Understandability and Transparency of the Financial Statements of ...

The key thing is to present the user of the financial statements with a clear indication of
the various funds and their movements. The issues revealed by this examination of
GAAP and key prior studies are the lack of guidance of how funds should be reported,
and limited guidance as to when funds should be consolidated, due to the notions of
„control‟ and „returns‟ not currently being appropriate to charities under the IASB‟s
definition of control. Thus, in this study, it will be important to ascertain which funds
charities include in their consolidated financial statements, if applicable, and why they
include, or exclude, these different funds, to determine if the notion of control is
consistent amongst charities. Next, the issues relating to reporting expenditure
overheads ratios will be considered.
3.2.4 Expenditure overheads ratio
A fourth complexity identified by Hui (2006) looks at the reporting of administration
and fund raising expenses. The complexity looks at whether donations have been
„properly spent‟ through analysing the proportion of donations that are not directly
spent on beneficiaries but spent on administration and fundraising. This focus on the
expenditure overheads ratio is also supported in research by Palmer & Randall (2002)
who found that these costs elicit the greatest interest from the general public.
3.2.4.1 GAAP
Fundraising expenditure refers to the costs incurred by a charity in inducing others to
make donations to the charity (Charity Commission, 2005). NZICA‟s R120 paragraph
3.44 (New Zealand Institute of Chartered Accountants, 1999) details that gross
fundraising revenues should be separately disclosed and paragraph 8.9 states that
fundraising expenses should usually be disclosed. It does not explicitly state which
circumstance falls under „usually‟. Also in paragraph 3.44, the net results of fundraising
activities may be provided as additional disclosure. The more recent guide NZICA‟s
NFPFRG (New Zealand Institute of Chartered Accountants, 2007a) is more explicit in
stating that gross expenses must be disclosed and not be offset with revenue. NFPFRG
paragraph 5.23 gives organisations the opportunity to analyse expenses by nature, e.g.
salaries, or function, e.g. fundraising. Also, paragraph 5.50 encourages disclosure of
direct fundraising costs.
The Charity Commission in England and Wales refer to fundraising expenses as the
„costs of generating funds‟ and under SORP paragraph 183 these are required to be
shown separately in the notes to the financial statements (Chitty & Whitehill, 2007;
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