When is income from the legacy/bequest of an individual recognised by a NFP entity?

The receipt of income according to the provisions of a deceased person’s will, testament or other legal document commonly occurs in the NFP sector.

Difficulties exist in determining the point at which income from this source should be recognised.

The section focuses on:

  • When is income from the legacy/bequest of an individual recognised;
  • The measurement basis is used; and
  • How an intention or pledge to donate in the will/bequest of an individual recognised prior to their death.

The section does not cover the recognition of general pledges/promises made by donors, or the guidance offered in accounting and reporting standards for dealing with the many permutations of bequests based on the terms of the gift and/or the NFP’s share of the assets (i.e. residual, deferred, contingent/conditional, life interested).


Language

There is a variety of language and terms used to describe those situations where income is received according to the provisions of a deceased person’s will, testament or other legal document. As the terms ‘legacy’ or ‘bequest’ are used to describe this type of income within the individual accounting and reporting standards, this term is used throughout.

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Australia

When is income from the legacy/bequest of an individual recognised?

An entity is required to recognise income immediately in profit or loss for the excess of the initial carrying amount of an asset over any ‘related amounts’.

Where the terms of the bequest are as such that the entity controls a financial asset (and do not result in the entity having a related contribution by owners, lease liability, financial liability or provision), the income should be recognised when the entity controls the financial asset.

Therefore, the income should be recognised when the entity has a legal right to receive cash. This will usually be when the legacy is received.


What measurement basis is used?

Fair value


Prior to the donor’s death, how is an intention or pledge to donate in the will/bequest of an individual recognised?

Pledges or promises of donations within an individual’s bequest can only be recognised when the entity has a legal right to receive cash.

Where an entity has information on an individual donor’s intention or decision to leave a gift to the entity, the entity will only be legally entitled to the cash on the death of the individual. Therefore the entity will not recognise any income prior to the death of the individual.


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

AASB 9 Financial Instruments, Paragraph B3.1.1 - B3.1.2

AASB 1058 Income of Not-for-Profit Entities, Paragraphs 9-10 and B20


ILLUSTRATIVE EXAMPLE

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Canada

Private Sector NFPOs

When is income from the legacy/bequest of an individual recognised?

Income can be recognised if the amount to be received can be reasonably estimated and ultimate collection is reasonably assured.

Given the considerable uncertainty surrounding both the timing of the receipt and the amount that will actually be received, in many cases the recognition criteria will not be satisfied and the bequest will not be recognised until it is received.

Where an entity recognises outstanding bequests, the following must be disclosed:

  • the amount recognized as assets at the reporting date; and
  • the amount recognized as revenue in the period.


What measurement basis is used?

Fair value at the date of contribution, if fair value can be reasonably estimated.


Prior to the donor’s death, how is an intention or pledge to donate in the will/bequest of an individual recognised?

The amount and collection of the bequest cannot be reasonably assured until the death of the individual. Therefore the income cannot be recognised prior this point.


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

CPA Canada Handbook – Accounting (Part III), Section 4420 contributions receivable — Paragraphs 3-9


ILLUSTRATIVE EXAMPLE

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Colombia

When is income from the legacy/bequest of an individual recognised?

As the transfer of the assets associated with a bequest is dependent on the occurrence of a specified and future event, it will generally be classified as ‘conditional promise to give’.

A ‘conditional promise to give’ is recognised when the conditions on which they depend are substantially met (i.e. they become unconditional). For bequests, this will usually be when the will passes through probate and is declared valid. Up until this point, the donor has the ability to modify their will prior to death and other uncertainties may exist concerning the donor’s estate as it is settled.

A conditional promise in a valid will is disclosed in the notes to the financial statements. Information is given on the total amount promised to the entity and a description and amount for each group of promises having similar characteristics.


What measurement basis is used?

Fair value.


Prior to the donor’s death, how is an intention or pledge to donate in the will/bequest of an individual recognised?

The intention of the donor to remember the entity in their will is not a promise to give as the donor has the ability to modify their will at any time prior to their death. Therefore no contribution is recognised.


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 116, Accounting for Contributions Received and Contributions Made, Paragraphs 6, 8, 19, 20, 22 and 24


ILLUSTRATIVE EXAMPLE

Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 116, Accounting for Contributions Received and Contributions Made, Paragraphs 207-208 (Example 16)

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New Zealand

Tier 1 and Tier 2 PBE Standards

When is income from the legacy/bequest of an individual recognised?

Income must be only recognised when a bequest or legacy satisfies the definition of an asset (it is can be controlled by the entity as a result of a past event) and:

  • It is probable that the future economic benefits or service potential associated with the bequest will flow to the entity; and
  • The fair value of the bequest can be measured reliably.

A bequest will normally satisfy the definition of an asset when the entity has an enforceable claim, for example on the death of the transferor, or the granting of probate depending on the laws of the jurisdiction.

Determining that the future economic benefits or service potential associated with the bequest which will flow to the entity may involve the entity determining if the deceased person’s estate is sufficient to meet all claims on it and satisfy all bequests.


What measurement basis is used?

Fair value of the resources received or receivable. Discounting may be required if the receipt of the bequest is delayed because of a life interest.


Prior to the donor’s death, how is an intention or pledge to donate in the will/bequest of an individual recognised?

The entity will not have an enforceable claim against the bequest until the death of the individual has occurred, and as such will be unable to control the assets associated with the pledge. Therefore the legacy will not meet the definition of an asset.

Pledges items may be disclosed as contingent assets where the inflow of economic benefit or service potential is probable.


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

PBE IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets, Paragraphs 39-43

PBE IPSAS 23 Revenue from Non-Exchange Transactions, Paragraphs 30-31, 36 and 90-97


ILLUSTRATIVE EXAMPLE

PBE IPSAS 23 Revenue from Non-Exchange Transactions, Paragraphs B2-B7


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Tier 3 Simple Format Reporting Standard – Accrual (NFP)

When is income from the legacy/bequest of an individual recognised?

Income must be only recognised on receipt of the cash or significant asset.


What measurement basis is used?

Readily obtainable current value.


Prior to the donor’s death, how is an intention or pledge to donate in the will/bequest of an individual recognised?

The entity will not have received the cash or significant asset associated with the bequest until the death of the individual has occurred. As such entities will not recognise pledges.

The disclosure of known pledges and bequests not yet received in the notes to the performance report is optional.


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

Public Benefit Entity Simple Format Reporting – Accrual (Not-for-profit), Paragraph A62 and BC8


ILLUSTRATIVE EXAMPLE

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United Kingdom

When is income from the legacy/bequest of an individual recognised?

Income must be only recognised when all of the following criteria are met:

  • the entity has entitlement to the legacy;
  • it is probable that the income will be received; and
  • the monetary value or amount of the income can be measured reliably.

Entitlement to the legacy arises when the entity has sufficient evidence that a gift has been left to them and the executor is satisfied that the property in questions will not be required to satisfy claims in the estate.

Receipt is normally probable when:

  • there has been grant of probate;
  • 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.

Income should only be recognised when it can be measured or estimated with sufficient reliability.

Where an entity is entitled to a legacy and it is probably that income will be received, there may be uncertainty as to the amount of the payment (its monetary value).

If the amount cannot be measured or estimated with sufficient reliability, then the income should be disclosed as a contingent asset.


What measurement basis is used?

Estimated fair value based on the information available. This will generally be the expected cash amount to be distributed to the entity from the estate.

Where the payment of the income is yet to be received or notified as receivable, but receipt of the legacy is probable, the entity will be required to estimate the value of the income receivable.


Prior to the donor’s death, how is an intention or pledge to donate in the will/bequest of an individual recognised?

An intention or pledge to donate in the will of an individual is not sufficient to recognise income.


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, Paragraphs PBE34.64-PBE34.74 and Appendix B to Section 34 (specifically Paragraphs PBE34B.5-PBE34B.7)

Charities SORP (FRS 102), Paragraphs 5.29-5.37


ILLUSTRATIVE EXAMPLE

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USA

When is income from the legacy/bequest of an individual recognised?

As the transfer of the assets associated with a bequest is dependent on the occurrence of a specified and future event, it will generally be classified as ‘conditional promise to give’.

A ‘conditional promise to give’ is recognised when the conditions on which they depend are substantially met (i.e. they become unconditional). For bequests, this will usually be when the will passes through probate and is declared valid. Up until this point, the donor has the ability to modify their will prior to death and other uncertainties may exist concerning the donor’s estate as it is settled.

A conditional promise in a valid will is disclosed in the notes to the financial statements.


What measurement basis is used?

Fair value


Prior to the donor’s death, how is an intention or pledge to donate in the will/bequest of an individual recognised?

The intention of the donor to remember the entity in their will is not a promise to give as the donor has the ability to modify their will at any time prior to their death. Therefore no contribution is recognised.


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

FASB Accounting Standards Codification, ASC 958-310-50-4

FASB Accounting Standards Codification, ASC 958-605-25 11

FASB Accounting Standards Codification, ASC 958-605-30-4


ILLUSTRATIVE EXAMPLE

FASB Accounting Standards Codification, ASC 958-605-55 (Examples 6, Paragraphs 49-51)

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