Understandability and Transparency of the Financial Statements of ...

stories. However, this was only meaningful if properly applied, and not abused by
charities to hide the true level of unrestricted funds, as details of free reserves were
particularly important for stakeholders in making their decisions as to whether to fund
particular charities.
However, a problem was identified in this research with regards to restricted funds,
where donors had explicitly placed restrictions on how the monies were to be used but
did not follow-up that this had happened, as illustrated by a quotation from:
Tagged grants are in my view two parties‟ responsibility. One is the donor, one
is the donee. And what we find is that the donors are often very poor at
following up, or even show a general disinterest. We had one client recently
involved in a fraud case where it came to light that the funding was given for a
specific social purpose, and was not being used for that purpose. (Interviewee
18 A)
One interviewee also highlights the problem with the lack of specific definitions for
different funds in the Charities Commission (2008c) Annual Return which splits equity
into three (general accumulated funds; restricted purpose funds; and endowment funds),
but does not allow room for reserves.
Also, the Charities Commission currently provides no explicit definition of what should
be included in each of these three equity categories. Further, this research has exposed a
lack of basic understanding by charities of whether their funds are restricted in any way,
meaning that the figures being derived from the Annual Returns cannot be relied upon
to gain an understanding of the level of restricted and endowment funds in New Zealand
charities.
6.4.2 Recording of funds
In Chapter Three GAAP for SMEs states that equity could be split between restricted
and unrestricted, but no such suggestion is promulgated in GAAP for large
organisations. However, both GAAPs require disclosure on restrictions on cash and PPE
but make no specific mention of the need to disclose restrictions on funds. However, the
recent release of ED118 by the Australian Accounting Standards Board, & New
Zealand‟s Financial Accounting Standards Board is more explicit about the need to
disclose on the face of the financial statements, or in the notes, any income, assets or
liabilities that are subject to restrictions (Australian Accounting Standards Board &
Financial Accounting Standards Board, 2009) .
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