Understandability and Transparency of the Financial Statements of ...

3.2.1 Accounting basis
The „Accounting basis‟ refers to how transactions are recorded in an organisation. There
are three main types of accounting bases: (1) accrual basis; (2) cash basis and (3)
modified accrual accounting. Under the accrual basis, the effects of transactions and
other events are recognised when they occur. The time that transaction occurs may or
may not coincide with the time that cash is received or paid (New Zealand Institute of
Chartered Accountants, 1993). This is unlike the cash basis where transactions are
recorded only when the money is received or paid. The modified accrual basis is where
expenses are recorded when they occur, and revenue e.g. donations, when they are
received. The complexity arises with regards to when it is appropriate to use each
different accounting basis. GAAP prescribes some situations when certain accounting
bases should be used, and this will be looked at next.
3.2.1.1 GAAP
R120 paragraph 2.3.4 (New Zealand Institute of Chartered Accountants, 1999) requires
that the accrual basis be used, rather than a cash basis, with two exceptions to this rule.
Firstly pledges, which are an undertaking to donate money (Penguin, 2000), as per
paragraph 3.45 are not normally recognised until the cash is received, because there is
doubt over the likelihood of the pledge being honoured. The second exception is where
donations are collected by other parties on behalf of a charity. These will be accrued
when the money is collected (paragraph 3.44) unless there are no reliable estimates of
the amounts collected. In this case the transaction is recorded when the money has been
received. This highlights the third type of measurement – the modified accrual basis.
NFPFRG (New Zealand Institute of Chartered Accountants, 2007a) has a similar ruling
with regards to accrual basis (paragraph 3.16) and pledges (paragraph 5.55). However,
NFRFRG is more specific in relation to donations, as it acknowledges that donations are
usually at the discretion of the donor so it is more appropriate to record them when the
donation is received (paragraph 5.35), i.e. to use modified accrual accounting as per
R120. This ensures that for donations the criteria are whether there is „certainty‟ that the
donations will be received, and the donations are able to be measured. If there is
certainty of receipt, e.g. under a binding agreement, then Exposure Draft 118 Income
from Non-exchange Transactions (Taxes and Transfers) states that it should be
recognised as income (Australian Accounting Standards Board & Financial Accounting
Standards Board, 2009) which comes from IPSAS23 paragraph 95: “when it is probable
that the future economic benefits or service potential will flow to the entity and the fair
49