recognising the income has been met.
It can take some time, often many months, between the notification of a legacy to a charity and the actual receipt of the income or assets, and in some cases, particularly those that take longer than a year to resolve, consideration may need to be given to discounting the value of the monies to be received, to reflect the decrease in money over time, due to inflation.
There is the strong possibility that COVID-19 may affect the value of legacy income. For example, this could be the case where a charity has been left a percentage of a property or other investment. If the estimated value of the legacy was based upon the market rate expected (or known) prior to the pandemic, it is feasible that this may have significantly decreased due to market changes, therefore impacting the income due to the charity.
Where it is anticipated that the amount initially recognised is now reduced, then an adjustment should be made to reduce the amount due within the financial statements. This directly reduces the income receipt within the financial statements, rather than charged as an expense for the impairment.
The recognition of legacy income is often a difficult area for charities If you need any advice or assistance relating to the initial recognition or subsequent measurement of legacy income then please contact our charity specialist directors, Joanne Kingsnorth ( / 01494 552159) or Liz Horton ( / 01494 552148)
This blog is for guidance only, professional advice should be obtained before acting on any information contained herein. The information was correct at time of publishing 4 August 2020.