Spenders or Savers? An Examination of the Reserves of Australian NGOs

Not‐for‐profit (NFP) organisations experience a tension between societal perceptions about maximising mission expenditure on one hand, and their need to accumulate reserves to ensure longer term financial sustainability on the other. While studies have examined the level of reserves in UK and US contexts, there is little Australian research or guidance about what constitutes an appropriate level of NFP reserves. This paper examines the levels and implications of the reserves of 52 Australian NFP non‐governmental organisations (NGOs) over eight years, identifying two groups. Spenders, with less than three months of expenditure in reserve, were more financially vulnerable, had higher levels of debt, yet spent a relatively greater proportion of their revenue on mission‐related activities than savers. Savers, with more than three months’ reserves, demonstrated a greater proportion of revenue from fundraising, proportionately greater equity levels, and higher returns on assets. Providing unique insights into the financial reserves of Australian NGOs, this empirical study contributes to existing NFP literature on reserves, which to date has focused primarily on US and UK contexts. Further, we propose that by developing, monitoring and communicating their reserves’ strategies, NFP boards and managers will be able to improve their organisations’ financial sustainability and manage societal perceptions about reserves.     

Exploring attitudes to financial reporting in the Australian not‐for‐profit sector

The current level of satisfaction among different stakeholders about the current approaches and practises of financial reporting of not‐for‐profit (NFP) entities is underexplored ( Christensen and Mohr, 2003 ; Lee, 2004 ; Gray et al., 2006 ; Parker, 2007 ). This paper uses content analysis to examine submissions to the 2008 Australian Senate Economics Standing Committee for its inquiry into the disclosure regimes of charities and NFP organisations, which aimed to explore attitudes about financial reporting in the NFP sector. Financial reporting is viewed as an important part of accountability, but the sector identifies deficiencies in the current regime in terms of consistency, efficiency and transparency. Respondents to this inquiry believed that a sector‐specific accounting standard was important. Financial reporting standards, regulations and legal structures should be uniform across the entire sector, but with some variation allowed for smaller NFPs. The cost of complying with standards was a significant issue for smaller NFPs.     

Defining the Reporting Entity in the Not‐for‐profit Public Sector: Implementation Issues Associated with the Control Test

This paper reports the main findings of a research project carried out on behalf of the Australian Accounting Standards Board (AASB) and the New Zealand Financial Reporting Standards Board. The purpose of the research is to inform standard setters about implementation issues that had been encountered in the not‐for‐profit (NFP) public sector when applying the control concept in AASB 127, Consolidated and Separate Financial Statements. The intention is to use the findings to inform proposed implementation guidance for AASB 10, Consolidated Financial Statements. Data were collected via a literature review and meetings with various NFP public sector constituents. Identified issues were either conceptual in nature (for example, who are the relevant users of NFP public sector general purpose financial statements and what are their needs?) or related to implementation concerns (for example, is the power exerted by one NFP public sector entity over another of an ‘ownership’ or a ‘regulatory’ form?). The findings give rise to several suggested actions that standard setters could take in providing useful guidance to NFP public sector constituents.     

Accountability Beyond the Headlines: Why Not‐for‐profit Organisations Need to Communicate Their Own Expenditure Stories

This paper analyses the expenditure patterns of 97 Australian international aid and development organisations, and examines the extent to which they disclose information about their expenditure in order to discharge their accountability. Not‐for‐profit (NFP) expenditure attracts media attention, with perceptions of excessive costs potentially damaging stakeholder trust in NFP organisations. This makes it important for organisations to be proactive in communicating their expenditure stories to stakeholders, rather than being judged on their performance by standardised expenditure metrics. By highlighting what it costs to ensure longer‐term operational capability, NFP organisations will contribute to the discharge of their financial accountability and play a part in educating all stakeholders about the dangers of relying on a single metric.     

Australian not‐for‐profit sector views on the conceptual framework,accounting standards and accounting information

In this paper, we examine the conceptual framework, accounting standards and accounting information relevant to the not‐for‐profit (NFP) sector. Based on the responses of 242 Australian NFP managers, we find support for the inclusion of accountability in the conceptual framework, and for a common set of accounting standards across NFP and for‐profit sectors with additional standards or paragraphs to recognise NFP specific issues. Respondents also rated information within general‐purpose financial reports to be useful for decision making within their organisations. We offer suggestions as to what our findings mean for the development of accounting standards for the NFP sector.     

Voluntary Disclosures as a Mechanism for Defining Entity Status in Australian Not‐for‐Profit Organisations

This study examines managerial efforts to portray an entity's not‐for‐profit (NFP) status based on voluntary disclosure practices. The annual report text of 61 NFPs are analysed in accordance with Salamon and Anheier's (1997) NFP definitional framework. Results indicate a predominant application of the structural‐operational definition. Furthermore, the ‘organised’ attribute of this definition prevails over the ‘non‐profit‐distributing’ criterion that has been advocated by various parties. Standard‐setting bodies may want to consider: (1) NFP management perspectives in any revised NFP definition; and (2) greater clarity in conceptual framework and standard‐setting arrangements to improve overall transparency in NFP reporting practices.     

Estimating and validating a firm‐year‐specific measure of conservatism: Australian evidence

We provide new evidence on the asymmetric timeliness with which economic gains and losses are recognized in Australian financial reporting (i.e. conservatism), as well as some of the factors associated with variation in conservatism. We first derive, and then estimate and subsequently validate, a firm‐year‐specific measure of conservatism (C_Score) in the manner suggested by Khan and Watts (2007) . Our results indicate that conservatism is a pervasive feature of the Australian financial reporting environment. Conservatism is positively associated with stock return volatility, investment cycle length and prior period conservatism, and it is negatively associated with firm age, firm size and leverage. The results are an encouraging start for research into the causes and consequences of conservatism in Australian financial reporting.     

Communicating the Impact of the Global Financial Crisis in Annual Reports: A Study of Australian NGOs

This paper analyses the extent and nature of communication by Australian non‐governmental organisations (NGOs) about the impact of the global financial crisis (GFC). NGOs need to balance their communications about financial need against news that could potentially reflect negatively on stakeholders’ impressions of their worthiness to receive funding. Recognising this, we content analyse the annual report narratives of 10 Australian NGOs for information about the impact of the GFC and their use of impression management (IM) techniques. All NGOs in the study experienced some financial impact from the GFC, with nine referring to it in their annual report narratives. However, the information was very limited, indicating a missed opportunity to communicate meaningfully with stakeholders. Further, of the nine NGOs providing disclosures about the GFC's impact, eight used at least one IM technique, indicating a lack of transparency that has potentially negative implications for trust‐building with their stakeholders. This study focuses on a limited number of NGOs, but further research could broaden this approach to examine organisations in the broader not‐for‐profit (NFP) sector, other modes of communication or communication patterns at other times of crisis, and currently, in an era of austerity.     

Corporate Commitment to Sustainability – Is it All Hot Air? An Australian Review of the Linkage between Executive Pay and Sustainable Performance

Across time, companies have increasingly made public commitments to sustainable development and to reducing their impacts on climate change. Management remuneration plans (MRPs) are a key mechanism to motivate managers to achieve corporate goals. We review the MRPs negotiated with key management personnel in a sample of large Australian carbon‐intensive companies. Our results show that, as in past decades, the companies in our sample have MRPs in place that continue to fixate on financial performance. We argue that this provides evidence of a disconnection, or ‘decoupling’, between the sustainability‐related rhetoric of the sample companies, and their ‘real’ organisational practices and priorities.     

User Requirements for Not-For-Profit Entity Financial Reporting: An International Comparison

This study investigates the not-for-profit (NFP) external financial reporting regulatory environments of the US, the UK, Canada and New Zealand and compares them with that of Australia. It finds a lack of clarity in the definition of a NFP entity under Australian accounting standards. The study also identifies various types of information that earlier research and the guidance in other countries suggest are useful to the users of NFP entities' financial statements. This information is not currently required under Australian accounting standards.     

User Requirements for Not-For-Profit Entity Financial Reporting: An International Comparison

This study investigates the not-for-profit (NFP) external financial reporting regulatory environments of the US, the UK, Canada and New Zealand and compares them with that of Australia. It finds a lack of clarity in the definition of a NFP entity under Australian accounting standards. The study also identifies various types of information that earlier research and the guidance in other countries suggest are useful to the users of NFP entities' financial statements. This information is not currently required under Australian accounting standards.     

A review of research on regulation changes in the Asia‐Pacific region

In this study, we review the financial research on regulation in the Asia‐Pacific region. We do this by analysing six leading regional accounting and finance journals – Abacus, Accounting & Finance, Australian Accounting Review, Australian Journal of Management, International Review of Finance and the Pacific‐Basin Finance Journal. We identify five main themes of regulation research relating to: (i) banking and financial institutions, (ii) markets and trading, (iii) corporate governance, (iv) disclosure and (v) accounting standard setting. Our paper synthesises the regional literature in these areas and provide some suggestions for future directions.     

Do Board Characteristics Influence Impression Management through Graph Selectivity Around CEO Changes?

Research has shown evidence of impression management through the selective use of graphs in financial reports of Australian firms changing chief executive officer. This paper examines whether boards with characteristics associated with strong corporate governance constrain impression management in the financial reports of Australian firms that change CEOs. Our tests of graph selectivity find that boards with a higher proportion of independent directors appear to be more effective in curbing any potentially opportunistic impression management by new CEOs in the period of their appointment.     

The Use of Performance‐based Remuneration: High versus Low‐growth Firms

This study analyses the CEO remuneration structure and level for 100 Australian‐listed entities. Consistent with expectations, it finds that high‐growth firms pay their CEOs a greater proportion of performance‐based pay, when equity‐based rewards only are considered. High‐growth firms also place greater reliance on market and/or non‐financial performance standards for the award of performance‐based pay. The extent to which performance‐based remuneration is used as a component of CEO pay is positively associated with firm size and growth options. Other potential determinants of performance‐based pay, such as financial performance, are not significantly associated with the use of performance‐based remuneration.     

The Impact of Corporate Governance on Closed‐end Funds

This study uses a large sample of UK‐listed closed‐end funds to examine whether governance has an impact on two indicators of fund performance: the level of fund‐management fees and the discount at which a fund trades. Fees are under the control of the directors, and we find that they are inversely related to fund returns, even after allowing for differences across investment sectors. Fees are, on average, higher if a fund has a large board, few directors from outside the fund‐family, many directors from within the fund‐family, and low ownership by the management company. Discounts for funds are wider if the management company or any blockholder has a significant long‐term stake, suggesting that investors are wary of entrenched management. The results suggest that boards are frequently compromised in their duty to shareholders by their dependence on fund‐management companies.     

Do Not‐For‐Profits Need Their Own Conceptual Framework?

This paper raises the issue of whether not‐for‐profit (NFP) oganisations require a conceptual framework that acknowledges their mission imperative and enables them to discharge their broader accountability. Relying on publicly available documentation and literature, it suggests the current Conceptual Frameworks for the for‐profit and public sectors are inadequate in meeting the accountability needs of NFPs. A NFP‐specific conceptual framework would allow the demonstration of broader NFP‐specific accountability and the formulation of NFP‐appropriate reporting practice, including the provision of financial and non‐financial reporting. The paper thus theoretically challenges existing financial reporting arrangements and invites debate on their future direction.     

Evaluating Constructive Lease Capitalization and Off‐Balance‐Sheet Financing: An Instructional Case with FedEx and UPS

This case illustrates the effects of the proposed new lease standard by the Financial Accounting Standards Board and the International Accounting Standards Board on existing outstanding operating leases. Specifically, the case examines the effects of the proposal that all firms report existing operating leases as capital leases upon the initial adoption of the proposed standard. By applying a constructive capitalization model to two firms who rely on operating leases for financing, FedEx and UPS, we found that both companies would have to record billions of dollars of liabilities that had only appeared in the footnotes of their financial statements under the current lease standards. In addition, the firms would experience a decline in retained earnings and key financial ratios, such as the debt‐to‐equity, return‐on‐assets, and interest coverage ratios, by reporting operating leases as capital leases under the new proposed standard. Furthermore, the magnitude of the lease capitalization impact is much smaller for UPS than for FedEx.     

Research horizons for public and private not‐for‐profit sector reporting: moving the bar in the right direction

The examination of public and private not‐for‐profit sector financial reporting has been a topic of interest on a cyclical basis in Australia over the last 30 years. Traditional topics have included examinations of the intended and unintended consequences of specific standards, the accountability value of financial reports, transaction neutrality, compliance with the accounting standards, and more recently, the prospective implications of new, differently focused reporting standards considering such issues as income measurement and outcomes reporting. With increased recent attention from standard setters and regulators, and greater data availability, the opportunities for undertaking impactful research in these and related areas are increasing. In this paper, we focus on research that has examined the following questions: (i) Which private and public NFPOs lodge financial reports and what is reported; (ii) Who are the users and what are their information needs? (iii) Which private and public NFPs should lodge financial reports and what should be included in them; and (iv) How should the accounting frameworks for NFP sector reporting be set? For each of these issues, we identify the research gaps and opportunities for further research.     

“Non‐Financial” Is a Misnomer,but Doesn't Have to Be a Missed Opportunity

With enterprise values now representing increasing multiples of companies' net book assets, investors are clearly looking beyond financial reporting for enhanced insights and understanding of when and how companies are adding value. This shift includes growing attention to environmental, social, and governance (ESG) information. Although ESG data presents its own unique challenges, dismissing it as “non‐financial” can be misleading. When explicitly linked to a company's long‐term value creation strategy, ESG information can serve as a valuable input to more farsighted financial analysis. Market‐driven initiatives, notably that of the Sustainability Accounting Standards Board (SASB), aim to standardize a subset of business‐critical, industry‐specific sustainability data for investors. Research indicates such approaches can generate positive outcomes not only for providers of financial capital, but for their portfolio companies and markets in general. In illustrating these concepts, the authors explore ESG impacts in three sectors and industries, while examining how access to consistent, comparable, reliable sustainability information in those sectors can augment an analysis of traditional business fundamentals. One example focuses on water management in the Oil & Gas Exploration & Production industry, a major environmental issue where geographic considerations can shed light on company‐specific exposures to cost increases, production disruptions, increased CapEx and R&D spending, as well as the potential for asset write‐downs. In the Food & Beverage sector, health and nutrition concerns are shown to be changing consumer preferences, triggering regulatory action, and reshaping companies' product portfolios—with significant implications for the companies' brand values and ability to compete for market share. Finally, in Aerospace & Defense, lapses in business ethics such as bribery of government officials present a governance challenge that comes with the risk of value‐destroying fines and penalties and, even more significant, associated reductions in revenues.     

Effective derivative hedging and initial public offering long‐run performance

We investigate the role of corporate currency risk management through the use of financial derivatives in influencing the long‐run performance of a sample of Australian resources companies. We find that derivative users generally outperformed nonderivative users in the 5‐year period following listing. Effective derivative users consistently outperformed the nonhedgers. Furthermore, within the population of derivative users, effective derivative users tended to perform better than ineffective hedgers. Our results indicate that effective financial risk management plays a role in long‐run IPO performance.