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General purpose versus special purpose financial statements: not much choice for charities?

In reading this post, please keep its age in mind.

Financial statements, type thereof. You, the CEO or director make the decision; you, the auditor, check this decision; you, the ‘stakeholder’, use the result to make judgements about the organisation. Two types only: general purpose and special purpose.


But general purpose versus special purpose is not the decision. That would make it a choice, and it’s not a choice. The type of financial statements is the result of an assessment of whether the organisation is something called a ‘reporting entity’. Reporting entities have to prepare general purpose statements.


Old hat you say; we’ve been doing this for years. Yes we have, and we have been getting it wrong for years. And due to a lack of enforcement, getting away with it for years.


I’ll give you one example. Does the organisation call for donations on its website? And its annual report includes a special purpose statement? Well, according to the standard-setters, this organisation is then saying that there is something in their governing legislation or rules that means that, on demand, they will prepare a report to answer that donor’s questions about the organisation. That’s the corollary of the definition of ‘general purpose financial statements’:


General purpose financial statements are those intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs[i].


The usual way of making the decision is to assess whether the organisation meets the definition of a ‘reporting entity’:


Reporting entity means an entity in respect of which it is reasonable to expect the existence of users who rely on the entity’s general purpose financial statements for information that will be useful to them for making and evaluating decisions about the allocation of resources….[ii]


So for the organisation calling for donations on its website, doesn’t one end up with the same decision? Donors that could be anywhere in the world; donors mostly having no connection with the organisation other than via the internet – sounds like the epitome of users who have to rely on general purpose statements to me.


If only we could just choose between types of financial statements.


P.S.  Business by The Book exists to provide accounting, audit and governance services, for no fee if necessary, to not-for-profits who are themselves serving those who are the least, last and lost of the world.


[i] AASB 1053 Application of Tiers of Australian Accounting Standards, June 2010, Appendix A, www.aasb.gov.au

[ii] AASB 1053. Appendix A