Understandability and Transparency of the Financial Statements of ...

charities in England and Wales found 90% compliance in large charities and their 2001
study found 97% compliance in medium sized charities (Connolly & Hyndman, 2001).
An earlier New Zealand study (Rees & Dixon, 1983) found that movements in charities‟
funds were difficult to trace. A later study by Newberry (1992) found that 44% of
charities failed to disclose transactions of some funds or disclosed movements through
funds in a misleading manner. Newberry (1995b) suggested that it would be most
helpful to utilise a multi-columned extended Income Statement. However, New Zealand
is still waiting for that suggestion to be implemented and this remains a threat to
transparency and understandability.
The Accounting Standards Committee (1984) considered that there were two ways of
reporting funds. First, reporting separate accounts for each different fund and second, as
per the SoFA, reporting a columnar statement showing total figures, analysed into
columns between funds with external restrictions and funds for use at the charity‟s
discretion.
Rees and Dixon (1983) determined that the first method, the operation of separate fund
accounts, was common and the proliferation of these accounts and the fragmented
manner of their reporting made the charities‟ financial statements very difficult to
follow.
A New Zealand study to determine the usefulness of the Statement of Financial
Activities‟ format to separate out funds produced contradictory results (Sinclair,
Hooper, & Lai, 2009). Although 70% of respondents found it useful to separately
disclose restricted funds, 65%, although considering it useful, would not change their
current structure. Some respondents specifically commented that their current format
was adequate and familiar so there was no need to change (Sinclair et al., 2009).
Also in relation to the first method Anthony (1978, 1989) considers that funds should be
consolidated, rather than a number of separate financial statements for each fund.
Consolidated funds concentrate attention on the charity as a whole (Accounting
Standards Committee, 1984). This supports the SORP‟s recommendation that
consolidated accounts should be prepared (Charity Commission, 2005). This was
reflected in Connolly and Hyndman‟s study (2000) which found that consolidated
accounts were prepared in 96% of large charities and, of the medium-sized charities
surveyed, 61% consolidated subsidiaries (Connolly & Hyndman, 2001).
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