Understandability and Transparency of the Financial Statements of ...

the PPE in the acquired year (Accounting Standards Committee, 1984). This means that
users would be unable to make an informed opinion on the efficiency and effectiveness
of charitable organisations‟ resources. In England, Bird and Morgan-Jones (1981) found
that 20% of charitable organisations wrote their plant and equipment off on acquisition.
In New Zealand, Newberry‟s study (1992) found that 14% of charitable organisations
did not capitalise some of their PPE.
The second valuation method, where PPE is capitalised and not depreciated
(Accounting Standards Committee, 1984). Bird and Morgan-Jones (1981) found that
6% of charitable organisations recorded their plant and equipment at cost with no
subsequent depreciation. In New Zealand, Rees and Dixon‟s study (1983) found that
some organisations did not depreciate PPE. Newberry‟s study (1992) later supported
this by identifying that 16% of those that capitalised did not depreciate. Hines and Jones
(1992, p. 63) considered that “the failure to depreciate [PPE once capitalised] is
puzzling”.
The third valuation method, where the PPE is capitalised and depreciated, is the agreed
GAAP in R120 and NFPFRG. It is also the agreed GAAP in England and Wales, where
various studies were conducted after the strengthening of GAAP through the publication
of various Statements of Recommended Practices (SORPs) (Charity Commission,
2005), which saw an improvement in recording and depreciating PPE from: 13% (Bird
& Morgan-Jones, 1981); 70% (Hines & Jones, 1992); 88% (Williams & Palmer, 1998)
to 99% (Connolly & Hyndman, 2000). These studies relate to large (>GBP650, 000)
charities. In relation to medium sized (GBP 100,000-650,000) charities, Connolly &
Hyndman (2001) determined that 76% depreciated their PPE.
Two issues arise out of these studies. The first issue relates to the first valuation method
i.e. writing off PPE on acquisition particularly donated PPE. An Australian study
(Institute of Chartered Accountants in Australia, 2006) found that the majority of
respondents that received donated PPE neither recognised them nor explained their
accounting treatment.
The second issue arises out of the second and third valuation method and relates to
depreciation. There have been numerous arguments both for, and against, depreciation.
The argument for depreciation considers that, as PPE wear out, this is a cost which the
charity suffers and as the PPE are within the control of the charity they should be
recorded and depreciated (Accounting Standards Committee, 1984).
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