Legacies are a welcome and often unexpected source of income for many charities. However the accounting treatment can often cause confusion, with many charities unclear on when to recognise the income and what records they should be keeping for audit purposes.
A legacy is a gift that someone leaves to a charity in their Will. Charities should recognise legacy income in their financial statements when the following criteria are met: i) the charity is entitled to the money; ii) it is probable that the charity will receive the money; and iii) the amount due to the charity can be reliably measured.
A charity is entitled to a legacy at the date of death if a valid Will is in place. Legacy receipts are usually considered probable once probate has been granted, the executors have confirmed there are sufficient net assets to pay the legacy, and any conditions attached to the legacy have been met.
There are two types of legacies: the first is a pecuniary legacy, which is a specified amount, e.g. £10,000, and can therefore be reliably measured. The second is a residuary legacy, which is a share of a person’s net estate after the deduction of any pecuniary legacies and any other distributions and expenses. The calculation of a person’s net estate can be complex and time consuming, especially if there is a property to sell. There is therefore usually a significant delay between the dates the charity is first notified and when they receive sufficient information to calculate the amount due to them. Solicitors will usually provide an initial estimate once the Estate Accounts are available.
If the legacy meets the first two criteria but the amount due cannot be reliably estimated, the charity should disclose the potential income as a contingent asset in a note to the financial statements if the amount is likely to be material.
Once a charity is notified of a legacy and can make a reasonable estimate of the amount due, it should recognise this as income, and accrue the amount due until the money is received. For example, for a charity with a December 2021 year end: if they are notified in March 2022 that probate has been granted and the date of death is in November 2021, the charity should include the accrued income in the 2021 accounts if they have a reasonable estimate of the amount. Upon receipt of the money in 2022, the debtor is then released.
Charities should keep a clear audit trail for all income streams. For legacies this includes all correspondence from solicitors or executors, plus a copy of the Will, and Estate Accounts for residuary legacies. Charities should request a copy of the Will and Estate Accounts if these are not provided to verify the amount of income due to them. For charities receiving multiple legacies, it is recommended to maintain a log to keep track of notifications and receipts since there can be months or even years between the initial correspondence and final receipt. A clear log and organised correspondence file will result in a much more efficient audit.
Near the year end, charities should chase up any outstanding legacies with solicitors or executors to ensure their financial statements reflect the most up to date information. This should be monitored up to the point of signing the financial statements as any new notifications or updates which meet the above criteria should be adjusted for. This can sometimes lead to last minute adjustments!
Charities should also review the Will to determine whether it specifies any restrictions on how the money should be spent. If the Will states the money should be spent in a particular way, a restricted fund should be set up with clear records on how the money is subsequently spent.
As a final point, legacy income is unpredictable and therefore charities should be cautious about being over-reliant on this source of income when preparing future budgets and cashflow forecasts. Find out more about accounting for charities.