Understandability and Transparency of the Financial Statements of ...

application of the appropriate GAAP amongst charities in this study will need to be
assessed to determine whether the appropriate accounting basis is used, according to
GAAP. Next, studies relating to the accounting basis and when it is appropriate to use
the different types will be considered.
3.2.1.2 Studies
In New Zealand, Rees and Dixon‟s (1983) study found that 55% of NFPs, including
charities, practiced cash accounting and 45% accrual accounting - no mention was made
of modified accrual accounting. This contrasted with Hooper, et al.‟s more recent New
Zealand study (2008) where 62% used modified accrual accounting basis. However, the
remaining interviewees (38%) opposed the use of a modified accrual basis as they
considered that only an accrual basis can reflect a true and fair view of the charity‟s
financial results and position (Hooper et al., 2008).
However, an accrual basis is not always appropriate with regards to pledges. The media
is full of examples of organisations that have been pledged monies which they have
never received. One example is from Afghanistan, which have not received USD10
billion (approximately NZD14 billion) in aid (Anonymous, 2008d). Another example is
with regards to monies pledged for the tsunami relief fund, where the United Nations‟
disaster relief coordinator has said that only a tenth of the NZD3.4 billion dollars
pledged was actually received (Radio New Zealand, 12 January 2005). These examples
highlight the importance of charities not recording pledges until they have actually been
received i.e. there is certainty of receipt, which is what is recommended GAAP. This
supports Anthony‟s (1993, p. 55) view that a pledge to contribute funds should not be
classified as revenue in the year in which the pledge was received as “pledges that
promise payments … are not revenues in any sound accounting system”. For, as Granof
(2007, p. 492) highlights, “NFPs generally lack legally enforceable claims against
fickle donors”. In relation to the accounting basis, the concern here is the certainty of
receipt i.e. how enforceable the promise is, or how certain is the receipt of monies.
Another concern of the accounting basis is in relation to the matching concept. The
matching concept is where income is matched with the expenditure needed to produce
that income. Unfortunately, charities‟ income does not necessarily relate to the
expenditure. Any consideration that might be received for the service to the beneficiary
is unlikely to be related to the amount of resources, e.g. expenses, provided. Ashford
(1986, p. 18) felt that “the lack of an output measure makes any suggestion of matching
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