Success fees: when a law practice counts them as income
When a law practice counts a fee payable only if the client's case succeeds as income, and what its books should show while the outcome is unknown.
By Achekam · · 5 min read · For Legal businesses in South Africa, Nigeria, Kenya
A client cannot afford to fund a damages claim, so the practice agrees to take the matter on a success basis: a reduced fee, or no fee at all, unless the claim succeeds, and an agreed success fee if it does. The practice then works on the matter for months, sometimes years. Pleadings are drafted, experts are briefed, the trial date moves twice.
The question for the practice's books is when that success fee becomes income. When the agreement is signed? As the work is done? When the court rules? When the money arrives? The answer affects how profitable the practice looks each year, and getting it wrong can mean showing income that later disappears.
A fee that depends on the result
IFRS 15 requires revenue to be recognised in an amount that reflects the consideration the entity expects to be entitled to in exchange for the services it provides. Where the promised consideration includes a variable amount, the entity must estimate what it expects to be entitled to. The IFRS Foundation's summary of IFRS 15 sets out these principles.
A success fee is a textbook variable amount. The services are being delivered now, as the practice works on the matter. The amount the practice will be paid for them depends on an event outside its control: the court's decision, or the other side's willingness to settle.
Where the agreement combines a reduced fee that is payable whatever the outcome with an uplift payable only on success, treat the two parts separately. The fixed part is earned as the work is done, like any other fee. Only the uplift is uncertain.
Estimating it, and the brake on optimism
ACCA explains that under IFRS 15 variable consideration is estimated either as the expected value or as the most likely amount, and is included in the transaction price only to the extent that it is highly probable that a significant reversal of revenue will not occur.
For a single matter that either succeeds or fails, the most likely amount is the natural method: the practice asks whether it will most likely win, and what the fee would then be. But the second half of the rule usually decides the answer. A litigated outcome depends on a judge, on evidence that may not hold up, on a defendant's ability to pay and on appeals. Even a strong case rarely makes it highly probable that recognising the success fee early would not have to be reversed later.
So for much success-based litigation, the likely position, to be agreed with your accountant, is that little or none of the success fee is counted as revenue while the matter is undecided. The fee is not ignored; it is simply not yet earned in an amount the practice can rely on.
When the outcome becomes clear
Revenue under IFRS 15 is recognised as the practice satisfies its performance obligation, which is when the client obtains control of the promised service. The services have been delivered throughout the matter. What changes at the end is the uncertainty about the amount.
Once the case is won, or a settlement is signed that triggers the fee, the uncertainty falls away. The success fee is then included in revenue, because a reversal is no longer a realistic prospect. If the judgment is under appeal, or the settlement depends on a payment that may not be made, discuss with your accountant whether the constraint still applies.
A worked example in words. The practice signs a success fee agreement at the start of the year. It works on the matter all year and issues no fee notes for the success portion. At year end, the trial has not started, so the accountant agrees that none of the success fee is recognised. In the following year the matter settles, the settlement agreement is signed and the conditions for the fee are met. The fee is recognised in that year, when the practice issues its fee note.
Time spent on a matter that may pay nothing
While the outcome is open, the practice's own costs keep running: salaries, counsel's fees it bears, expert reports, travel. Those costs show in the books as they are incurred, while the matching income may arrive only years later, or never.
That timing gap is the real commercial risk of success-based work, and the reason to manage it deliberately:
- Track the time recorded on each success-based matter, so the practice knows what it has invested.
- Review each matter's prospects at least once a year, and decide whether to continue.
- Agree in writing who bears disbursements if the matter fails.
- Limit how much of the practice's capacity is tied up in success-based work at any time.
Issuing the fee note and posting the fee in Achekam
When the success fee is earned, the practice issues its fee note. In Achekam, an invoice starts as a draft that can be changed or deleted, and issuing it takes the next number in the sequence and posts it to the ledger as debtors, sales and output VAT. Prepare the draft as soon as the outcome is known, check the calculation against the agreement, and issue it once it is right.
If your accountant concludes that part of a success fee should be recognised before the fee note can be issued, for example where a settlement has been signed but the paperwork for the fee is not complete at month end, that estimate is posted as a manual journal and reversed when the fee note is issued. Achekam refuses a journal that does not balance or is dated in a closed month, and a posted journal is corrected only by reversing it.
The management accounts then show the result: an income statement for a chosen period beside the period before, and a balance sheet at period end, both built from the practice's own journals and exportable as PDF or CSV. A year in which several success fees land will look unusually strong, so note those matters when you present the figures to partners or a lender.
Check the local rules before you agree a success fee
Whether a fee may depend on the outcome at all, how large it may be and what the agreement must contain are matters for the law and the professional rules in each country. South Africa, Nigeria and Kenya each have their own position, and some types of matter may be treated differently. Check the current legislation and your professional body's rules before you sign a success fee agreement, and keep the signed agreement with the matter file.
Settle the policy now
Agree with your accountant how success fees are treated in your books before year end, and apply the same approach to every success-based matter. For the steps from draft to issued fee note, see fee notes from draft to issued, and for the end of a matter, closing a matter with a final account.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
