Title:
Users of external financial reports of not for profit entities are different than
those identified by the AASB and the IASB: a survey of preparer, donor and
member perceptions.
Authors:
Kilcullen, L.,
Hancock, P., and
Izan, H.
Key words:
Conceptual Framework, Australian Accounting Standards Board, Not for
profit, Users, Preparers
Abstract:
This research examines the users of external financial reports of private sector
Not For Profit (NFP) entities by considering the views of those that prepare
such reports for member and community serving NFP entities as well as the
views of donors and members.
In Australia, accounting standards are adopted by the Australian Accounting
Standards Board (AASB) on the basis that they will provide information that is
useful to an articulated set of users. Over time, this set of users has been
modified following the development of the Conceptual Framework through
guidance including Statement of Accounting Concepts 2 (SAC2), the 2005
International Financial Reporting Standards (IFRS) Conceptual Framework and
going forward through to the newly announced incorporation by the AASB of
Chapters 1 and 3 of the revised International Accounting Standards Board
(IASB) Conceptual Framework for Financial Reporting. This paper
investigates the extent to which preparers and users agree with the users
identified in the current and emerging frameworks.
A survey was sent to preparers, of both member and community serving NFP
entities as well as donors and members, to examine their views as to who relies
on the external financial reports of private sector NFP entities. Comparisons of
preparers, donors and member respondents indicate very high levels of
agreement in their views.
When users identified in the pre and post December 2013 AASB conceptual
frameworks are compared with users identified by respondants, a number of
significant differences are found. Preparers consider (among others) auditors,
related bodies, other like entities, management and governing bodies to rely on
external financial reports. However, the current and proposed conceptual
frameworks do not consider these groups to be users of external financial
reports.
Furthermore, one of the primary user groups identified within the proposed
IASB/FASB conceptual framework, equity investors, is not appropriate for
private sector NFP entities as they do not have investors.
Acknowledgements: The authors acknowledge the helpful feedback provided by reviewers at the
2008 conference of the Accounting and Finance Association of Australia and
New Zealand in Sydney; the 2008 conference of the European Accounting
Association in Rotterdam and to the PhD examiners who provided valuable
comments on the PhD thesis from which this paper is derived. The authors also
thank the CPA Centre of Excellence for External Reporting and Governance
and the Accounting and Finance Association of Australia and New Zealand for
funds to support this research into the not-for-profit sector.
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1.
Introduction
The issue of what types of information and how Not For Profit (“NFP”) entities should make
disclosures to stakeholders about their activities, including their use of resources and their success in
meeting organisational objectives, has been the subject of much discussion in Australia, New Zealand
and other jurisdictions. Financial reports that include financial information and the performance of
management are a source of information about NFP entities, however there is a view that the financial
reports of these entities are not useful to the users of those reports. Guidance on the preparation of
external financial reports is provided by the Australian Accounting Standards Board (“AASB”) which
has as its mission, the development and maintenance of high-quality financial reporting standards for
all sectors of the Australian economy and to contribute to the development of global financial
reporting standards.
There have been numerous calls for reform around NFP reporting and disclosures. These can be
traced as far back as the 1995 government recommendation for the development of specific
accounting standards for charities (Industry Commission on Charitable Organisations in Australia,
1995). This is followed more recently by the government inquiry into the disclosure regimes for
charities and NFP entities (The Senate Standing Committee on Economics, 2008) and by the 2011
announcement of the establishment of the Australian Charities and Not-for-profits Commission. Calls
for reform have come not just from the government. Other examples of similar calls have included
those made by Choice Magazine, who called for a single regulator for the sector (2008) and Trinca
(2002) and Ferguson (2005) who call for more accountability from NFP entities. Others have argued
that the solution is the development of accounting standards specifically for NFP entities (Institute of
Chartered Accountants in Australia, 2003), Traill (2008), and that this would lead to improved
reporting about the nature of NFP activities, as well as improved measurement of performance
(Anderson, 2008).
It has been argued that one reason why financial information disclosed by NFP entities does not meet
the needs of users is that the accounting standards do not identify NFP entity users and further that the
users within the standards are not an appropriate proxy for users of external financial reports of NFP
entities.(AASB ED 164 submission xx).
Young (2006) argues that accounting standards in the US
are guided by a conceptual framework that specifically limits the population of users to a subset that
includes users who are rational economic decision makers. The standard setting process is less about
what readers want and more about what the standard setters think investors and creditors should find
useful for decision making (Young, 2006, page 595).
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When developing standards and other forms of guidance, the AASB considers the users of financial
reports and obtains direction from the Conceptual Framework. The AASB is currently1 guided by
two sources within the Conceptual Framework. The first is AASB Framework for the preparation of
Financial Statements (AASB, 2009) (“the AASB Framework”). This guidance was developed by the
IASB and adopted with some amendments by the AASB as part of the broader adoption of IASB
standards. The second source of guidance was developed by the predecessor to the AASB, the
Australian Accounting Research Foundation (“AARF”): Statement of Accounting Concepts 2
‘Objective of General Purpose Financial Reporting’ (AARF, 1990) (“SAC2”).
One of the
amendments to the AASB Framework was to direct readers to SAC2 particularly when considering
NFP entities.
Within the AASB Framework, the objective of financial reporting is the provision of information
useful to users for making and evaluating decisions and to assist management and governing bodies in
discharging their accountability obligations. Users of financial reports are assumed to be external to
the entity and to have a reasonable knowledge of business and economic activities and accounting and
a willingness to study the information with reasonable diligence. Users are specifically identified as:
investors and their advisers; employees and their representative groups; lenders; suppliers and other
trade creditors; customers; governments and their agencies; and the public. While the AASB
Framework does not identify a primary user, it states that meeting the needs of investors will also
meet most of the needs of other users – to the extent that financial statements can satisfy those needs
(AASB, 2009, para 10).
Within SAC2 users are broadly characterised as external to the entity and are also expected to
exercise diligence in reviewing those reports and who possess the proficiency necessary to
comprehend the significance of contemporary accounting practices. Users are identified under four
categories, with the first three identified as primary users whose common information needs should
dictate the type of information disclosed in financial reports:
•
providers of resources; including suppliers of finance, members, donors, creditors,
suppliers of goods and services, and employees
•
recipients of goods and services; including beneficiaries, customers, ratepayers, and
taxpayers
•
parties that perform oversight or review services on behalf of the community; including
government regulators, analysts and advisors, regulatory agencies, parliamentarians,
media, special interest groups, employers groups, and trade unions.
1
November 2013
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The final category of user recognised in SAC2 is management and governing bodies, however this
category is deemed to be able to command the preparation of financial information to meet their
specific needs, and therefore should not be considered users for the purposes of developing
accounting standards and other forms of guidance.
The AASB is considering replacing the section of the current AASB Conceptual Framework on the
objective and qualitative characteristics of financial reporting with the contents of the IASB
Conceptual Framework for Financial Reporting 2010 (“IASB Conceptual Framework 2010”). This
document reflects the output of the first phase of the IASB project to update its Conceptual
Framework. The primary users of financial reports are identified as existing and potential investors,
lenders, and other creditors who cannot require reporting entities to provide information directly to
them and have to rely on these reports for the financial information they need. Users are characterised
as having a reasonable knowledge of business and economic activities and financial accounting, who
study the information with reasonable diligence, to comprehend its meaning
In responding to an earlier version of the IASB Conceptual Framework 2010 2, the AASB provides an
insight into the Board’s view of potential users of NFP financial reports (AASB, 2008). The AASB
indicates acceptance of the identification of the needs of a primary user group as a proxy for the needs
of a wider range of users. They suggest, however, that for NFP entities, this primary user group
should include resource providers (including creditors, donors and other financial supporters),
recipients of goods and services (including beneficiaries) and parties providing a review or oversight
function.
These comments provide support for the SAC2 style of identification of users into broad categories in
contrast to the AASB Framework and IASB Conceptual Framework 2010 identification of specific
users.
The AASB comments that “many users of financial reports of not-for-profit entities will not have the
same ability to make decisions in their capacity as capital providers as occurs for private sector
businesses and will sometimes be interested in financial reports primarily to assess the accountability
of the entity’s management”. It seems that the AASB is recognising that users of NFP entities may
have different abilities than users in the ‘for-profit’ sector, and may rely on financial reports for
reasons other than those provided in the IASB Conceptual Framework 2010 i.e. making decisions
about providing resources to the entity and the prospects for future net cash inflows to the entity.
2
Exposure Draft: An improved Conceptual Framework for Financial Reporting (IASB, 2008)
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The AASB forewarn that they and possibly other standard setters (including the Canadian Accounting
Standards Board, The US Financial Accounting Standards Board, the NZ Accounting Standards
Board and the UK Accounting Standards Board) may need to defer the adoption of the proposed
changes to the IASB Conceptual Framework with respect to NFP entities until such time as the IASB
has considered issues related to these types of entities.
2.
Motivation
At the time of writing, the AASB had issued a ballot draft of the Chapter of the revised IASB
Conceptual Framework (2012) addressing objectives and qualitative characteristics, with the Work
Program of October 2013, indicating that guidance on this subject for NFP entities would be
considered in 2014 (insert ref)
This review of the proposed changes to the AASB Conceptual Framework provides the opportunity to
acknowledge three distinct aspects of the identification of users. The first is that since the earliest
edition of an Australian Conceptual Framework, the objective of financial reporting was to provide
information to a subset of potential users, namely, users who are external to the entity.
The second distinct aspect is that users have consistently been characterised as equipped with the
skills to read the financial reports.
The third distinct aspect is that the proposed identification of a primary user group is based on an
assumption that such a user group is a proxy for other user groups and that the information needs of a
wide range of users are common to the information needs of the primary user group. Linked to this
characteristic is the view of the AASB that for NFP entities, this primary user group should include
resource providers, recipients of goods and services, and parties providing a review or oversight
function. This view has been adopted since the earliest version of the AASB Conceptual Framework
and was reiterated in response to the IASB Conceptual Framework 2010,
This study considers the argument presented by Young (2006) in an Australian context by providing
evidence to assess the relationship between the users identified in the AASB Conceptual Framework
and users of external financial reports of private sector NFP entities as perceived by preparers, donors,
and members. In so doing the results of the study will assist the AASB in its deliberations on the
adoption of the IASB Conceptual Framework 2010 into the Australian environment. NFP entities in
Australia
Although commentators, researchers and governments all refer to NFP entities, there is a lack of
clarity over what this term means and the types of entities it encompasses. Different terms are used to
identify NFP entities, usually within particular fields of activity. Examples of this include ‘clubs’
when referring to NFP entities in the field of sport and recreation. In the social services field, the
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terms ‘charity’, ‘voluntary organisation’, ‘NGO’ or ‘non government organisation’, and ‘community
organisation’ are all commonly used to refer to NFP entities (Lyons, 1998).
One way of distinguishing entities within an economy is by institutional form. An example of this is
the use of the terms ‘private sector’, ‘government sector’ and ‘non-profit sector’ to describe distinct
groups within an economy. There is however a lack of consensus between countries, disciplines and
practitioners as to the most appropriate way to classify groups within economies (for example, see
Kaufmann, Majone and Ostrom, 1986).
Figure 1 presents the grouping of Australian NFP entities adopted throughout this research. The
Australian economy is split into entities that are NFP and entities that are not (i.e. ‘for profit’). NFP
entities are further split between those in the public and private sectors. Public sector NFP entities
include local government councils as well as state and federal government departments. Private sector
NFP entities can be classified into two types. The first type includes those that provide a service to the
community or a section of the community. Commonly known as charities, voluntary organisations or
religious organisations, they are termed community serving NFP entities in this research. The second
type of private sector NFP entity provides goods or services to its members and is collectively known
as a club or an association. In this research, this type of NFP entity is termed member serving. 3 The
AASB generally adopts the breakdown of NFP above although it makes no distinction between
member serving and community serving NFP entities. At times the AASB distinguishes between
NFP entities in the public and private sectors (AASB, 2006), while at other times it splits the economy
into three sectors, namely private, government, and NFP.
Insert Figure 1 about here
3.
Methodology
Data was collected using surveys of donors, members and preparers, about the users of external
financial reports of both community serving and member serving NFP entities.
3.1
Online survey
An online survey approach was adopted, with three separate surveys undertaken. The first two
surveys were of donors and members. They were asked questions about the extent to which they
agreed or disagreed that donors or members relied upon the external financial reports of either
community serving or member serving NFP entities. The third survey was of preparers. Respondents
were asked to indicate the extent to which they agreed or disagreed that each of 36 separate user
3
There will always be exceptions to the rule. For example, some community serving NFP entities are operated through a company
structure.
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groups relied upon the external financial reports of either community serving or member serving NFP
entities. Responses to all surveys were given a 5-point Likert attitudinal scale ranging from strongly
disagree to strongly agree.
3.2
Identification of user groups
In addition to the users identified within the current AASB Conceptual Framework a wide ranging
review was undertaken to identify other possible users of external financial reports. This review
included normative and empirical research as well as a review of the guidance provided by accounting
standard setters in New Zealand, the USA, Canada, and the UK.
Prior research considering private sector NFP entities has focused on community serving NFP
entities, predominantly charities or universities 4 (for example, see Coy, Fischer and Gordon, 2001;
Engstrom, 1988; Engstrom and Esmond-Kiger, 1997; Hyndman, 1990, 1991; Leo and Addison,
2000). A review of prior literature was unable to identify research on users of external financial
reports of member serving NFP entities.
In some of the earliest work on NFP financial reporting, Anthony (1978) normatively identified an
extensive range of users of NFP external financial reports. In Anthony’s view, it was not practical to
design a set of financial information to meet the needs of all users. In his opinion, external financial
reports should be designed to meet the needs of a primary group of users ‘with the expectation (which
may be only a hope) that the needs of other classes of users will be met adequately by such reports’
(Anthony, 1978). In a later work, Anthony presents the view that identifying users is not a worthwhile
exercise because it does not help determine the principles that govern the preparation of financial
information (Anthony, 1989).
Many others (for example, see Abzug and Webb, 1999; Flack and Ryan, 2002; Khumawala and
Gordon, 1997; Seville, 1987) normatively identify particular categories of users of NFP entities or a
subset of this sector as part of their research. However, they do not add additional categories to those
identified within the AASB Conceptual Framework or Anthony. Other normative researchers have
identified additional users (for example, Bird and Morgan-Jones, 1981; Canadian Institute of
Chartered Accountants, 1980; Gordon and Khumawala, 1999; Leat, 2001).
Within other prior literature, researchers empirically test a pre-established classification of users.
Using this approach further users of external financial reports were identified (for example, Engstrom,
1988; Herman and Heimovics, 1994; Hyndman, 1990; Khumawala and Gordon, 1997; Parsons, 2003;
Seville, 1987). Only a limited number of researchers have empirically identified users of financial
4
Universities are considered public sector NFP entities in some countries and community serving NFP entities in others.
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information. In the earliest identified empirical research on private sector NFP entities, Skousen,
Smith and Woodfield (1974) asked business officers of public and private universities and colleges in
the USA who they perceived to be the external users of financial statements (on the basis that they
received financial statements). They provided them with a list of potential users derived from prior
literature, but also asked them to identify any other users. Additional users identified by this research
include alumni and other like entities (in this research these were represented by ‘other universities’).
Coy et al. (1997) empirically identify users of annual reports of New Zealand tertiary education
institutions (“TEI”) by surveying recipients of annual reports. TEI are considered to be part of the
public sector in New Zealand; however, given the similarities with their private sector counterparts in
other parts of the world, the findings were considered useful. Respondents were asked to identify their
relationship with the TEI (i.e. what type of user were they) by selecting a category from a list that
included ‘other(s) – please specify’. They were also asked to specify their main relationship. They
found that all user groups identified from FP and NFP prior literature received annual reports with the
exception of accreditation agencies. Compared with the emphasis in prior literature, they found higher
than expected relationships with users internal to the entity as well as with other like entities. They
also found lower than expected relationships with researchers, analysts and journalists.
Woodward and Marshall (2004) asked the CEOs of Australian NFP companies limited by guarantee
to identify the three most important stakeholders of their company. Additional users identified by
these researchers were other like entities, religious organisations, community/general public and
related bodies.
3.3
Summary - potential users of external financial reports
A wide range of potential users can be identified from the AASB Conceptual Framework, other
standard setters and prior literature.
Insert Table 1 about here
3.4
Respondents
3.4.1
Preparers
Potential respondents came from members of CPA Australia 5 who had indicated that they were
employed in academia or the NFP private sector. These respondents were targeted for two reasons.
Firstly, it was considered reasonable to assume that they would have experience as preparers of
external financial reports and knowledge of private sector NFP entities.
Secondly, and more
practically, access had been granted to this group by the professional body. Of the 108,000 members
5
The largest (in membership) professional accounting body in Australia.
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of CPA Australia, 5,405 met the criteria mentioned above with 49.1% employed in academia and
50.9% in the NFP private sector.
The survey was advertised on the CPA Australia website and through various e-newsletters. In
addition, potential respondents were sent an email inviting them to participate in the online survey and
providing a link to the website hosting the survey. For this respondent group, the survey was opened
on 5 December 2006 and remained open for a total of 68 days. Respondents responded with respect
to either community serving or member serving NFP entities. Of the 285 usable responses received,
204 responded with respect to community serving NFP entities and 81 responded with respect to
member serving NFP entities.
3.4.2
Donors
Responses were collected from donors of a community serving NFP entity located in Western
Australia. This organisation has a large number of donors and also has ‘members’ who pay a nominal
fee per annum to support the entity and its objectives, which are to educate the community on a
particular health issue and to undertake research into the treatment and prevention of that health issue.
The vast majority of donors responding (93.4%) donated less than $100 during the year preceding the
survey. Anecdotal evidence from the entity indicates this reflects actual donation patterns.
Potential respondents were targeted through invitations advertised through an email database
maintained by entity. This database not only included donors but also ‘members’ and ‘friends’ and
interested parties to the entity. For this response group, the survey was opened on 15 February 2007
and remained open for a total of 38 days. A total of 153 usable responses were received.
3.4.3
Members
Members from two member serving NFP entities were surveyed. The first entity was a sporting club
located in Western Australia. All adult members of the club were advised of the survey and invited to
participate using a range of methods. Flyers were included as in insert in the July 2008 edition of the
quarterly members’ magazine. In addition, emails were sent to the club email list, which is
predominantly made up of members. The survey was mentioned on three occasions as a news item
during weekly presentations of sporting results to members and was also included as a news item on
the club website. The survey was opened on 8 July and remained open for a total of 96 days. A total
of 90 usable responses were received.
Members were also surveyed from CPA Australia; using a different target audience to the preparer
survey. 2,500 potential respondents were randomly chosen from the total membership, excluding
those previously targeted for the preparers’ survey. This sub group of members were sent emails
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advertising the survey. The survey for this respondent group was opened on 5 December 2006 and
remained open for a total of 68 days. A total of 85 usable responses were received.
On-line collection of data circumvented the potential problem of errors in coding. Non response bias
was considered and tested by comparing responses from early and late responders (Little and Rubin,
2002). No significant differences were found for any of the groups providing support for the notion
that those that did not respond to the survey are not significantly different to those who did. The
survey included missing data which was firstly identified as ignorable or non-ignorable, then assessed
to determine the extent and nature of the missing data. Finally, an appropriate remedy was applied.
4.
Findings
In this section the views of preparers, donors and members are presented and contrasted with the
guidance contained in the AASB Conceptual Framework and the IASB Conceptual Framework 2010..
4.1
Preparer views
In Table 2 the views of preparers are presented after collating ‘strongly disagree’ and ‘disagree’ into
the category ‘disagree’, and ‘agree’ and ‘strongly agree’ into the category ‘agree’. The 36 user groups
are ranked on the basis of highest to lowest percentage of preparers that selected ‘agree’ or ‘strongly
agree’. Of the 36 potential user groups, 22 were identified by the majority of preparers as user groups
that rely on the external financial reports of NFP entities.
Preparers were asked to respond with respect to either community serving or member serving NFP
entities and the results were compared to determine the extent of differences between the two types of
NFP entities. 6 There were few differences between the responses. Preparers considering member
serving NFP entities included ‘employees’ and ‘suppliers of goods and services’ as user groups while
preparers considering community serving NFP entities excluded these user groups. Further analysis
using an independent samples t-test to compare the means of responses by preparers for these two
types of user groups revealed significant differences (employees, p = 0.031) and (suppliers of goods
and services, p = 0.030) indicating that those preparers considering member serving NFP entities
differ significantly in their opinions from those preparers considering community serving NFP entities
on the extent to which employees and suppliers of goods and services rely on external financial
reports.
A Spearman Rank Correlation Coefficient test was undertaken to compare the rankings of the
preparers considering community serving NFP entities and the preparers considering member serving
NFP entities. The correlation was 0.961, indicating an almost
6
perfect correlation between the
Responses relating to each type of NFP entity may be obtained from the corresponding author.
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rankings of these two groups of preparers. These findings indicate that preparers considering
community serving and member serving NFP entities have closely aligned views on the types of user
groups that rely upon external financial reports of NFP entities. 7
Insert Table 2 about here
4.2
Donor and member views
Donor and member respondents were asked to identify the extent to which they agreed or disagreed
that their user group relied on the external financial reports of NFP entities. The findings are presented
in Table 3 after collating ‘strongly disagree’ and ‘disagree’ into the category ‘disagree’, and ‘agree’
and ‘strongly agree’ into the category ‘agree’.
Insert Table 3 about here
The majority of donors surveyed did not agree that donors rely on the external financial reports of
community serving NFP entities. In contrast, the majority of members agreed that members rely on
the external financial reports of member serving NFP entities.
Further, professional body and
sporting body members have very similar views.
4.3
Preparer views versus donor and member views
The responses from preparers, donors and members were compared to identify the extent to which
they had similar views. There were differences in responses from preparers and donors considering
community serving NFP entities. 60.3% of preparers considering this type of entity ‘agree’ or
‘strongly agree’ that donors rely on external financial reports, whereas only 46.6% of donors are of
the same view. An independent samples t-test revealed significant differences between the means
from the two response groups (p = 0.026) indicating that preparers and donors differ in their opinion
on the extent to which donors rely on external financial reports of community serving NFP entities.
75.0% of preparers considering member serving NFP entities ‘agree’ or ‘strongly agree’ that members
rely on the external financial reports of this type of entity while 78.6% of members from the
professional body and 75.6% of members from the sporting body are of the same view. Independent
samples t-tests revealed no significant differences between the means of each of the three respondent
groups indicating that preparers and members have similar opinions on the extent to which members
rely on the external financial reports of member serving NFP entities.
7
Preparers were asked to identify any other groups that they thought relied upon the external financial reports of community serving or
member serving NFP entities. There were only 20 responses to this question, of which three included suggestions already in the list of users.
Of the remaining 17 responses (some of which included multiple suggestions), academics, researchers and competitors were the most
common responses with three respondents indicating that these were users. Students and the family of residents of aged care facilities
received two responses and seven other groups receiving one response. Interestingly of those seven, three related to groups with a potential
relationship with NFP entities, i.e. potential employees, potential residents of aged care facilities and potential merging bodies.
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4.4
Respondent views compared to the AASB Conceptual Framework
The responses from preparers, donors and members were compared to the two parts of the AASB
Conceptual Framework, namely, SAC2 and the AASB Framework. A comparison is also made with
the IASB Conceptual Framework 2010.
4.4.1
SAC2
Under SAC2 users are categorised within four groups. The findings are presented in Figure 2 under
those groups.
Insert Figure 2 about here
Resource providers
Under SAC2, resource providers include those who may be compensated directly or indirectly for the
resources they provide (AARF, 1990). Six groups of users are specifically identified within this
category: creditors; suppliers of finance; members; 8 suppliers of goods and services; donors; and
employees. As noted earlier, all of these were identified by preparers as user groups who rely on
external financial reports with the exception of employees who were identified by preparers
considering member serving NFP entities but not by preparers considering community serving NFP
entities. The majority of sporting club and professional body members consider that members would
rely on external financial reports of member serving NFP entities. The majority of donors did not
consider donors to be a user group that rely on external financial reports of community serving NFP
entities.
Six additional user groups identified in other accounting standards and prior research fit within the
category of ‘resource providers’ although not specifically identified as an example of this category
within SAC2; government funders; non-government suppliers of grants; sponsors; partners;
volunteers; and alumni.
Of these, government funders; non- government suppliers of grants;
partners; and sponsors were considered by preparers to be user groups that rely on external financial
reports of both community serving and member serving NFP entities. Volunteers and alumni were not
identified as user groups by preparers.
Investors and contributors are included under SAC2. However, they were not considered as a user
group in this study on the basis that NFP entities in the private sector do not have investors or
contributors.
8
Members are identified under the AASB Conceptual Framework both as resource providers and as recipients of goods and services.
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Recipients of goods and services
Recipients of goods and services of NFP entities are described under SAC2 as those who consume or
otherwise benefit from the goods and services provided by the reporting entity (AARF, 1990).
Four user groups are identified under SAC2: customers; ratepayers; taxpayers; and beneficiaries. Of
these, only beneficiaries are considered by preparers to be user groups that rely on external financial
reports of both community serving and member serving NFP entities.
Users with a review or oversight role
The discussion in SAC2 concerning the basis for inclusion as a user ‘with a review or oversight role’
points to users having indirect interests through advising or representing those who have direct
interests (AARF, 1990). Eight groups of users are included in SAC2 under this category. Of these
eight, the majority of preparers agree that three user groups rely on the external financial reports of
community serving and member serving NFP entities: analysts and advisors, government regulators
and regulatory agencies, and five do not: employer groups, parliamentarians, special interest groups,
trade unions and the media.
In addition to the eight examples of users included within SAC2 under the category ‘users with a
review or oversight role’, five additional groups of users identified in other accounting standards and
prior research fit within this category: accrediting agencies, watchdog organisations, professional
bodies, community/general public and religious bodies. The majority of preparers agree that two of
these user groups rely on the external financial reports of community serving and member serving
NFP entities: accrediting agencies and watchdog organisations, and three do not: professional bodies,
community/general public and religious bodies.
Management and governing bodies
Management and governing bodies are identified in SAC2 as users of financial information about the
entity; however, they are not considered users of external financial reports as they are able to access
financial information through other means (AARF, 1990).
The following user groups fit within this category: advisory committee members, board members,
internal elected officials and internal management. The majority of preparers considering both
community serving and member serving NFP entities agreed that all these user groups rely on external
financial reports.
Users unable to be categorised
Auditors, who are not identified as a separate user group under SAC2, were ranked highest for what?
by preparers considering both community serving and member serving NFP entities.
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Related bodies and other like entities were also considered by preparers to be users that rely on the
external financial reports of both member serving and community serving NFP entities. They are also
not identified under SAC2.
4.4.2
The AASB Framework
Figure 3 presents a summary of views of respondents to the survey, and the overlap between these
views and the users identified in the AASB Framework
Insert Figure 3 about here
Under the AASB Framework, users are specifically identified as investors and their advisers;
employees and their representative groups; lenders; suppliers and other trade creditors; customers;
governments and their agencies; and the public. Of these users, customers, employee representative
groups (represented by trade unions), the public (termed community/general public) were not
considered users by preparers. Further, while employees were considered users by preparers of
member serving NFP entities they were not by community serving NFP entities. Preparers considered
15 other groups to be users.
4.4.3
The IASB Conceptual Framework 2010
Figure 4 presents a summary of views of respondents to the survey, and the overlap between these
views and the users identified in the IASB Conceptual Framework 2010.
Insert Figure 4 about here
Under the IASB Conceptual Framework 2010, users of external financial reports are limited to
existing and potential investors, lenders and other creditors – to the extent that they make decisions
about providing resources to the entity, and the prospects for future net cash inflows to the entity
(IASB, 2010, paras OB2 to OB4). On this basis, 20 other groups identified by respondents in this
research as users who rely on the external financial reports of community serving and member serving
NFP entities would not be considered users under the IASB Conceptual Framework 2010. This is
perhaps not surprising given the IASB issues pronouncements aimed at the for-profit sector.
5.
5.1
Discussion
Major Findings
The aim of this study is to provide evidence to assess the relationship between users who rely on the
external financial reports of NFP entities as perceived by preparers, donors, and members and the
users identified in the AASB Conceptual Framework. There are three major findings.
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The first is that preparers considering users of community serving and member serving NFP entities
have closely aligned views on who those users are and that their views are to a significant extent
consistent with the position taken within the AASB Conceptual Framework. When the findings are
compared to SAC2, users are identified within each of the three broad categories that represent the
primary users with common information needs.
Secondly, while there are many consistencies between the findings and the users identified in the
AASB Conceptual Framework, there are also significant and fundamental omissions. There was
unanimous inclusion by preparer respondent groups from both community serving and member
serving NFP entities of advisory committee members, board members, internal elected officials and
internal management as users that rely on the external financial reports. Possible reasons for this may
include the size of the reporting structure of NFP entities resulting in only limited financial reports
being produced—and these essentially are the external financial reports.
These users, collectively termed management and governing bodies, are specifically excluded from
SAC2 and are not included within the AASB Framework. Further, in contrast with the AASB
Conceptual Framework, preparers consider auditors, related bodies and other like entities to be
important users with auditors ranked highest by both preparer respondent groups. These findings
support prior research including Coy et al (1997) when considering TEIs in New Zealand, Woodward
and Marshall (2004) when considering NFP companies limited by guarantee, Engstrom (1988) when
considering universities in the U.S.A., and Mack (2003) when considering public sector entities.
The role of the auditor in the context of this research is an interesting one. On the one hand, it could
be argued that the auditor is a party with a review or oversight role. However, the AASB Conceptual
Framework implies that this heading relates to parties external to the organisation. While the auditor
is external to the organisation, they do have access to internal records of the organisation when they
perform the audit. It could be argued that the auditor as a user is captured in the category of
management and governing bodies discussed above. Whether they rely upon external financial reports
is debateable, but respondents provide a clear indication in this research, that they regard the auditor
as a user that relies on the external financial reports of both member serving and community serving
NFP entities.
Finally, preparers and donors have inconsistent views on the reliance of donors on external financial
reports. While members and preparers agree that members rely on external financial reports, and
preparers considering community serving NFP entities consider donors to be users, donors themselves
do not. This finding is in contrast with prior research that found donors to be users (Bird and MorganJones, 1981; Hyndman, 1990; Khumawala and Gordon, 1997; Seville, 1987) though it supports the
findings of Gordon and Khumawala (1999) who found that small donors were less likely to evaluate
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financial information but more likely to rely on the information provided by intermediaries who
monitor and collect information about NFP entities.
5.2
Contribution
While there has been much discussion and commentary on the external financial information
requirements of NFP entities and the ability of accounting standards issued by the AASB to yield
financial reports of NFP entities that meet the needs of users, there is an extensive gap in the empirical
literature on many aspects of the debate.
Research into users has focused almost exclusively on the ‘for-profit’ sector. The studies focused on
the NFP sector have for the main part looked at public sector NFP entities. Only a small number of
studies have investigated the needs of users in the private NFP sector and these have concentrated on
charities or universities. This study is one of the first to consider preparer views on users of financial
reports of community serving NFP entities and to our knowledge the first to consider member serving
NFP entities.
Prior research has found that users have low levels of involvement in the due process for developing
standards and as a consequence other stakeholders have had more success in lobbying the standard
setters. This study provides significant insight into a largely missing aspect of prior research by
identifying similarities and differences in preparer, donor, and member views with respect to NFP
entities.
The study also contains two methodological aspects that have been relatively neglected by previous
researchers in this area. The first is that it is policy relevant ex ante research, i.e. it is research that
may be used by standard setters as part of their deliberations on a revised Conceptual Framework and
or guidance for the NFP sector. During his tenure as chairman of the AASB, Keith Alfredson called
on academics to undertake this type of research to assist the AASB in their deliberations of proposed
standards (Alfredson, 2000). The second is that it adopts a behavioural accounting research method.
There have been several Australian and international calls for research that is ex ante with recognition
that such research will require the use of behavioural accounting research methods (for example, see
Harris, 1995).
5.3
Implications and recommendations
In the discussions on the provision of financial information by NFP entities - whether it be the call for
a reduction in the excessive levels of reporting and acquittals by the entities themselves or calls by
stakeholders for an improvement in the financial information provided – the AASB and the standards
they issue are often identified as a means through which improvements can be made.
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There is a tension; perhaps it could be called an expectation gap, between the AASB and stakeholders
of NFP entities. Accounting standards are designed to provide guidance on the preparation of
financial reports to meet the needs of a particular subset of the potential population of users. That
subset is external to the entity, equipped with the skills to read financial information and, under the
widest umbrella of SAC2 includes resource providers, recipients of goods and services and parties
providing a review or oversight function. Under IASB Conceptual Framework 2010, users could be
limited to existing and potential investors, lenders, and other creditors.
This study provides valuable evidence of preparer, donor and member perceptions of the users of
external financial reports. This information is of importance to both standard setters and NFP entities.
There are three recommendations for the AASB and NFP entities. The first is that in its deliberations
on the application of the IASB Conceptual Framework 2010 for Australian entities, that the AASB
given its responsibility for both the for-profit and NFP sectors, maintains its position with respect to
NFP entities that their users are much broader than those included in the IASB Conceptual
Framework 2010. Secondly, the AASB and NFP entities could benefit from an open discussion
about the role of accounting standards in Australia.
Finally, as part of the development of new
guidance for NFP entities, that the AASB recognises that preparers may not be an appropriate proxy
for users; that there is value in obtaining input from users directly; and that NFP entities and their
peak bodies should be engaged in the process..
No one is naive enough to imagine that the Australian Conceptual Framework is about to change so as
to include management and governing bodies and auditors as users of external financial reports of
NFP entities, however an acknowledgement of the objective of financial reporting under the
Conceptual Framework and a shared understanding of the role of the AASB could contribute to a
reframing of the debate from what is not working to what can be done to improve the information
provided by NFP entities.
5.4
Limitations
The member group of respondents are accountants from the same professional body that was the
source of the sample of preparer respondents and it may be that this group of members do not reflect
the views of members from other types of member serving NFP entities or members without high
levels of experience in reading external financial reports.
The donor group of respondents are also members but not in the traditional sense of members such as
those in a sporting club or professional facility. They receive limited benefits from their membership
fee, which is more aligned to an additional donation.
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It is acknowledged that the NFP entities from which the sample data was collected may not be
representative of the whole population and that the preparers, donors and members sampled may also
not be representative of all preparers, donors and members of member serving and community serving
NFP entities. Consequently, caution needs to be taken when considering the generalisation of findings
and conclusions. It is argued that with respect to preparers sampled in this survey that given the large
number of responses, the inclusion of responses from preparers from both the public and private
sectors, the range of experience and qualifications of preparers, it was considered appropriate to use
them as a proxy for preparers generally.
5.5
Future research
This research only considers the responses from two user groups, donors and members. It may be that
other private sector NFP user groups have different views on the users of external financial reports.
Future research extending to other users would provide a useful contribution.
A related issue is one of cost versus benefit. The AASB Conceptual Framework recognises the
balance between benefit and cost as a pervasive constraint on providing relevant and reliable
information (AASB, 2009). Users of external financial information of NFP entities may not make a
direct payment for the costs involved; however, they may view the usefulness of information
differently when also considering the costs to the entity of providing that information. Further
research incorporating an evaluation of costs related to the provision of information would provide an
important contribution.
Harding and McKinnon (1997) suggest that preparer responses to questions about the decision
usefulness of information is linked to the impact of those responses on the benefits they receive in
their role as preparer. Future research could focus on the reasons why preparer responses were
different to users including whether it is due to a wish to preserve the judgement domain of preparers
or whether it is a lack of perception or understanding of user needs.
6.
Conclusions
This study shows that in addition to the three broad external user categories identified in SAC2,
management and governing bodies, auditors, other like entities and related bodies are considered users
by preparers of community serving and member serving NFP entities. Further, that preparers and
donors disagree on the extent to which donors rely on the external financial reports of NFP entities.
These findings suggest that there is significant common ground between the users of external
financial reports identified by the AASB and users identified by the preparers of those reports.
Notwithstanding this common ground, there is an expectation gap between the AASB and preparers
with respect to the use of external financial reports by users internal to NFP entities
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These findings may assist the deliberations of the AASB on the adoption of the IASB Conceptual
Framework 2010 for NFP entities and may also inform a dialogue between the AASB and its
stakeholders on their remit and the role they play in the provision of guidance for NFP entities. These
findings may also facilitate the efforts of NFP entities themselves to improve information they publish
by providing evidence of the users of that information.
References
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Coy, D., K. Dixon, J. Buchanan and G. Tower, 1997, Recipients of Public Sector Annual Reports:
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Engstrom, J. H., 1988, Information Needs of College and University Financial Decision Makers,
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Engstrom, J. H. and C. Esmond-Kiger, 1997, Different Formats, Same User Needs: A Comparison of
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Harding, N. and J. McKinnon, 1997, User Involvement in the Standard-Setting Process: A Research
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Figure 1 Types of Australian NFP entities
NON GOVERNMENT
(PRIVATE)
GOVERNMENT
(PUBLIC)
Community Serving Entities
Member Serving Entities
Local Councils
State Government Departments
Federal Government Departments
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Table 1 Summary of potential NFP users identified
User
b
Accrediting agencies
Advisory committee members b
Alumni b
Analysts and advisors a b
Auditors b
Beneficiaries a b
Board members b
Community/general public b
Creditors a b
Customers a b
Donors a b
Employees a b
Employer groups a
Government funders b
Government regulators a
Internal elected officials b
Internal management b
Media a b
a
Members a b
Non-government suppliers of grants b
Other like entities b
Parliamentarians a
Partners b
Professional bodies a
Ratepayers a b
Regulatory agencies a b
Related bodies b
Religious bodies b
Special interest groups a
Sponsors b
Suppliers of finance a b
Suppliers of goods and services a b
Taxpayers a b
Trade unions a b
Volunteers b
Watchdog organisations b
AASB Conceptual Framework, b Prior literature and other standard setters
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Table 2 Preparers views of users of external financial reports of NFP entities
n
Disagree
%
Neutral
%
Agree
%
Rank
Meani
SD
Auditors
Board members
282
284
2.8%
5.6%
3.9%
2.5%
93.3%
91.9%
1
2
4.54
4.48
0.721
0.826
Suppliers of finance
284
4.2%
3.9%
91.9%
3
4.43
0.801
Government funders
284
2.8%
7.0%
90.1%
4
4.43
0.774
Government regulators
282
5.3%
10.6%
84.0%
5
4.23
0.894
Internal management
282
10.3%
7.4%
82.3%
6
4.10
0.992
Non govt suppliers of grants
282
7.1%
13.1%
79.8%
7
4.05
0.907
Advisory committee members
282
6.7%
13.8%
79.4%
8
3.99
0.856
Accrediting agencies
282
11.0%
11.0%
78.0%
9
3.90
0.940
Analysts and advisors
282
8.9%
17.0%
74.1%
10
3.84
0.902
Regulatory agencies
281
9.6%
18.9%
71.5%
11
3.82
0.924
Internal elected officials
283
12.4%
19.8%
67.8%
12
3.73
0.944
Sponsors
283
14.5%
20.1%
65.4%
13
3.65
1.000
Members
282
12.1%
23.4%
64.5%
14
3.65
0.947
Watchdog organisations
282
10.6%
28.4%
61.0%
15
3.64
0.956
Related bodies
279
8.2%
29.7%
62.0%
16
3.62
0.799
Donors
284
13.7%
25.0%
61.3%
17
3.62
0.961
Beneficiaries
283
19.4%
24.4%
56.2%
18
3.48
1.008
Other like entities
281
12.5%
32.7%
54.8%
19
3.48
0.850
Partners
281
14.2%
32.7%
53.0%
20
3.47
0.937
Creditors
282
21.6%
18.4%
59.9%
21
3.45
0.998
Suppliers of goods and services
284
23.2%
25.0%
51.8%
22
3.32
1.022
Professional bodies
282
24.8%
33.7%
41.5%
23
3.20
0.972
Parliamentarians
283
25.8%
31.8%
42.4%
24
3.19
1.031
Employees
283
31.4%
25.8%
42.8%
25
3.14
1.117
Media
281
28.1%
31.7%
40.2%
26
3.12
1.093
Community/general public
282
29.4%
29.8%
40.8%
27
3.11
1.078
Special interest groups
279
25.8%
41.9%
32.3%
28
3.03
1.007
Employer groups
282
32.6%
29.1%
38.3%
29
3.02
1.036
Customers
283
35.3%
31.8%
32.9%
30
2.96
1.027
Alumni
281
32.4%
42.3%
25.3%
31
2.88
0.923
Religious bodies
283
34.6%
38.9%
26.5%
32
2.86
1.031
Trade unions
283
39.2%
32.9%
27.9%
33
2.80
1.080
Volunteers
282
46.1%
35.1%
18.8%
34
2.63
1.046
Ratepayers
283
43.1%
42.4%
14.5%
35
2.61
0.940
Taxpayers
283
47.3%
33.2%
19.4%
36
2.60
1.031
i
5-point Likert attitudinal scale, ranging from 1 = strongly disagree to 5 = strongly agree
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Table 3 Donors and members — reliance on external financial reports
n
Disagree
%
Neutral
%
Agree
%
Meani
SD
148
12.2
41.2
46.6
3.36
0.826
84
7.1
14.3
78.6
3.90
0.830
90
4.4
20.0
75.6
3.91
0.759
(Donors)
Do donors rely on the external
financial reports of community serving
NFP entities?
(Sporting club members)
Do members rely on the external
financial reports of member serving
NFP entities?
(Professional body members)
Do members rely on the external
financial reports of member serving
NFP entities?
i
5-point Likert attitudinal scale, ranging from 1 = strongly disagree to 5 = strongly agree
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Users not identified
in SAC2
Users identified but
excluded from SAC2
Users identified in SAC2iv
Figure 2 Research findings compared to SAC2
Preparers agree are usersi
Preparers do not agree are users
Resource providers
Suppliers of finance, Members, Donorsii,
Creditors, Suppliers of goods and
services, Government funders, Nongovernment suppliers of grants,
Sponsors, Partners
Resource providers
Employeesiii
Alumni, Volunteers
Recipients of goods and services
Beneficiaries
Recipients of goods and services
Customers, Ratepayers, Taxpayers
Review or oversight
Government regulators, Analysts and
advisors, Regulatory agencies,
Accrediting agencies, Watchdog
organisations
Review or oversight
Parliamentarians, Media, Special interest
groups, Employer groups, Trade unions,
Community/general public, Religious bodies,
Professional bodies
Management and governing bodies
Board members, Internal management,
Advisory committee members, Internal
elected officials
Other
Auditors, Related bodies, Other like
entities
i Investors and contributors were not included in the survey to preparers
ii Donors were identified as users by preparers but not by donors themselves.
iii Employees were identified as users by preparers of member serving NFP entities but not community serving NFP entities.
iv The users shown in italics represent those that fit within each broad category however are not specifically identified as an example.
G:\bus_grp\accounting\ADMINISTRATION\Website\2014 Symposium\2014 Feb 3 & 4th Consortium (Mon & Tue)\Papers\Users Paper
UTS January 2014 V1.docx
Users not identified in AASB
Users identified in AASB
Figure 3 Research findings compared to AASB Framework
Preparers agree are usersi
Preparers do not agree are users
Suppliers of finance
Creditors
Suppliers of goods and services
Government funders
Government regulators
Analysts and advisors
Regulatory agencies
Employeesii
Customers
Trade unions
Community/general public
Members
Donorsiii
Non-government suppliers of grants
Sponsors
Partners
Accrediting agencies
Watchdog organisations
Board members
Internal management
Advisory committee members
Internal elected officials
Related bodies
Other like entities
Auditors
Beneficiaries
Alumni
Volunteers
Ratepayers
Taxpayers
Parliamentarians
Media
Special interest groups
Employer groups
Religious bodies
Professional bodies
i Investors and contributors were not included in the survey to preparers
ii Employees were identified as users by preparers of member serving NFP entities but not community serving NFP entities
iii Donors were identified as users by preparers but not by donors themselves.
G:\bus_grp\accounting\ADMINISTRATION\Website\2014 Symposium\2014 Feb 3 & 4th Consortium (Mon & Tue)\Papers\Users Paper
UTS January 2014 V1.docx
Figure 4 Research findings compared to IASB Conceptual Framework
Users not identified in IASB
Users identified in IASB
Preparers agree are users
Preparers do not agree are users
Suppliers of finance, Creditorsi
Government funders
Non-government suppliers of grants
Sponsors
Partners
Suppliers of goods and services
Members
Donorsiii
Beneficiaries
Accrediting agencies
Watchdog organisations
Government regulators
Analysts and advisors
Regulatory agencies
Board members
Internal management
Advisory committee members
Internal elected officials
Related bodies
Other like entities
Auditors
Alumni
Volunteers
Employeesii
Customers
Ratepayers
Taxpayers
Community/general public
Religious bodies
Professional bodies
Parliamentarians, Media
Special interest groups
Employer groups
Trade unions
i Investors and contributors were not included in the survey to preparers
ii Employees were identified as users by preparers of member serving NFP entities but not community serving NFP entities
iii Donors were identified as users by preparers but not by donors themselves.
G:\bus_grp\accounting\ADMINISTRATION\Website\2014 Symposium\2014 Feb 3 & 4th Consortium (Mon & Tue)\Papers\Users Paper
UTS January 2014 V1.docx