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$: 1. - uts.edu.au · G:\bus_grp\accounting\ADMINISTRATION\Website\2014 Symposium\2014 Feb 3 & 4th Consortium (Mon & Tue)\Papers\Users Paper UTS January 2014 V1.docx Title: Users of$
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UTS January 2014 V1.docx

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.



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).



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



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 20102, 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)



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



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.



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 universities4 (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.



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 Australia5 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.



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



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 perfect correlation between the

6 Responses relating to each type of NFP entity may be obtained from the corresponding author.



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


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’.


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.



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.


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.



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.



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


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.


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. Discussion

5.1 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.



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 Morgan-

Jones, 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



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.



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.



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



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.

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Figure 1 Types of Australian NFP entities

Local Councils State Government Departments

Federal Government Departments

Community Serving Entities Member Serving Entities

NON GOVERNMENT (PRIVATE)

GOVERNMENT (PUBLIC)



Table 1 Summary of potential NFP users identified

User Accrediting agencies b Members a b Advisory committee members b Non-government suppliers of grants b Alumni b Other like entities b Analysts and advisors a b Parliamentarians a Auditors b Partners b Beneficiaries a b Professional bodies a Board members b Ratepayers a b Community/general public b Regulatory agencies a b Creditors a b Related bodies b Customers a b Religious bodies b Donors a b Special interest groups a Employees a b Sponsors b Employer groups a Suppliers of finance a b Government funders b Suppliers of goods and services a b Government regulators a Taxpayers a b Internal elected officials b Trade unions a b Internal management b Volunteers b Media a b Watchdog organisations b a AASB Conceptual Framework, b Prior literature and other standard setters



Table 2 Preparers views of users of external financial reports of NFP entities

n Disagree %

Neutral %

Agree % Rank Meani SD

Auditors 282 2.8% 3.9% 93.3% 1 4.54 0.721 Board members 284 5.6% 2.5% 91.9% 2 4.48 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



Table 3 Donors and members — reliance on external financial reports

n Disagree %

Neutral %

Agree % Meani SD

(Donors)

Do donors rely on the external financial reports of community serving NFP entities?

148 12.2 41.2 46.6 3.36 0.826

(Sporting club members)

Do members rely on the external financial reports of member serving NFP entities?

84 7.1 14.3 78.6 3.90 0.830

(Professional body members)

Do members rely on the external financial reports of member serving NFP entities?

90 4.4 20.0 75.6 3.91 0.759

i 5-point Likert attitudinal scale, ranging from 1 = strongly disagree to 5 = strongly agree



Figure 2 Research findings compared to SAC2

Preparers agree are usersi

Preparers do not agree are users

Use

rs id

entif

ied

in S

AC

2iv

Use

rs id

entif

ied

but

excl

uded

from

SA

C2

Use

rs n

ot id

entif

ied

in S

AC

2

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.

Review or oversight Parliamentarians, Media, Special interest groups, Employer groups, Trade unions,

Community/general public, Religious bodies, Professional bodies

Resource providers Employeesiii

Alumni, Volunteers

Recipients of goods and services Customers, Ratepayers, Taxpayers

Review or oversight Government regulators, Analysts and

advisors, Regulatory agencies, Accrediting agencies, Watchdog

organisations

Resource providers Suppliers of finance, Members, Donorsii,

Creditors, Suppliers of goods and services, Government funders, Non-

government suppliers of grants, Sponsors, Partners

Recipients of goods and services Beneficiaries

Management and governing bodies Board members, Internal management, Advisory committee members, Internal

elected officials

Other Auditors, Related bodies, Other like

entities



Figure 3 Research findings compared to AASB Framework

Preparers agree are usersi


Use

rs id

entif

ied

in A

ASB

Use

rs n

ot id

entif

ied

in A

ASB


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.

Employeesii Customers

Trade unions Community/general public

Suppliers of finance Creditors

Suppliers of goods and services Government funders

Government regulators Analysts and advisors Regulatory agencies

Alumni Volunteers Ratepayers Taxpayers

Parliamentarians Media

Special interest groups Employer groups Religious bodies

Professional bodies

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



Figure 4 Research findings compared to IASB Conceptual Framework

Preparers agree are users


Use

rs id

entif

ied

in IA

SB

Use

rs n

ot id

entif

ied

in IA

SB


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.

Suppliers of finance, Creditorsi

Alumni Volunteers Employeesii Customers Ratepayers Taxpayers

Community/general public Religious bodies

Professional bodies Parliamentarians, Media Special interest groups

Employer groups Trade unions

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

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