Understandability and Transparency of the Financial Statements of ...

confused with pledges. Contrary to reports in the media, charities adopted a cautious
approach in relation to the certainty of receipts as several interviewees considered that a
pledge is just a promise so there was no certainty that it would be received. Hence,
pledges were not recorded until received, as charities wanted to be transparent in their
recording of revenues. This research highlighted that in order to be transparent there
was a need for not only charities but the larger NFP sector to deal with issues of
certainty of receipts, e.g. bequests, on a case-by-case basis to ensure organisations are
accountable to their stakeholders.
There were two views in relation to the matching concept and both relate to
transparency. The first view considered that it was a useful tool to utilise, especially
with regards to projects spread over more than one financial year. However, the other
view was that the charity should be proud to show how much funding it has received for
the year. However, the key reason for the choice of method appeared to be the focus on
„looking poor‟ rather than being transparent. There was also an impact on
understandability as the matching concept, with its ability to spread income over several
years, was utilised if interviewees were aware of the concept, in order to „look poor‟.
Next, the complexities of PPE are reviewed.
9.2.2 Property, plant and equipment (PPE)
Chapter Six determined that there was limited transparency with regards to PPE that
was donated, as many charities did not record these PPE. The main reason for not
recording was that the charity did not want to look „rich‟ by having too many assets. For
charities willing to record donated PPE at „fair value‟ there was little understanding on
how to measure „fair value‟ as there was limited guidance from GAAP and hence the
methods of valuing varied considerably. Until GAAP provides specific guidance on
how to „fair value‟ different types of PPE this situation will continue to impact
transparency and understandability.
This study also highlighted a lack of understanding of depreciation by several
interviewees who considered that depreciation was a capital replacement reserve rather
than the operational cost of using the PPE, i.e. the „wear and tear‟ of the PPE or the
writing off of PPE over its useful life.
Both of these situations impact on the transparency and understandability of the
financial statements of charities and this focus on looking poor limits the ability to
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