Understandability and Transparency of the Financial Statements of ...

some of the other historical stuff, these properties we had for years and years
and years and they have increased in value. I think the fact that you have more
realistic figures far better. Although, I find it more complex to look at than the
old days - I think that that might just be from habits. (Interviewee 28 M/B)
The lack of understandability within charities must be addressed to ensure charities have
meaningful financial statements that can be utilised for decision making. The English
Accounting Standards Board (2007a, p. 27) consider that understandability is dependent
on the way in which transactions are “characterised, aggregated and classified” and
information is shown. This supports Connolly et al.‟s (2009, p. 37) view that:
Steps should be taken to improve the presentation of financial information so as
to aid understandability, it is accepted that an understandability gap inevitably
arises (to some degree).
This is seen in the media in New Zealand where a charity Chair on national television
(Television New Zealand, 12 August 2009) stated:
We want to work with other charities [pause] and the Charities Commission to
work out a way in which these figures can be better presented so that people can
really understand them. I mean it is difficult to look at accounts and understand
what they say. So, we want a better way of presenting that which shows all of the
inputs and all of the outputs.
With the increasing accessibility of charities‟ financial statements in New Zealand,
charities do run the risk of casting doubt on their ability to effectively carry out their
charitable mission which was highlighted by the following author in England.
Describing Sue Ryder Care's annual report as „astonishing‟, Mr Pitchford said:
"If they struggle to produce something this straightforward, it calls into question
other aspects of their operation including how diligent they are” (Womack,
2006, p. 2).
New Zealand stands on the cusp of the biggest change to financial reporting in the last
twenty years (Accounting Standards Review Board, 2009; Ministry of Economic
Development, 2009d). This is particularly relevant for many charities with the
suggestion that medium-sized charities utilise differential public benefit entity
accounting standards for their GAAP while small charities use „simple format reporting‟
(Accounting Standards Review Board, 2009).
These standards and formats have yet to be developed. Their development will be a
golden opportunity to ensure financial statements are understandable to the preparers of
financial statements, who perhaps have less knowledge than a business financial
statement preparer. We should learn from the experience of England and Wales where:
It was believed that those charities who cannot cope with the SORP would likely
struggle even under a more simplified framework, as these would most probably
be small charities with little or no in-house expertise. Without a strong
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