31/1/07

‘Sector Bending’ and Conceptual Challenges in the Financial Reporting of Early Childhood Education Centres

Paper submitted to the Accounting and Finance Association of Australia and New Zealand,

Brisbane, July 2007

Carolyn Corderya and Gwyn Narrawayb

aVictoria University of Wellington and bThe Open Polytechnic of New Zealand

Address for contact: Carolyn.Cordery@vuw.ac.nz

Fax: 64 4 463 5076

Telephone: 64 4 463 5761

Postal Address: School of Accounting and Commercial Law, Victoria University of Wellington, P O Box 600, Wellington, New Zealand.

Key words: conceptual framework, standard setting, not-for-profit.

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‘Sector Bending’ and Conceptual Challenges in the Financial Reporting of Early Childhood Education Centres

Abstract

In July 2006, the International Accounting Standards Board (IASB) and the Financial

Accounting Standards Board (FASB) issued a discussion document, Preliminary Views

on an Improved Conceptual Framework for Financial Reporting (Preliminary Views)

recommending that financial reporting have a singular objective: decision usefulness

(IASB, 2006). It is the objective of this paper to make an academic case for a

reconsideration of the IASB and FASB’s Preliminary Views on the objective for financial

reporting, specifically in light of the myriad profit-oriented and not-for-profit entities that

contract with Government to provide social services. The paper uses an example of the

early childhood education sector in New Zealand to show that the manner in which these

entities deliver care blurs the lines between sectors and brings demands from users for

accountability as an objective of financial reporting. It is suggested that it inadvisable for

the IASB and FASB to leave their consideration of this second objective of financial

reporting until the final phase of their project.

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‘Sector Bending’ and Conceptual Challenges in the Financial Reporting of Early Childhood Education Centres

1. Introduction

In July 2006, the International Accounting Standards Board (IASB) and the Financial

Accounting Standards Board (FASB) issued a discussion document as their Preliminary

Views on an Improved Conceptual Framework for Financial Reporting (Preliminary

Views) (IASB, 2006). It is part of an eight-phase process to consider aspects of a

conceptual framework for converged standards setting. The first phase (Preliminary

Views) discussed the objectives of financial reporting and the qualitative characteristics

of financial reporting information that would meet one objective, that of decision

usefulness.

Concurrent with the release of Preliminary Views, was a report from a monitoring group

comprising chairs and senior staff members of the standard-setting bodies of Australia,

Canada, New Zealand and the United Kingdom on the application of the conceptual

framework as it would apply to not-for-profit entities in both the private and public

sectors (Simpkins, 2006). This report argued that financial reporting needed to include an

objective of accountability or stewardship, especially for not-for-profit entities. It was

noted by the IASB that these bodies’ concerns are to be addressed at phase eight of the

project, when the role of the conceptual framework as a basis for not-for-profit

accounting standards will be defined. However, the arguments presented by that report

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and the dissenting views of Board members provided in Preliminary Views, were taken

up in many of the 178 submissions to the IASB in November 2006 (Comment Letters

(2006).

It is the objective of this paper to make an academic case for a reconsideration of the

IASB and FASB Preliminary Views on the objective of financial reporting, not only to

cover not-for-profit entities, but also the myriad profit-oriented entities that contract with

Government to provide social services. In business areas such as aged care, early child

care and health care, listed companies provide services alongside not-for-profit concerns.1

It is the mix of profit-oriented and not-for-profit entities in these business areas that blur

the lines between the sectors, strongly suggesting a role for accountability as an objective

of financial reporting and therefore making it inadvisable for the IASB and FASB to

leave their consideration of this second objective of financial reporting until the final

phase of their project.

This paper provides a synopsis of Preliminary Views and its argument for standards

setting to focus on decision usefulness and particular users. Against this argument are the

arguments provided by academic literature, and backed by submissions, for the

consideration of a wider range of users and a dual objective for financial reporting. It is

1 For example, ABC Learning Centres Ltd, which is the world’s largest listed childcare provider, with a market capitalization of AU$2.5 bn; Kidicorp Group Limited, the largest listed childcare provider in New Zealand with a market capitalization of NZ$35m, and Ryman Healthcare Ltd in the aged care market with a market capitalization of NZ$1.0 bn.

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the role of the following section to show that those against the Preliminary Views are not

just saying “We don’t like the answer” (Wyatt, 1990) but that they are genuinely

concerned at the lack of transparency that may result from this pathway if it is followed.

Secondly, the paper will consider one particular social service, that of early childhood

education, to show that the manner in which it is funded in New Zealand affects the

objective of financial reporting by these early childhood education centres. Evidence

from this sector will support the authors’ claims that accountability or stewardship should

continue to be an important objective of financial reporting, alongside decision

usefulness, for a number of private sector entities so that taxpayer funds are used to

increase social capital, rather than being misapplied by providing a surplus to profiteers.

2. Financial Reporting

2.1 Conceptual Frameworks

Financial reporting standards assist resource providers to make more informed

evaluations on the accountability of management delegated to use those resources

(Brown, 1990). Brown also reminds us that financial reporting standards ensure public

confidence through increased credibility of financial statements. When common financial

reporting standards apply across a number of jurisdictions, users can more readily

compare information, preparers’ costs will decrease and the cost of capital will further

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decrease (Whittington, 2005). In this respect, the endorsement of the IASB by IOSCO

(the international organisation of securities regulators) in 2000 cemented the IASB as an

international standard setter for listed entities. However, the signatories to the IASB’s

standards did not include the United States (US) and the IOSCO endorsement required

that the IASB and US standards setters (the FASB) seek opportunities for harmonisation.

This led to the Norwalk agreement of 2002 (Whittington, 2005) and a memorandum of

understanding in 2006. Armed with the dual aims of convergence with the FASB and

leadership in standards setting, the IASB advanced a joint conceptual framework project

beginning with the discussion document Preliminary Views (IASB, 2006).

Conceptual frameworks have been advanced as a means to resolve differences of opinion

about the financial measurement, recording and disclosure of transactions and events.

When there is an agreed understanding of the purpose or objective of financial

accounting, it is more likely that consistent and logical financial reporting standards will

be developed (Peirson & Ramsay, 2003). Preparers and users may also assess standards

developed from such a framework and hold standards-setting boards accountable for their

decisions in respect of those standards. These frameworks can also improve

communication between standards setters, users and preparers and will be important

when a Board is endeavouring to show leadership: a stated aim of the IASB (Whittington,

2005). The development of conceptual frameworks is not without critics who argue that

they assume a technical reality that does not exist (Macve, 2006; Page & Spira, 1999).

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However, in defining objectives of financial reporting, Preliminary Views will affect

future financial reporting standards and therefore requires wide engagement.

2.2 Users of financial reporting

The initial phase of the IASB/FASB project considered the objective of financial

reporting so that the qualitative characteristics of financial reporting could be outlined. In

respect of objectives for financial reporting, Statements of Concepts in Australia (1995),

Canada (1991), New Zealand (1993) and the United Kingdom (1992) have recognised

two objectives for general purpose financial reports. These objectives link to the

underlying reasons for financial reporting standards and end-users. General purpose

financial reports may provide information useful in making resource allocation decisions

to users who have that freedom. A wider cross-section of users will, however, use

financial reports as one element in evaluating managers’ decisions and the manner in

which accountability is discharged.

In its Framework of 1989, the IASB was concerned with a wide range of users and

developing standards that would enable financial statements to be directed towards the

‘common information needs’ of this range of users. This would include accountability

and decision usefulness. A wider set of users is potentially interested in financial

statements from entities receiving significant public funds and not-for-profit entities

delivering goods and services with social aims. Although some of these entities will have

defined owners, public sector and not-for-profit trusts and societies will not have an

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equity stake that can be sold or transferred. The role of stewardship by managers of these

entities can be evaluated through budgets and comparisons of actual performance against

those budgets (Simpkins, 2006). Information about service performance against

objectives can be provided in non-financial reports. They are mandatory for public sector

organisations in New Zealand (Public Finance Act (2004)). No such requirement exists

for entities independent of government.

One reason for dual objectives of financial reporting was related to the push for sector

neutrality or, more precisely, transaction neutrality, which aimed for similar transactions

to be reported in the same way. Standards built from common objectives would assist

users of general purpose financial reports to understand reports prepared by profit-

oriented entities and public or private not-for-profit entities. Transaction neutrality suited

the New Public Management reformers, whose efforts were evidenced in changed

reporting lines of government departments as some departments were privatised and

others commercialised. Further, as governments increasingly contracted with private

entities, and these entities became more dependent on that funding, distinctions between

pure public sector and pure private sector blurred leading to a growing ‘grey area’. James

(2004) called this ‘sector bending’.

Conversely, the FASB has had separate financial reporting standards so that public and

private not-for-profit sector reporting is differentiated from that of profit-oriented entities.

IOSCO’s endorsement of the IASB relies on the IASB’s progressing convergence

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projects with the FASB on financial reporting standards for profit-oriented entities. The

standards aim at providing information for equity investors, creditors and regulatory

bodies. It is argued in the Preliminary Views that equity investors are the proxy for those

users and that decision-useful information provides information useful to assess the

future cash flows of an entity (IASB, 2006). This information will be found primarily in

Statements of Cash Flows and the valuation of assets and liabilities at fair value prices.

Standards setters have increasingly relied on users’ needs as they have developed

conceptual frameworks. However, Young (2006) suggested there is “limited knowledge

about the information needs and decision processes of actual users of financial

statements”. In respect of the Preliminary Views, which defined a narrow set of users as

paramount (equity investors), it was a short step for the standard setters to conclude that

decision usefulness was the objective of financial reporting. The authors contend that

users of financial reports from private sector, profit-oriented entities deriving significant

funding from public money will demand reporting on accountability as a joint objective

of financial reporting and that these users cover a wider span than merely equity

investors. An example of one such business sector is New Zealand’s early childhood

education sector, where listed companies are thriving alongside not-for-profit concerns

and the government and parents as users of the services are significant funders. The

following section describes this sector and explores what users’ information needs may

be in respect of financial statements.

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3.0 The Early Childhood Education Sector

3.1 Background and users

As in other countries, the demand for early childhood education centres has grown

rapidly in New Zealand. The annual number of children having access to care has risen

from 110,000 in 1990, when Government began bulk funding of licensed centres, to

163,000 in 2004 (Clough & de Raad, 2005). The sector is diverse. Statistics show half of

all centres are variously kindergartens, playcentres, Te Kohanga Reo,2 licensed home-

based care facilities and Correspondence School. Of these, only the Correspondence

School (with less than 1,000 enrolments) is government-owned. The remaining centres

(around 1,800 centres accounting for over 81,000 enrolments) are also outside the public

sector. They are education and care centres providing sessional or full-day services and

they have diverse ownership, being almost evenly split between profit-oriented and not-

for-profit concerns (as shown in Table 1). This segment of the sector has grown 140

percent since 1990 and it is the objective of the financial reporting of these centres on

which this study concentrates.

2 Te Köhanga Reo is a total immersion te reo Mäori (Maori language) whänau (family) programme for mokopuna (young children) from birth to six years of age raised within their whänau Mäori and in which the language of communication is Mäori.

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Table 1: Proportion of licensed education and care providers by organisational form as at 1 July 2001 (adapted from Clough & de Raad, 2005)

Owned by Description % of centres

Private interests

Characterised by a large number of individuals (predominantly women) owning one, or a small number of centres, in recent years small, locally based chains and larger private companies have entered the marketplace.

51%

Incorporated society

These ownership forms are typically taken for centres that are community-owned and operated by a management board. The trust form may also be used by private individuals or groups to reduce liability.

24%

Trust 19%

Public body This covers the centres provided by public sector organisations to their staff

5%

Other Not described 1%

Demand for quality early childhood education has grown for two main reasons. Firstly, it

can improve children’s educational outcomes and lifetime earning prospects. Secondly,

when childcare opportunities are provided to parents, they are able to participate in

employment, education and/or training, thus potentially improving their families’ welfare

(Clough & de Raad, 2005). Yet the quality of early childhood education is hard to judge,

potentially leading to contract failure (Hansmann, 1987). The prime beneficiaries of the

service (small children) are not the purchasers of the service, resulting in information

asymmetry, that avaricious providers may use to reduce quality to increase profits.

Further, research shows that in well-developed markets, not-for-profit centres “may have

an advantage in providing difficult-to-observe quality that benefits children, because they

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do not have an incentive conflict” (Cleveland & Krashinsky, 2005, p. 1). Accordingly,

many parents will prefer services provided by not-for-profit organisations that provide

assurances of quality and “value for money” (Hayes, 1996).

When not-for-profit providers are in scarce supply, public choice theory would suggest

that governments will regulate for quality in early childhood education centres. In New

Zealand, the Education Act (1989) and Education (Early Childhood Centres) Regulations

(1998) established core principles that resulted in the licensing of centres being licensed

and, more recently, required caregivers to be registered. Further, Government has shown a

marked preference for not-for-profit organisations as providers of choice (Clough & de

Raad, 2005; Mitchell, 2002).

However, market failure and access issues mean that not all families can have their early

childhood education demands met by privately funded activities, thus requiring

government funding intervention (Cleveland & Krashinsky, 2003; Wallis & Dollery,

1999). As noted, the New Zealand Government bulk funding of early childhood

education began in 1990 to advance children’s social benefits and to encourage higher

participation in employment by parents. The outcomes of successful early childhood

education will also affect communities when the children become socially adjusted

individuals. Government funding recognises that wider societal benefits may include better

population health, less crime and social capital. When centres provide networks of inter-

dependent family units, the social capital benefits of social cohesion and greater civic

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engagement improve communities (Putnam, 1995). These benefits may not be taken into

account by parents when making decisions about child care services (Clough & de Raad,

2005). Government therefore augments parent fee contributions to reduce the likelihood

that high costs will drive parents to make choices that are less than optimum to society.

There are a number of users who are likely to be interested in the financial statements of

the centres including parents, government, staff, the tax-paying public and equity investors,

as detailed below.

The two main funders to early childhood education centres in New Zealand are parents,

who currently fund approximately 60 per cent of care and government, which funds the

remaining 40 per cent (Clough & de Raad, 2005).3 Parents as prime users of the centres’

services are best placed to assess the worth of the services and call for accountability for

their funding input. Their decision to use the service is based on the quality of care, as

well as the cost of care4, and a concern that their funds are used to provide quality care

for their child, rather than to build equity to provide for future generations of children

unrelated to them. Therefore, they will be interested in how fees have been spent on

equipment and staff to meet these goals, rather than future cash flows.

3 Compared internationally, these parent costs are very high. Parent charges in Europe average 25%, in Canada, they range between 34% and 82% of costs, making this country more similar to New Zealand (OECD – early childhood education and care policy: Canada country note October 2004. Retrieved January 16, 2007 from http://www.hrsdc.gc.ca/en/cs/sp/sdc/socpol /publications/reports/2004-002619/page00.shtml).

4 When the cost of care becomes prohibitive, parents will choose not to work, or use informal care arrangements with family and neighbours (Adema, 2006).

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Government, currently the minority funder in New Zealand, is driven by aims to provide

quality, equitable early childhood education that is available to all families across all

income groups. As a result, funding models are complicated. They involve parents’

income, children’s ages and centre attributes in respect of quality. Government seeks to

fund reasonable costs for quality care to meet its education priorities (Mallard, 2003).

These costs will include those incurred for appropriate, well-maintained premises that

comply with regulations. In addition, not-for-profit centres can access small start-up

grants to meet government’s ancillary aim to build social capital.

Conditional upon this funding by both government and parents, the Education Act (1989)

outlines an expectation for these centres to be accountable to funders. Centres are to

report annually to both the Ministry and community (including parents and staff) on how

the subsidies provided by the Ministry of Education have been spent. All centres must

provide audited annual accounts to the Ministry in the June that is not less than 6 months

following the centre’s year-end.5 Reporting to parents and staff may be through annual

financial statements, newsletters or other notices, but must be provided within 90 days of

the end of the centre’s financial year. The Statement of Desirable Objectives and

Practices (Ministry of Education, 1996, 11c), which underpins government funding,

requires management of these centres to implement “financial management policies

which include budgeting to ensure that policies and objectives are met”. There is no

requirement to report publicly against these budgets as a performance check, nor for

5 This means, for Centres with a March year end, that the return to the Ministry does not need to be provided until June in the following calendar year.

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centres to provide Statements of Service Performance; however, the Education Review

Office (ERO) makes regular (approximately 3-yearly) audits of centres as detailed further

below.

In order to improve the take-up of early childhood education services, the New Zealand

Government has offered further funding from July 2007.6 This policy promises full

funding for 20 hours of free early childhood education centre attendance for all 3- and 4-

year-olds.7 Centres’ treatments of expenses and revenues will be of special interest to

policy makers deciding on subsidy funding levels. Current indicators are that the policy

will specifically ignore the costs of renting or establishing new property, perhaps to

signal a reticence to provide public money to fund future generational equity in private

sector providers. Indications are, however, that even not-for-profit organisations will

struggle to cover reasonable costs when 20 hours free become a ‘loss leader’ (Hill, 2006;

Stewart, 2006)

Staff members also have an interest in the financial statements of a centre for example to

use them for wage negotiations (Brown, 1990). The early childhood education sector has

low wage rates, and staff wage negotiations are further affected by increased qualification

6 Despite the fact that participation in “formal early childhood services is almost universal among three- and four-year-olds (largely in private centres or kindergartens), while participation among zero-, one- and two- year olds almost doubled over the last 15 years. In 2004, about 60% of two-year-olds attended a formal care and education service” (Adema, 2006, p. 56).

7 Current policy does not allow centres to make additional charges to parents for their use of these hours. However centres may ask for donations (to top up under-funding by Government).

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requirements for teacher registration, which may or may not be funded by their

employer.8 Staff members also provide volunteer input to centres, both in not-for-profit

and profit-oriented centres (Narraway & Cordery, 2005; Rush & Downie, 2006), making

the impact of this volunteering of interest to the staff volunteers.

In relation to public funding, the tax-paying public may also join the wide range of users

with “common information needs”, especially in respect of centre accountability for

public funding. As a policy decision of the elected government, there is recognition from

the taxpaying public that building intellectual capital towards a knowledge economy is

important to this country, as also is the provision of child care for working parents. Yet

Brown (1990) suggested (and there is more current anecdotal evidence that supports the

suggestion) that policy-makers are concerned that government funding of private sector

entities will be put under the spotlight when taxpayers view them as highly successful

businesses making profits from the public purse. As centre funding is progressively from

a wider reach of users, the need for accountability grows (Weinstein, 1978). These users

will be watching centres’ stewardship of public funds for current generations of early

childhood education attendees.

In contrast listed companies’ investors are interested in financial reporting focused on

decision usefulness and the ability of an organisation to generate future cash flows. This

8 From December 2007 centre funding from Government will be dependent on registration of 50% of centre staff. This figure rises to 100% by 2012 (Ministry of Education, 2002).

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is despite the fact that corporate collapses such as Enron and WorldCom and continuous

information needs show us that accounting is a poor predictor of future performance. Yet,

the rapid rise of listed child care centre’s share prices suggests that some funding is

lining the pockets of investors, rather than being used for the greater public good and that

this industry is providing good returns. Mitchell (2002) notes an advertisement in the

New Zealand Herald in 1998. It read, “Childcare. An industry which will return you 20

percent plus on your investment”. Analysis of ABC Learning Centres Ltd shows a robust

business with a share price that has climbed from $2.64 in June 2002 to $6.40 in June

2005 (on an adjusted basis). Revenue increased by 150 per cent in the June 2006 financial

year, owing to an aggressive acquisitions policy.

3.2 Addressing user’s concerns

A review of the early childhood education literature confirmed that quality and funding

of early childhood education is a pressing issue (for example Adema, 2006; Cleveland &

Krashinsky, 2003, 2005; Clough & de Raad, 2005; Ministry of Education, 2002;

Mitchell, 2002; Rush & Downie, 2006). We also interviewed a small number of

managers of private centres and not-for-profit centres in New Zealand to assess the

information needs of users and the objectives of general purpose financial statements

provided to parents, government, staff, the tax-paying public and investors.

As a significant funder of early childhood education centres in New Zealand, the

government commissions intermittent ERO reports, which are also available to parents

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and the public. These reports focus on three consistent strands and

interlocking quality demands, as shown in Appendix 1 and detailed

below:

quality of education, dealing with the quality of the centre’s pedagogical

programme as a whole

operation of the service, relating to the effectiveness of management’s setting and

achieving centre objectives, keeping parents informed and meeting good

employer obligations

compliance issues, using the centre’s self-audit of their compliance with key

legislation, including: the Education Act (1989), Education (Early

Childhood Centres) Regulations (1998) and the Public Finance

Act (1989).9

The two main foci for this evaluation of the early childhood education centres are

accountability and educational improvement. Whilst an improvement focus encourages

centres to develop quality through feedback, evaluation for accountability purposes

involves reporting on goals and standards (including checking on compliance matters)

(Education Review Office (2006)). It is assumed that the issues covered by these audits

are of interest to a wide range of users when they deal with care of children and

9 Compliance is also required with the Building Act (2004), Education (Registration of Early Childhood Services Teachers) Regulations (2004), Employment Relations Act (2000), Fire Safety and Evacuation of Buildings Regulations (1992), Health (Immunisation) Regulations (1995), Health and Safety in Employment Act (1992), Health and Safety in Employment Regulations (1995), Human Rights Act (1993), New Zealand Teachers Council (Making Rules and Complaints) Rules (2004), Privacy Act (1993), Protected Disclosures Act (2000), Resource Management Act (1991) and the Smoke-Free Environments Act (1990).

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educational advancement, legal compliance, and the setting and achievement of

objectives. Quality of care is consistently checked by the requirement that staff be

qualified and undertake continuing professional development to ensure quality of care.

Parents are able to address the quality of care that they can observe but, as already noted,

it is very difficult for small children to report the quality of care to absent parents. All

centres market themselves as quality providers, and parents depend on ERO reports and

reputation, as well as their personal assessment of Centre quality.

However, centres are less likely to provide information about objective setting and

reporting against those objectives. As noted, Statements of Service Performance, ideally

suited to non-financial reporting on objectives and performance (Thompson, 1995), are

not required of early childhood education centres. Thus, a valuable opportunity to meet

users’ demands for accountability is lost and can be contrasted against the requirements

for the public sector to produce Statements of Service Performance to demonstrate

accountability. Despite receiving significant government funding beneficial to third

parties, no centres provided Statements of Service Performance with their annual

accounts.

In addition, financial accounts are not readily available to parents or the public

(Education Review Office, 1991; Parent Advocacy Council, 1991; Rush & Downie,

2006). Accounts for publicly listed profit-oriented centres are available, but unlisted

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Centres are reluctant to provide this information. Conversely, accounts for not-for-profit

Centres were available to the researchers either from the centres themselves, or from the

Incorporated Societies Registrar. Without the ready availability of accounting reports, it

is difficult to refute concern that public funding is not necessarily spent on reducing

parent fees or enhancing staffing and resources (Parent Advocacy Council, 1991; Rush &

Downie, 2006).

Legal compliance seems high in these centres. ABC Learning Centre staff reported to

Rush and Downie (2006) that they spent considerable time on reporting and

administrative requirements and that, at times, this prevented them from supplying the

quality of care and attention they believed children needed. Some of these teachers took

work home so that they could provide a higher quality of care than they were paid to

provide and reported that they were angry at having to give their own time to a profit-

oriented company. Whilst Narraway & Cordery (2005) found similar activities occurring

in not-for-profit centres, staff members in those centres were more likely to accept this

voluntary commitment as part of the ethos of the centre, where volunteering reduced

parent fees and contributed to the family atmosphere. The effect in profit-oriented centres

was that staff members felt that their time, and that of their young charges, was being

commodified instead of valued.

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In our study and that of Rush and Downie (2006), who interviewed staff of ABC

Learning Centres in Australia in respect of business performance, we found that the

issues required by Government in their intermittent audits may not be available in all

centres. Rush and Downie (2006) reported on a culture of form over substance, whereby

an impending audit meant a centre received temporary new equipment to impress the

assessors. We were unable to obtain anyone willing to go on record to report this practice

in profit-oriented centres in New Zealand, but were able to obtain anecdotal evidence that

this did occur in centres that were part of a group of centres owned by a single entity, so

that accreditation was successful.

4.0 Conclusion

Public funding is provided to both profit-oriented and not-for-profit centres in the early

childhood education sector. Research shows that profit-oriented centres are less likely to

provide the quality of service that not-for-profit centres supply. One answer is to restrict

public funding to not-for-profit entities (Mitchell, 2002); however, the New Zealand

Government has introduced quality regulations as an aspect of control. Centres are also

required to provide financial and non-financial reports.

The potential users of financial reports of early childhood education centres are parents,

Government, staff, the tax-paying public and, in the case of profit-oriented centres, equity

investors. These users are concerned to evaluate the quality of child care, and the quality

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of management in setting and achieving objectives and in complying with legislation. In

respect of non-financial reporting, this can be achieved through Statements of Service

Performance and financial reporting that has a stewardship or accountability perspective.

Budgets can establish funding objectives to compare with actual performance. Users can

assess how current income that benefits the current generation of children attending the

Centre has been applied to expenditure.

Equity investors receive significant gains on their investments when profit-oriented

centres are able to indicate positive cash flows in a growing industry. The experience

with one early childcare provider is that this is achieved through rigid application to

legislation and cost containment. Users are able to make limited assessments in respect of

their equity investments when decision-useful information is based on future cash flows.

Whilst the authors recognise that differences between the sectors sometimes need to be

reflected by specific financial reporting standards, this example from the early childhood

education sector in New Zealand shows that when government is a significant funder,

transaction neutrality demands general purpose financial reporting to recognise both

decision-usefulness and accountability objectives. The output of ‘sector bending’ (James,

2004) would suggest that the Preliminary Views (IASB, 2006) are myopic in attributing

one objective of financial reporting to a single user.

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APPENDIX ONE: CHAIN OF QUALITY

Downloaded from the internet, 23rd January 2006 from: “Chain of Quality” http://www.ero.govt.nz/EdRevInfo/ECedrevs/ECchain.doc

26

Clear philosophy

Effective

management

High quality

educators

Professional

leadership

High quality

programmes,

environment,

interactions

Positive

outcomes for

children

Involved Families and Communities

27