Pesh Framjee, Special Advisor to Charity Finance Group, shares some of his thoughts around the new SORP Exposure Draft, particularly focusing on the subject of legacies and how they are recognised.
I recently read an interesting article in Charity Finance Magazine that seems to take the view that legacies should be recognised when probate is granted. The article asserts that “Once a legacy has gone through probate, there should be an intention to include it unless there is a clear reason why not, rather than an assumption that it should not be included.” I don’t agree with this assertion and here I explain why.
When are legacies recognised?
In practice, charities adopt one of two main policies for recognising outstanding legacies as income in their financial statements:
- On grant of probate/confirmation.
- When estate accounts are “settled” or a distribution is notified by the executors.
There is also a third approach where legacies are accounted for on a receipt basis. This is not compliant with accruals accounting under the SORP and FRS 102 unless the difference between income received and receivable is immaterial.
What does FRS102 and the SORP Exposure Draft say?
FRS 102 (para 2.27) defines recognition as:
“The process of incorporating in the statement of financial position or statement of comprehensive income an item that meets the definition of an asset, liability, equity, income or expense and satisfies the following criteria:
(a) it is probable that any future economic benefit associated with the item will flow to or from the entity; and
(b) the item has a cost or value that can be measured reliably.”
The Exposure Draft (ED) of the SORP explains in para 5.90 that legacy income is normally considered probable when:
- there has been grant of probate or, in Scotland, grant of confirmation;
- the executors have established that there are sufficient assets in the estate, after settling any liabilities, to pay the legacy; and
- any conditions attached to the legacy are either within the control of the charity or have been met
This is consistent with paragraph 5.31 in the current SORP. Crucially, all three conditions must be met, not just the grant of probate. The second and third bullet points are why many charities don’t recognise legacies that the time of grant of probate and wait for the necessary confirmation from executors. This can be particularly important for residuary legacies.
Considering the definition of an asset
Recognising a legacy not yet received requires the existence of a debtor as an asset on the balance sheet. The ED SORP defines an asset as: “A present economic resource controlled by the entity as a result of past events.” FRS102 explains that “Control links an economic resource to an entity. Assessing whether control exists helps to identify the economic resource for which the entity accounts. An entity controls an economic resource if it has the present ability to direct the use of the economic resource and obtain the economic benefits that may flow from it.”
This ability to “direct the use of the economic resource” is a key aspect of control, not necessarily ownership. The ability to direct the use of an economic resource means the charity must be able to decide whether to use the resource, when to use it, and in what way to use it.
In other words, for a charity to control a legacy asset, it must:
- Have clear access to the economic benefit (e.g. proceeds of an estate);
- Be reasonably certain that no other party can prevent or redirect that benefit; B
- Be past any conditions or uncertainties (e.g. the asset is not needed to pay liabilities or subject to dispute).
This supports the thinking that control only arises as and when the executors conclude that the legacy asset will not be required to satisfy claims in the estate. Until then the legacy may be contested or there may be significant liabilities to meet. A charity legatee would have an interest to ensure the estate was properly managed but would not have a specific immediate right to the gift until the executors have concluded that the property will not be needed to meet other claims. Until then, the charity’s interest could be seen to be contingent.
It would be helpful if the 2026 SORP, in the section on legacy income recognition, refers to the definition of an asset and the importance of considering when the charity has control of the economic resource before it can record an asset.
Entitlement
The current SORP explains that income must only be recognised in the accounts of a charity when all of the following criteria are met:
- Entitlement – control over the rights or other access to the economic benefit has passed to the charity
- Probable – it is more likely than not that the economic benefits associated with the transaction or gift will flow to the charity.
- Measurement – the monetary value or amount of the income can be measured reliably and the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
The use of the term ‘entitlement’ has effectively been dropped in the ED because it is now considered subsumed within the concept of ‘control’ as defined by FRS 102. Control and removal of uncertainty around entitlement are prerequisites under FRS 102 and the SORP. Without these, the legacy remains a contingent asset, not a debtor.
So, ‘entitlement’ as a term disappears because if a charity controls a resource arising from a past event then it is by implication usually entitled to it. Entitlement can be viewed as a subset or precondition of control - you can’t control something unless you’re entitled to it in some enforceable or de facto sense.
Although I liked the concept of entitlement, I think the change makes sense. The concept of control is broader and more aligned with general accounting principles - it better handles complex income streams like performance related grants or conditional funding. Also, I found that “entitlement” was often misunderstood or inconsistently applied - particularly with legacies, where probate was used by some as a proxy for entitlement.
Instead of asking ‘Do we have entitlement?’ the question becomes, ‘Do we control a present economic resource as a result of a past event?’
This is more compelling and my view is that if there’s uncertainty, due to unresolved conditions or lack of control, then the income shouldn't be recognised.
Measurement
Of course, there is also the measurement test but I have never really seen this as a barrier to recognising legacy income. Both accounting and auditing standards make clear that measurement uncertainty does not usually preclude recognition and they explain that it is usually possible to arrive at a reliable estimate, even if there's a range of possible outcomes. FRS 102(10.17) states, “The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability.” This affirms that reasonable estimation is expected and valid, even when uncertainty exists.
Although the charity can often easily pass the measurability test with a potential legacy, it may not yet have control and the inflow might not be probable. Hence, I believe that the criteria that needs focus must be control and probability.
Prudence
FRS 102 section 2 Concepts and Pervasive Principles refers to ‘Qualitative characteristics of information in financial statements’ and explains (paragraph 2.9) the concept of prudence in financial reporting:
“Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated…”
The standard is clear that prudence does not permit bias or deliberate understatement. However, it does require caution. In cases of material legacy income, the ED SORP also mandates disclosure explaining how the timing of recognition may affect the availability of resources.
Accounting and practical realities
In my experience, legacy managers and fundraisers often prefer to recognise legacies as early as possible and use the probate date as the trigger. This helps boost the income figures. However, most preparers of charity accounts would rather not recognise income that may not be received for years or which the charity cannot yet access or control.
Some estates take several years to settle and recognising a legacy on the grant of probate can lead to the charity seeming to have more resources and reserves than it actually has available to apply. So, charity accountants try to find a pragmatic way of deciding on when legacies should be included in the year end accounts and avoids the toing and froing that I see in trying to arrive at a value to include.
A common practice is to review legacies received shortly after the year end date and determine whether the estate was settled before year end. This is based on the thinking that if executors had concluded before the year end that the funds were not needed for other claims then it would not be unreasonable to assume that the funds would be received within a few months.
This is not cash accounting, rather it’s an estimation technique aimed at aligning recognition with paragraph 5.90 in the ED. Such estimations must be revisited if evidence suggests they’re no longer producing reliable outcomes.
Conclusion
The ED continues to allow different approaches that can be justified and in certain circumstances recognising at probate may be acceptable. However, rather than defaulting to recognising legacies on the grant of probate, the rebuttable presumption is that a legacy should not be recognised unless:
- The executors confirm there are sufficient assets, post-liabilities, to pay the legacy; and
- Any conditions attached to the legacy are either fulfilled or within the charity’s control
This will usually be later than the probate date and for residuary legacies this can often be much later. Probate may be granted long before the estate is administered, and it is not uncommon for liabilities and conditional gifts to remain unresolved for a considerable period. A nuanced, evidence-based approach which acknowledges the variability in estate administration and supports charities in making judgments that reflect the true economic substance of their legacy income is needed. It is essential that the accounting treatment aligns practical realities with the principles of control, probability, measurement reliability and prudence.
Pesh Framjee is Special Advisor to the Charity Finance Group and chairs the Technical Accounting Forum. He is a member of the Charity Law Association and of the Practitioner Advisory Group developing a new International Non Profit Accounting Standard. He was a member of the SORP committee for over 20 years and has founded Consulting for Purpose that provides wide ranging consultancy services for Public Benefit entities and their funders