Understandability and Transparency of the Financial Statements of ...

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Herzlinger & Sherman (1980, p. 95) who defined it as a “collection of cookie jars in which resources for various purposes are stored”. The English and Welsh Charity Commission still considers that fund accounting remains a key feature of charity accounting (Charity Commission, 2005). This contrasts with O‟Connor who considers that fund accounting has become obsolete elsewhere (O'Connor, 2007). In New Zealand, fund accounting has not become obsolete and Rees and Dixon‟s study (1983) identified that 69% of not-for-profits have some form of fund accounting. This was supported by Newberry (1992) who found 62% of charities practise some form of fund accounting. Next, the GAAP, if any, of fund accounting is determined. 3.2.3.1 GAAP Before going further and looking at the recording of funds there is a need to clarify the terms used in fund accounting. In particular, it is necessary that a distinction be made between funds and reserves. Restricted funds have a restriction imposed by the donor. The NFPFRG (paragraph 4.172) defines restricted reserves, also referred to as provisions, as amounts that have been set aside by the charity, not donors, for future expenses or as a buffer against adverse events (New Zealand Institute of Chartered Accountants, 2007a). Hence, reserves are just arbitrary amounts that the charitable organisation has decided to separate out. Donors may have placed restrictions or conditions on their donations i.e. funds. A restriction (International Public Sector Accounting Standards Board, 2006) limits or directs the purposes for which the contribution may be used whereas a condition (New Zealand Institute of Chartered Accountants, 1999) stipulates a right of return of the donation if, for example, it is not used. With regards to a definition of restricted funds R120 paragraph 3.35 (New Zealand Institute of Chartered Accountants, 1999) states that funds may be split between restricted and unrestricted. However, there is no indication as to what these terms specifically mean. While the NFPFRG makes no explicit mention of fund accounting, it offers more guidance on accounting for conditions and restrictions of assets. The NFPFRG (paragraph 4.136) utilises the definitions from IPSAS 23 Revenue from Non-Exchange Transactions (Taxes and Transfers) to define restrictions (International Public Sector Accounting Standards Board, 2006). However, whilst the NFPFRG has a detailed analysis of eight different types of bequests (paragraphs 5.40-5.49) there is no specific definition given of endowment, even though these are required in charities‟ Annual Returns (Charities Commission, 2008c). An exposure draft (Australian Accounting Standards Board & 56
Financial Accounting Standards Board, 2009) jointly released by Australia and New Zealand, ED118 Income from Non-exchange Transactions (Taxes and Transfers), acknowledges fund accounting and incorporates a specific definition of conditions as well as suggesting when income would be recognised in non-exchange transactions such as donations. In relation to the reporting of these funds, R120 paragraph 5.25 requires disclosure on the restriction of cash and PPE. Specifically, NZ IAS 7 Statement of Cash Flows, paragraph 49.1 requires that any restrictions on the use of cash must be disclosed. NZ IAS 16 PPE paragraph 74(a) states that any restriction on the title of PPE must be disclosed. However, it does not require disclosure on restrictions on equity. This means that movements between funds may not be clear and it could be hard to look at whether expenditure and income is being correctly allocated to particular funds. The Annual Return question 25 requires equity to be split between: Endowment funds; Restricted purpose funds; and General accumulated funds. The recent exposure of IPSAS 23 requires the disclosure of the amount of restricted assets to be recognised and the nature of those restrictions detailed (Australian Accounting Standards Board & Financial Accounting Standards Board, 2009). Also the breakdown of changes to restricted and unrestricted equity must be shown in the notes to the financial statements. This contrasts with the SORP paragraph 74, that requires clear separation between restricted and unrestricted funds (Charity Commission, 2005) and that movements on major funds should be shown separately from allocations to designated funds without aggregation, accompanied by a narrative explanation. This led to the adoption of the Statement of Financial Activities (SoFA), as England and Wales considers that the main purpose of the financial statements of charities is to give an overall view of total incoming resources (Palmer & Randall, 2002). The SoFA achieves this by providing a summary of all the charity‟s funds, i.e. all its incoming resources and resources expended, and transfers between funds. It also separates by means of a columnar format: unrestricted funds; restricted funds and endowment funds (Appendix One). Thus it shows what funds the charity has and how they have been used, thereby amalgamating the IASB‟s Income Statement and Statement of Changes in Equity, but clearly separating unrestricted funds, restricted funds and endowment funds (Palmer & Randall, 2002). NZ IAS 27 Consolidation and Separate Financial Statements determines which funds to include in the financial report by consideration as to what is the reporting entity (New 57
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Understandability and Transparency
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CHAPTER 2: REGULATORY & CONCEPTUAL
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4.3.3 Axiom 3 - The possibility of
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6.6 Summary .......................
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Appendix One - Statement of Financi
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Abbreviations AASB Australian Accou
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Related Research Outputs The follow
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Acknowledgements My journey through
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Abstract Access to charities‟ fin
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CHAPTER 1: INTRODUCTION 1.1 Introdu
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More importantly the study will loo
Page 23 and 24: Unerman and O‟Dwyer (2008, p. 801
Page 25 and 26: adopted here is clarified, as the l
Page 27 and 28: March 1999. Further, a study by the
Page 29 and 30: those by: Vatter (1947); Anthony (1
Page 31 and 32: CHAPTER 2: REGULATORY & CONCEPTUAL
Page 33 and 34: (k) The erection, laying out, maint
Page 35 and 36: Before looking at the legal structu
Page 37 and 38: 2.3.4 Problems As with charity nome
Page 39 and 40: yet to be determined. This ensures
Page 41 and 42: per annum (Charities Commission, 20
Page 43 and 44: certain cases there will be concept
Page 45 and 46: The focus of the Charities Commissi
Page 47 and 48: Unlike incorporated societies, the
Page 49 and 50: 2.4.4.4 Future conceptual framework
Page 51 and 52: problems with New Zealand‟s regul
Page 53 and 54: This research seeks to identify if
Page 55 and 56: charities” (Charity Commission, 2
Page 57 and 58: statements in different documents t
Page 59 and 60: seek to identify whether a lack of
Page 61 and 62: In the international arena transpar
Page 63 and 64: elevance is compromised. The link b
Page 65 and 66: 3.2 Complexities in Charities’ Fi
Page 67 and 68: 3.2.1 Accounting basis The „Accou
Page 69 and 70: application of the appropriate GAAP
Page 71 and 72: length transaction”. This definit
Page 73: There are four arguments against de
Page 77 and 78: al., 2008; Newberry, 1992; Rees & D
Page 79 and 80: However, the notion of control is a
Page 81 and 82: Kilcullen et al., 2007b). Charities
Page 83 and 84: the amount of money spent on admini
Page 85 and 86: This research seeks to identify wha
Page 87 and 88: As a result of the literature revie
Page 89 and 90: the elements of the world, or rathe
Page 91 and 92: come about through the mutually sim
Page 93 and 94: Research reports from other organis
Page 95 and 96: clearer picture of the interviewee
Page 97 and 98: In England, Palmer and Randall (200
Page 99 and 100: APPROACHING PARTICIPANTS Within the
Page 101 and 102: availability of charities‟ financ
Page 103 and 104: As credibility was usually achieved
Page 105 and 106: clarifications. This approach was u
Page 107 and 108: to understand the meaning behind an
Page 109 and 110: analysis is both complete and impar
Page 111 and 112: subjective realities (Chua, 1986).
Page 113 and 114: To assure the study was dependable
Page 115 and 116: CHAPTER 5: ACCOUNTABILITY 5.1 Intro
Page 117 and 118: emphasis on the definition of accou
Page 119 and 120: supposition was that a lack of resp
Page 121 and 122: general public (Charity Commission,
Page 123 and 124: assumes the other is monitoring the
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performance reporting rather than f
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appropriate performance information
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examiners and the Charities‟ Boar
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which was set up in 2003. Charity a
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Western Australia, all financial st
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The fourth level of independent exa
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What are the major areas of concern
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subset of good accountability pract
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Programme refers to a meeting of ob
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ecording property, plant and equipm
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Figure 6-2 Dimensions of Financial
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Because the [charity‟s] finances
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„selling a story‟ makes them fo
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that you can use it [the stove] for
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the organisation pay to have those
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contributors twice - first to fund
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There is a need to record restricte
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charity will have control of a seco
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of accountants involved in Charitie
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their decision making. One auditor
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Whilst the sample in this thesis is
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Another problem my study found was
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framework funders would not be able
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The lack of professionalism must be
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New Zealand‟s charitable purpose
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We have since February of last year
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analysis was done of the first comp
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Also the idea of members „taking
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The transparency of their organisat
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7.3 Monitoring As discussed in Chap
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Zealand] Statistics Department poin
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There was a sub-committee running [
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useful for smaller organisation and
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change and they‟re doing a good j
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problem that you‟ve [pause] we‟
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legislation and monitoring. Of part
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CHAPTER 8: PERFORMANCE ACCOUNTABILI
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In New Zealand both the Controller
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what proportion of their charitable
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None of the above reasons includes
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Charities Commission publication
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achieve an appropriate level of per
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more effectively in order to increa
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eneficiaries‟ needs are met is an
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As well as setting aside reserves,
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The important aspect of the propose
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Mostly they [the funders] are worki
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eyond financial health to include
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8.4.4 Prescribed performance report
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impact they have on their beneficia
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statements, but also other mechanis
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compare different charitable organi
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shock when their accounts are eithe
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9.4 Academic Contribution This rese
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Outcomes (Effectiveness) Figure 9-1
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Charities Register, of which thirty
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success in their activities. For as
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Ahrens, T., & Chapman, C. S. (2006)
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Australian Accounting Standards Boa
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Bradbury, M. E., & Baskerville, R.
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Charities Commission. (2009f). A sn
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commission.gov.uk/Our_regulatory_ac
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Cordery, C. J., & Baskerville, R. (
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Eisenberg, P. (Ed.). (2005). Challe
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Fremont-Smith, M. R. (2004). Pillag
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Hui, D. (2006). Financial Reporting
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http://www.ifac.org/Members/DownLoa
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Maxwell, J. A. (1992). Understandin
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http://www.nzica.com/AM/Template.cf
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O'Sullivan, N., & O'Dwyer, B. (2009
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Robson, C. (1993). Real World Resea
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Television New Zealand (Writer) (27
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Appendix One - Statement of Financi
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Appendix Three - Semi-structured in
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Appendix Five - Participant informa
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Appendix Six - Transcriber’s Conf
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Heading 1 Heading 2 Heading 3 Prope
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