Understandability and Transparency of the Financial Statements of ...

Whilst these complexities have already been identified there is a lack of understanding
as to why these complexities still exist. Could complexities be clarified through a
prescribed conceptual framework or are there other reasons that cause these
complexities to still exist thirty years after first identified by Bird & Morgan-Jones
(1981)?
This research will analyse the four complexities, identified by Hui (2006), that still
impact on the transparency and understandability of financial statements in the New
Zealand charities sector. These relate to complexities with the accounting treatment
within the financial statements particularly, on the accounting basis, the recording of
property, plant and equipment, fund accounting, and reporting expenditure overhead
ratios. For each complexity two aspects will be considered. First, the appropriate
accounting treatment will be looked at in terms of what is the appropriate GAAP, and
second, a review of what studies have found with regards to complexities with
transparency and understandability will be considered for each of the complexities.
When considering what is the appropriate GAAP for these complexities several sources
will be utilised. First, as this study focuses on New Zealand charities, the two New
Zealand guides – „Not for Profit Financial Reporting Guide‟ (NFPFRG) which is based
on the IFRS (New Zealand Institute of Chartered Accountants, 2007a), and the R120
Financial Reporting by Voluntary Sector Entities based on the old New Zealand
Financial Reporting Standards, (New Zealand Institute of Chartered Accountants,
1999) described in Chapter Two, section 2.4.4.3, will be considered. Also it is
appropriate to include England and Wales‟ Statement of Recommended Practice
(SORP) (Charity Commission, 2005). This is because, as well as having a specific
Charity GAAP, unlike Australia and New Zealand, England and Wales has had
extensive research (Accounting Standards Committee, 1984; Ashford, 1986; Bird &
Morgan-Jones, 1981; Charity Commission, 2004; Connolly & Hyndman, 2000, 2001,
2004; Framjee, 2004; Hines & Jones, 1992; Hyndman, 1990, 1991; Palmer et al., 2001;
Palmer & Randall, 2002; Williams & Palmer, 1998) on these complexities and
incorporated these findings into their SORP (Charity Commission, 2005).
The first of the complexities in transparency and understandability in the financial
statements relating to the accounting basis, will be considered next.
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