EXPOSURE DRAFT
Accounting Standard for Local Bodies (ASLB)
Financial Reporting under the Cash Basis of
Accounting
(Last date of comments: June 30, 2014)
Issued by
The Committee on Accounting Standards for Local Bodies
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
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Exposure Draft
Accounting Standard for Local Bodies (ASLB)
`Financial Reporting under the Cash Basis of Accounting'
INVITATION TO COMMENTS
The Committee on Accounting Standards for Local Bodies of the Institute of
Chartered Accountants of India invites comments on any aspect of this Exposure
Draft of Accounting Standard for Local Bodies (ASLB) on `Financial Reporting under
the Cash Basis of Accounting'. Comments are most helpful if they indicate the
specific paragraph or group of paragraphs to which they relate, contain a clear
rationale and, where applicable, provide a suggestion for alternative wording.
Comments should be submitted in writing to the Secretary, Committee on
Accounting Standards for Local Bodies, The Institute of Chartered Accountants of
India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi 110 002,
so as to be received not later than June 30, 2014. Comments can also be sent by e-
mail at caslb@icai.in .
EXPOSURE DRAFT
ACCOUNTING STANDARD FOR LOCAL BODIES: FINANCIAL
REPORTING UNDER THE CASH BASIS OF ACCOUNTING
(This Accounting Standard for Local Bodies is being issued as an interim measure till
all Local Bodies in India shift to accrual basis of accounting. Since this Standard
contains various disclosure requirements relating to assets and liabilities, it would
facilitate transitioning to accrual basis of accounting for the Local Bodies preparing
general purpose financial statements under the cash basis of accounting as per this
Accounting Standard for Local Bodies. The requirements given in this Standard
including presentation requirements relating to cash receipts and cash payments are
in addition to the requirements, if any, prescribed under the law relevant to local
bodies in the context of cash basis of accounting. Wherever the requirement
prescribed by this Standard are in conflict with the requirements prescribed under the
law, the law will prevail.
This Accounting Standard includes paragraphs set in bold italic type and plain type,
which have equal authority. Paragraphs in bold italic type indicate the main
principles. This Accounting Standard should be read in the context of its objectives
and the Preface to the Accounting Standards for Local Bodies to the extent relevant
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for cash basis of accounting1.)
Structure of the Standard
This Standard comprises two parts:
· Part 1 of the Accounting Standard for Local Bodies: Financial Reporting under the
Cash Basis of Accounting will be recommendatory in nature in the initial years for use
by the local bodies. This part will be mandatory for Local Bodies in a state from the
date specified in this regard by the State Government concerned2. It sets out the
requirements which are applicable to all entities preparing general purpose financial
statements under the cash basis of accounting. It defines the cash basis of
accounting, establishes requirements for the disclosure of information in the financial
statements and supporting notes, and deals with a number of specific reporting
issues. After becoming mandatory, the requirements in this part of the Standard must
be complied with by entities which claim to be reporting in accordance with the
Accounting Standard for Local Bodies: Financial Reporting under the Cash Basis of
Accounting.
· Part 2 of the Accounting Standard for Local Bodies: Financial Reporting under the
Cash Basis of Accounting identifies additional accounting policies and disclosures
that an entity is encouraged to adopt to enhance its financial accountability and the
transparency of its financial statements. It includes explanations of alternative
methods of presenting certain information.
1
Attention is specifically drawn to paragraph 4.2 of the `Preface to the Accounting Standards for Local
Bodies', according to which Accounting Standards are intended to apply only to items which are
material.
2
Reference may be made to the paragraph 7.1 of the `Preface to the Accounting Standards for Local
Bodies' providing the discussion on the compliance with the Accounting Standards for Local Bodies.
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FINANCIAL REPORTING UNDER THE CASH BASIS OF ACCOUNTING
CONTENTS
Introduction
Structure of the Standard
Part 1: Requirements
Objective
Paragraphs
1.1 Scope of the Requirements.......................................... 1.1.1 1.1.5
1.2 The Cash Basis .......................................................... 1.2.1 1.2.9
Definitions.................................................................. 1.2.1 1.2.9
Cash Basis of Accounting ..................................... 1.2.2
Cash Equivalents ................................................1.2.3 1.2.5
Cash Controlled by the Reporting Entity ..................1.2.6 1.2.9
1.3 Presentation and Disclosure Requirements.................... 1.3.1 1.3.38
Definitions ..................................................................1.3.1 1.3.3
Financial Statements ................................................... 1.3.4 1.3.11
Information to be Presented in the Statement of Cash
Receipts and Payments ................................................1.3.12 1.3.29
Classification ..................................................... 1.3.17 1.3.17A
Line Items, Headings and Sub-Totals ..................... 1.3.18
Reporting on a Net Basis ..................................... 1.3.19 1.3.23
Payments by Third Parties on Behalf of the Entity ......1.3.24 1.3.29
Accounting Policies and Explanatory Notes........................1.3.30 1.3.38
Structure of the Notes .........................................1.3.30 1.3.31
Selection and Disclosure of Accounting Policies .......1.3.32 1.3.38
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1.4 General Considerations ...............................................1.4.1 1.4.25
Reporting Period ..........................................................1.4.1 1.4.2
Timeliness ..................................................................1.4.4
Authorisation Date ........................................................1.4.5 1.4.6
Information About the Entity ............................................1.4.7 1.4.8
Restrictions on Cash Balances and Access to Borrowings..... 1.4.9 1.4.12
Consistency of Presentation ........................................... 1.4.13 1.4.15
Comparative Information ................................................ 1.4.16 1.4.20
Identification of Financial Statements.................................1.4.21 1.4.25
1.5 Correction of Errors .................................................... 1.5.1 1.5.5
1.6 Consolidated Financial Statements .............................. 1.6.1 1.6.21
Definitions .................................................................. 1.6.1 1.6.4
Economic Entity .................................................. 1.6.2 1.6.4
Scope of Consolidated Financial Statements...................... 1.6.5 1.6.15
Consolidation Procedures .............................................. 1.6.16 1.6.19
Consolidation Disclosures ..............................................1.6.20
Transitional Provisions..... .............................................1.6.21 - 1.6.21B
1.7 Foreign Currency ....................................................... 1.7.1 1.7.8
Definitions................................................................... 1.7.1
Treatment of Foreign Currency Cash Receipts, Payments
and Balances ............................................................. 1.7.2 1.7.8
1.9 Presentation of Budget Information in Financial
Statement...............................................................................1.9.1 1.9.48
Definitions ......................................................... .........1.9.1 1.9.7
Approved Budgets ...............................................1.9.2 1.9.4
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Revised Budget................................................... 1.9.6
Actual Amounts ...................................................1.9.7
Presentation of a Comparison of Budget and Actual
Amounts......................................................................1.9.8 1.9.28
Scope ........................................................................1.9.9 1.9.10
Comparison of Budget and Actual Amounts........................1.9.11 1.9.15
Presentation ............................................................... 1.9.17 1.9.19
Level of Aggregation...................................................... 1.9.20 1.9.22
Changes from Original to Revised Budget.......................... 1.9.23 1.9.24
Comparable Basis ........................................................ 1.9.25 1.9.28
Note Disclosures of Budgetary Basis, Period and Scope....... 1.9.33 1.9.39
Reconciliation of Actual Amounts on a Comparable Basis
and Actual Amounts in the Financial Statements .................1.9.41 1.9.46
1.10 Recipients of External Assistance................................. 1.10.11.10.34
Definitions ..................................................................1.10.11.10.7
External Assistance..............................................1.10.31.10.4
Official Resources................................................1.10.5
External Assistance Agreements ...........................1.10.61.10.7
External Assistance Received ......................................... 1.10.81.10.17
Undrawn External Assistance.......................................... 1.10.181.10.20
Receipt of Goods or Services.......................................... 1.10.211.10.22
Disclosure of Debt Rescheduled or Cancelled .................... 1.10.231.10.24
Disclosure of Non-Compliance with Significant
Terms and Conditions....................................................1.10.251.10.27
Transitional Provisions for Section 1.10..............................1.10.301.10.34
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Appendix 1: Illustration of the Requirements of Part 1 of the Standard
Part 2: Encouraged Additional Disclosures
2.1 Encouraged Additional Disclosures ..............................2.1.1 2.1.63
Definitions .................................................................. 2.1.1 2.1.2
Future Economic Benefits or Service Potential........... 2.1.2
Going Concern ............................................................ 2.1.3 2.1.5
Extraordinary Items ...................................................... 2.1.6 2.1.14
Distinct from Ordinary Activities ..............................2.1.8
Not Expected to Recur in the Foreseeable Future....... 2.1.9
Outside the Control or Influence of the Entity............. 2.1.10
Identifying Extraordinary Items................................ 2.1.11 2.1.14
Administered Transactions ............................................ 2.1.15 2.1.22
"Pass-through" Cash flows ....................................2.1.21
Transfer Payments .............................................. 2.1.22
Disclosure of Major Classes of Cash Flows ........................2.1.23 & 2.1.30
Related Party Disclosures .............................................. 2.1.31 2.1.32
Disclosures of Assets, Liabilities and Comparison with
Budgets .....................................................................2.1.33 2.1.39
Comparison with Budgets ..................................... 2.1.36 2.1.39
Consolidated Financial Statements .................................. 2.1.41 2.1.48
Acquisitions and Disposals of Controlled Entities and
Other Operating Units .......................................... 2.1.44 2.1.48
Joint Ventures.............................................................. 2.1.49 2.1.50
Assistance Received from
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Non-Governmental Organisations (NGOs)..........................2.1.642.1.65
Recipients of External Assistance..................................... 2.1.662.1.93
2.2 Governments and Other Public Sector Entities Intending
to Migrate to the Accrual Basis of Accounting................ 2.2.1 2.2.6
Presentation of the Statement of Cash Receipts
and Payments..............................................................2.2.2
Scope of Consolidated Statements Exclusions from the
Economic Entity .......................................................... 2.2.3 2.2.6
Appendix 2: Illustration of Certain Disclosures Encouraged in
Part 2 of the Standard
Appendix 3: [Refer Appendix A]
Appendix 4: Qualitative Characteristics of Financial Reporting
Appendix 5: Establishing Control of Another Entity for Financial
Reporting Purposes
Appendix A: Comparison with IPSAS on `Financial Reporting under
the Cash Basis of Accounting'
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Exposure Draft
Accounting Standard for Local Bodies
FINANCIAL REPORTING UNDER THE CASH BASIS OF
ACCOUNTING
PART 1: REQUIREMENTS
Part 1 of this Standard sets out the requirements for reporting under the cash basis of
accounting.
The standards, which have been set in bold italic type, should be read in the context
of the commentary paragraphs in this Standard, which are in plain type, and in the
context of the "Preface to the Accounting Standards for Local Bodies."
Objective
The purpose of this Standard is to prescribe the manner in which general purpose
financial statements should be presented under the cash basis of accounting.
Information about the cash receipts, cash payments and cash balances of an entity is
necessary for accountability purposes and provides input useful for assessments of
the ability of the entity to generate adequate cash in the future and the likely sources
and uses of cash. In making and evaluating decisions about the allocation of cash
resources and the sustainability of the entity's activities, users require an
understanding of the timing and certainty of cash receipts and cash payments.
Compliance with the requirements and encouragements of this Standard will enhance
comprehensive and transparent financial reporting of the cash receipts, cash
payments and cash balances of the entity. It will also enhance comparability with the
entity's own financial statements of previous periods and with the financial statements
of other entities which adopt the cash basis of accounting.
1.1 Scope of the Requirements
1.1.1 An entity which prepares and presents financial statements under the
cash basis of accounting, as defined in this Standard, should apply
the requirements of Part 1 of this Standard in the presentation of its
general purpose annual financial statements.
1.1.2 General purpose financial statements are those intended to meet the
needs of users who are not in a position to demand reports tailored to
meet their specific information needs. Users of general purpose financial
statements include taxpayers, members of the legislature, creditors,
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suppliers, the media and employees. General purpose financial statements
include those financial statements that are presented separately or within
another public document such as an annual report.
1.1.3 This Standard applies equally to the general purpose financial statements
of an individual entity and to the consolidated general purpose financial
statements of an economic entity, i.e., a group of entities comprising the
controlling entity and controlled entities. It requires the preparation of a
statement of cash receipts and payments which recognises the cash
controlled by the reporting entity, and the disclosure of accounting policies
and explanatory notes. It also requires that amounts settled on behalf of
the reporting entity by third parties be disclosed on the face of the
statement of cash receipts and payments.
1.1.4 An entity whose financial statements comply with the requirements
of Part 1 of this Standard should disclose that fact. Financial
statements should not be described as complying with this Standard
unless they comply with all the requirements in Part 1 of the
Standard.
1.1.5 This Standard applies to entities described as Local Bodies in the
preface to the Accounting Standards for Local Bodies3.
1.1.6 [Refer Appendix-A]
1.1.7 [Refer Appendix-A]
1.2 The Cash Basis
Definitions
1.2.1 The following terms are used in this Standard with the meaning
specified:
Cash comprises cash on hand, demand deposits and cash
equivalents.
Cash basis means a basis of accounting that recognises transactions
and other events only when cash is received or paid.
Cash equivalents are short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject
to an insignificant risk of changes in value.
Cash flows are inflows and outflows of cash.
3
Refer paragraph 1.3 of the `Preface to the Accounting Standards for Local Bodies'.
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Cash payments are cash outflows.
Cash receipts are cash inflows.
Control of cash arises when the entity can use or otherwise benefit
from the cash in pursuit of its objectives and can exclude or regulate
the access of others to that benefit.
Cash Basis of Accounting
1.2.2 The cash basis of accounting recognises transactions and events only
when cash (including cash equivalents) is received or paid by the entity.
Financial statements prepared under the cash basis provide readers with
information about the sources of cash raised during the period, the
purposes for which cash was used and the cash balances at the reporting
date. The measurement focus in the financial statements is balances of
cash and changes therein. Notes to the financial statements may provide
additional information about liabilities, such as payables and borrowings,
and some non-cash assets, such as receivables, inventories, investments
and property, plant and equipment
Cash Equivalents
1.2.3 Cash equivalents are held for the purpose of meeting short-term cash
commitments rather than for investment or other purposes. For an
investment to qualify as a cash equivalent it must be readily convertible to
a known amount of cash and be subject to an insignificant risk of changes
in value. Therefore, an investment normally qualifies as a cash equivalent
only when it has a short maturity of, say, three months or less from the
date of acquisition. Equity investments are excluded from cash equivalents
unless they are, in substance, cash equivalents.
1.2.4 Bank borrowings are generally considered to give rise to cash inflows.
However, where bank overdrafts which are repayable on demand form an
integral part of an entity's cash management. In these circumstances, bank
overdrafts are included as a component of cash. A characteristic of such
banking arrangements is that the bank balance often fluctuates from being
positive to overdrawn.
1.2.5 Cash flows exclude movements between items that constitute cash
because these components are part of the cash management of an entity
rather than increases or decreases in the cash it controls. Cash
management includes the investment of excess cash on hand in cash
equivalents.
Cash Controlled by the Reporting Entity
1.2.6 Cash is controlled by an entity when the entity can use the cash for the
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achievement of its own objectives or otherwise benefit from the cash and
exclude or regulate the access of others to that benefit. Cash collected by,
or appropriated or granted to, an entity which the entity can use to fund its
operating objectives, acquire capital assets or repay its debt is controlled
by the entity.
1.2.7 Amounts deposited in the bank account of an entity are controlled by that
entity. In some cases, cash which an entity:
a) Collects on behalf of any government (or another entity) such as cesses
collected on behalf of State Government or water charges collected on
behalf of Water Board, is deposited in its own bank account before
transfer to such other government or entity; and
b) Is to transfer to third parties on behalf of any government (or another
entity) is initially deposited in its own bank account prior to transfer to
the authorised recipient.
In these cases, the entity will control the cash for only the period during
which the cash resides in its bank account prior to transfer to any
government controlled bank account, or to third parties. Paragraph 1.4.9
requires the disclosure of cash balances held by an entity at reporting date
that are not available for use by the entity or are subject to external
restrictions. Additional guidance on the treatment of cash flows that an
entity administers on behalf of other entities is included in paragraphs
2.1.15 to 2.1.22 of Part 2 of this Standard.
1.2.8 In some cases, a government will manage the expenditure of its individual
departments and other entities through a centralised treasury function,
often referred to as a "single account" basis. Under these arrangements,
individual departments and entities do not control their own bank accounts.
Rather, government monies are managed by a central entity through a
"single" government account or series of accounts. The central entity will
make payments on behalf of individual departments and entities after
appropriate authorisation and documentation. Consequently, individual
departments and entities do not control the cash that they have been
appropriated or otherwise authorised to expend. In these cases, the
expenditures made by individual departments and entities will be reported
in a separate column headed "treasury account" (or a similarly described
column) in the statement of cash receipts and payments in accordance
with the requirements of paragraph 1.3.24(a).
1.2.9 In some cases, the centralised treasury function will be undertaken by an
entity which controls the bank account(s) from which payments on behalf
of the individual operating departments and other entities are made. In
these cases, transfers to and payments from those bank accounts reflect
cash receipts and payments which the central entity administers on behalf
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of the individual operating departments and other entities. Paragraph
1.3.13 specifies that cash receipts and payments which arise from
transactions the entity administers on behalf of other entities and which are
recognised in the primary financial statements may be reported on a net
basis. Paragraph 1.4.9 requires the disclosure of cash balances held by an
entity at reporting date that are not available for use by the entity or are
subject to external restrictions.
1.3 Presentation and Disclosure Requirements
Definitions
1.3.1 The following terms are used in this Standard with the meanings
specified:
Accounting policies are the specific principles, bases, conventions,
rules and practices adopted by an entity in preparing and presenting
financial statements.
Materiality Information is material if its omission or misstatement
could influence the decisions or assessments of users made on the
basis of the financial statements. Materiality depends on the nature
or size of the item or error judged in the particular circumstances of
omission or misstatement.
Reporting date means the date of the last day of the reporting period
to which financial statements relate.
Economic entity means a group of entities comprising a controlling
entity and one or more controlled entities.
1.3.2 Financial statements result from processing large quantities of transactions
that are structured by being aggregated into groups according to their
nature or function. The final stage in the process of aggregation and
classification is the presentation of condensed and classified data that form
line items either on the face of the financial statements or in the notes. If a
line item is not individually material, it is aggregated with other items either
on the face of the financial statements or in the notes. An item that is not
sufficiently material to warrant separate presentation on the face of the
financial statements may nevertheless be sufficiently material that it should
be presented separately in the notes.
1.3.3 The principle of materiality provides that the specific disclosure
requirements of Accounting Standards for Local Bodies need not be met if
the resulting information is not material.
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Financial Statements
1.3.4 An entity should prepare and present general purpose financial
statements which include the following components:
a) A statement of cash receipts and payments which:
i. Recognises all cash receipts, cash payments and cash balances
controlled by the entity; and
ii. Separately identifies payments made by third parties on behalf of
the entity in accordance with paragraph 1.3.24 of this Standard;
b) Accounting policies and explanatory notes; and
c) When the entity makes publicly available its approved budget, a
comparison of budget and actual amounts either as a separate
additional financial statement or as a budget column in the
statement of cash receipts and payments in accordance with
paragraph 1.9.8 of this Standard.
1.3.5 When an entity elects to disclose information prepared on a different
basis from the cash basis of accounting as defined in this Standard
or otherwise required by paragraphs 1.3.4(a) or 1.3.4(c), such
information should be disclosed in the notes to the financial
statements.
1.3.6 The general purpose financial statements comprises the statement of cash
receipts and payments and other statements that disclose additional
information about the cash receipts, payments and balances controlled by
the entity and accounting policies and notes. In accordance with the
requirements of paragraph 1.3.4(a)(i) above, only cash receipts, cash
payments and cash balances controlled by the reporting entity will be
recognised as such in the statement of cash receipts and payments or
other statements that might be prepared. In accordance with the
requirements of paragraph 1.3.4(c) above, the general purpose financial
statements may include a comparison of budget and actual amounts as an
additional financial statement.
1.3.7 Paragraph 1.3.24 of this Standard requires disclosure on the face of the
statement of cash receipts and payments of certain payments made by
third parties on behalf of the reporting entity. Payments made by third
parties will not satisfy the definition of cash, cash payments and cash
receipts as defined in paragraph 1.2.1 of this Standard and will not be
presented as cash receipts and payments controlled by the reporting entity
in the statement of cash receipts and payments or other statements that
might be prepared by the reporting entity. Paragraph 1.9.17 of this
Standard provides that an entity can present a comparison of budget and
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actual amounts as additional budget columns in the statement of cash
receipts and payments only where the financial statements and the budget
are prepared on a comparable basis. When the budget and financial
statements are not prepared on a comparable basis, a separate statement
of comparison of budget and actual amounts is presented.
1.3.8 Notes to the financial statements include narrative descriptions or more
detailed schedules or analysis of amounts shown on the face of the
financial statements, as well as additional information. They include
information required and encouraged to be disclosed by this Standard, and
can include other disclosures considered necessary to achieve a fair
presentation and enhance accountability.
1.3.9 This Standard does not preclude an entity from including in its general
purpose financial statements, statements in addition to the statement of
cash receipts and payments as specified in paragraph 1.3.4 above.
Consequently, general purpose financial statements may also include
additional statements which, for example:
a) Report cash receipts, cash payments and cash balances for major fund
categories;
b) Provide additional information about the sources and deployment of
borrowings and the nature and type of cash payments; or
c) Provide a comparison of actual and budget amounts. In accordance
with the requirements of paragraph 1.3.5 above, any additional
statements will only report cash receipts, payments and balances which
are controlled by the entity.
1.3.10 Entities that report using the cash basis of accounting frequently collect
information on items that are not recognised under cash accounting.
Examples of the type of information that may be collected include details
of:
a) Receivables, payables, borrowings and other liabilities, non-cash assets
and accruing revenues and expenses;
b) Commitments and contingent liabilities; and
c) Performance indicators and the achievement of service delivery
objectives.
1.3.11 Entities preparing general purpose financial statements in accordance with
this Standard may disclose such information in the notes to the financial
statements where that information is likely to be useful to users. Where
such disclosures are made they should be clearly described and readily
understandable. If not disclosed in the financial statements themselves,
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comparisons with budget may also be included in the notes. Part 2 of this
Standard encourages inclusion of information about non-cash assets and
liabilities and a comparison with budget in general purpose financial
statements. For the purpose of making disclosures related to non-cash
assets and liabilities, guidance in respect of recognition and measurement
of such items may be drawn from the following in descending order (a) the
accrual based Accounting Standards for Local Bodies issued by the ICAI
(b) existing Accounting Standards issued by the ICAI for commercial
entities and Guidance Notes on Accounting. Such pronouncements also
include `Framework for the Preparation and Presentation of Financial
Statements' (c) International Public Sector Accounting Standards issued
by International Public Sector Accounting Standards Board.
Information to be Presented in the Statement of Cash Receipts and
Payments
1.3.12 The statement of cash receipts and payments should present the
following amounts for the reporting period:
a) Total cash receipts of the entity showing separately a sub-
classification of total cash receipts using a classification basis
appropriate to the entity's operations;
b) Total cash payments of the entity showing separately a sub-
classification of total cash payments using a classification based
on either the nature of the payments or their function appropriate
to the entity's operations; and
c) Beginning and closing cash balances of the entity.
1.3.12A In accordance with paragraph 1.3.12 (b), whichever basis is adopted
by the entity for sub-classification of total cash payments, the entity
should disclose the total cash payments as per the other basis of
classification either as a separate statement or by way of notes.
1.3.13 Total cash receipts and total cash payments, and cash receipts and
cash payments for each sub-classification of cash receipt and
payment, should be reported on a gross basis, except that cash
receipts and payments may be reported on a net basis when:
a) They arise from transactions which the entity administers on
behalf of other parties and which are recognised in the statement
of cash receipts and payments; or
b) They are for items in which the receipts and related payments are
in quick succession, the amounts are large, and the maturities are
short.
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1.3.14 Line items, headings and sub-totals should be presented in the
statement of cash receipts and payments when such presentation is
necessary to present fairly the entity's cash receipts, cash payments
and cash balances.
1.3.15 This Standard requires all entities to present a statement of cash receipts
and payments which discloses beginning and closing cash balances of the
entity, total cash receipts and total cash payments over the reporting
period, and major sub-classifications thereof. This will ensure that the
financial statements provide comprehensive information about the cash
balances of the entity and changes therein over the period in a format that
is accessible and understandable to users.
1.3.16 Disclosure of information about such matters as the cash balances of the
entity, whether cash is generated from taxes, fines, fees, and/or
borrowings and whether it was expended to meet operating costs, for the
acquisition of capital assets or for the retirement of debt will enhance
transparency and accountability of financial reporting. These disclosures
will also facilitate more informed analysis and assessments of the entity's
current cash resources and the likely sources and sustainability of future
cash inflows.
Classification
1.3.17 The sub-classifications (or classes) of total cash receipts and payments
which will be disclosed in accordance with paragraphs 1.3.12, 1.3.12A and
1.3.14 are a matter of professional judgment. That judgment will be applied
in the context of the objective and qualitative characteristics of financial
reporting under the cash basis of accounting. Appendix 4 of this Standard
summarises the qualitative characteristics of financial reporting. Total cash
receipts may be classified to, for example, separately identify cash receipts
from: taxation or appropriation; grants and donations; borrowings; proceeds
from the disposal of property, plant and equipment; and other ongoing
service delivery and trading activities. Total cash payments may be
classified to, for example, separately identify cash payments in respect of:
ongoing service delivery activities including transfers to constituents or
other entities; debt reduction programs; acquisitions of property, plant and
equipment; and any trading activities. Alternative presentations are also
possible, for example total cash receipts may be classified by reference to
their source and cash payments may be sub-classified by reference to
either the nature of the payments or their function or program within the
entity, as appropriate.
1.3.17A As mentioned in paragraph 1.3.12 and 1.3.12A, cash payment items may
be sub-classified using classification based on the nature of payments or
their function. The two classification basis referred to above are illustrated
below: The first method is referred to as the nature of payments method.
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Payments are aggregated according to their nature (for example,
purchases of materials, transport costs, wages and salaries), and are not
reallocated amongst various functions within the entity. An example of a
classification using the nature of payments method is as follows:
Cash payments
Wages and salaries (X)
Transport costs (X)
Capital expenditure (X)
Borrowing costs (X)
Other (X)
Total payments (X)
The second method, referred to as the functional method of classification,
classifies payments according to the program or purpose for which they
were made. This presentation often provides more relevant information to
users, although the allocation of payments to functions can be arbitrary and
may involve considerable judgment. An example of a functional
classification of cash payments is as follows:
Cash payments
Health services (X)
Education services (X)
Capital projects (X)
Finance costs (X)
Other (X)
Total payments (X)
Line Items, Headings and Sub-Totals
1.3.18 Factors to be taken into consideration in determining which line items,
headings and sub-totals should be presented within each sub-classification
in accordance with the requirements of paragraph 1.3.14 above include:
the requirements of other sections of this Standard (for example,
paragraph 1.10.8 requires that total external assistance received in cash
during the period be disclosed separately on the face of the Statement of
Cash Receipts and Payments); assessments of the likely materiality of the
disclosures to users; and the extent to which necessary explanations and
disclosures are made in the notes to the financial statements. Paragraphs
2.1.23 and 2.1.30 of Part 2 of this Standard set out disclosures of
additional major classes of cash flows that an entity is encouraged to make
in the notes to the financial statements or in the financial statements
18
themselves. It is likely that in many, but not necessarily all, cases these
disclosures will satisfy the requirements of paragraph 1.3.12 above.
Reporting on a Net Basis
1.3.19 This Standard requires the reporting of cash receipts, payments and
balances on a gross basis except in the circumstances identified by
paragraph 1.3.13 above. Paragraphs 1.3.20 to 1.3.21 below further
elaborate on those circumstances in which reporting on a net basis may be
justified.
1.3.20 Entities may administer transactions and otherwise act as agents on behalf
of others. These administered and agency transactions may encompass
the collection of revenues on behalf of another entity, the transfer of funds
to eligible beneficiaries or the safekeeping of monies on behalf of
constituents. Examples of such activities may include:
a) The collection of taxes by the entity for another level of government or
another entity, not including taxes collected by the entity for its own use
as part of a tax sharing arrangement;
b) [Refer Appendix A]
c) [Refer Appendix A]
d) Rents collected on behalf of, and paid over to, the owners of properties;
e) Transfers by a local body to third parties consistent with legislation or
other government authority; and
f) [Refer Appendix A]
1.3.21 In many cases, the cash an entity receives in respect of transactions it
administers as an agent for others will be deposited directly in the bank
account of, the ultimate recipients of the cash. In these cases, the entity
will not control the cash it receives in respect of the transactions it
administers and these cash flows will not form part of the cash receipts,
cash payments or cash balances of the entity. However, in other cases the
cash received will be deposited in bank accounts controlled by the entity
acting as an agent and the receipt and transfer of that cash will be reported
in the statement of cash receipts and payments of the entity.
1.3.22 In some cases, the amounts of the cash flows arising from administered
transactions which "pass-through" the bank account of the reporting entity
may be large relative to the entity's own transactions, and control may
occur for only a short time before the amounts are transferred to the
ultimate recipients. This may also be true for other cash flows including for
example, advances made for, and the repayment of:
19
a) The purchase and sale of investments; and
b) Other short-term borrowings, for example, those which have a maturity
period of three months or less.
1.3.23 The recognition of these transactions on a gross basis may undermine the
ability of the financial statements of some entities to communicate
information about cash receipts and cash payments resulting from the
entity's own activities. Accordingly, this Standard permits cash receipts and
cash payments to be offset and reported on a net basis in the statement of
cash receipts and payments in the circumstances identified in paragraph
1.3.13 above.
Payments by Third Parties on Behalf of the Entity
1.3.24 Where, during a reporting period, a third party directly settles the
obligations of an entity or purchases goods and services for the
benefit of the entity, the entity should disclose in separate columns
on the face of the statement of cash receipts and payments:
a) Total payments made by third parties which are part of the
economic entity to which the reporting entity belongs, showing
separately a sub-classification of the sources and uses of total
payments using a classification basis appropriate to the entity's
operations; and
b) Total payments made by third parties which are not part of the
economic entity to which the reporting entity belongs, showing
separately a sub-classification of the sources and uses of total
payments using a classification based on either the nature of the
payments or their function appropriate to the entity's operation.
Such disclosure should only be made when during the reporting
period the entity has been formally advised by the third party or the
recipient that such payment has been made or has otherwise verified
the payment.
1.3.25 Where a government manages the expenditure of its individual
departments and other entities through a centralised treasury function or a
"single account" arrangement, payments are made on behalf of those
departments and entities by a central entity after appropriate authorisation
and documentation from the department. In these cases, the department
or other entity does not control cash inflows, cash outflows and cash
balances. However, the department or other entity benefits from the
payments being made on its behalf, and knowledge of the amount of these
payments is relevant to users in identifying the cash resources the
government has applied to the entity's activities during the period.
20
Consistent with paragraph 1.3.24(a) above, the department or other entity
reports in a separate column on the face of the statement of cash receipts
and payments, the amount of payments made by the central entity on its
behalf, and the sources and uses of the amount expended sub-classified
on a basis appropriate for the department or other entity. These
disclosures will enable users to identify the total amount of payments
made, the purposes for which they were made and whether, for example,
the payments were made from amounts allocated or appropriated from
general revenue or from special purpose funds or other sources.
1.3.26 In some cases, government or other entities may have their own bank
accounts and will control certain cash inflows, cash outflows and cash
balances. In these cases, government directions or instructions may also
require government or an entity to settle certain obligations of another
entity, or to purchase certain goods or services on behalf of another entity.
Consistent with paragraph 1.3.24(a) above, the reporting entity reports in a
separate column on the face of the statement of cash receipts and
payments the amount, sources and uses of such expenditures made on its
behalf during the reporting period. This will assist users in identifying the
total cash resources of the government or other entity which have been
applied to the entity's activities during the reporting period, and the sources
and uses of those cash resources.
1.3.27 In some cases, third parties which are not part of the economic entity to
which the reporting entity belongs purchase goods or services on behalf of
the entity or settle obligations of the entity. For example, a government
may fund the operation of a health or education program of a local body by
directly paying service providers and acquiring and transferring to the local
body the necessary supplies during the period. Similarly, a government or
independent aid agency may pay a construction company directly for
laying or constructing a road for a particular local body rather than
providing the funds directly to the local body itself. These payments may
be made by way of a grant or other aid, or as a loan which is to be repaid.
In these cases, the local body does not receive cash (including cash
equivalents) directly from, or gain control of a bank account or similar
facility established for its benefit by, the other entity. Therefore, the amount
settled or paid on its behalf does not constitute "cash" as defined in this
Standard. However, the local body benefits from the cash payments being
made on its behalf.
1.3.28 Paragraph 1.3.24(b) above requires that an entity report in a separate
column on the face of its statement of cash receipts and payments, the
amount, sources and uses of expenditures made by third parties which are
not part of the economic entity to which it belongs. This will enable users to
identify the total cash resources being applied to the entity's activities
during the reporting period, and the extent to which those resources are
21
provided from parties which are, and which are not, part of the economic
entity to which the reporting entity belongs. In some cases, as at reporting
date an entity may not be aware that payments have been made on their
behalf by third parties during the reporting period. This may occur where
the entity has not been formally advised of the third party payment or
cannot otherwise verify that an expected payment has occurred.
Paragraph 1.3.24 above requires that third party payments only be
disclosed on the face of the statement of cash receipts and payments
when during the reporting period the entity has been formally advised that
such payments have been made or otherwise verifies their occurrence.
1.3.29 The sub-classifications (or classes) of sources and uses of third party
payments which will be disclosed in accordance with paragraphs 1.3.24
are a matter of professional judgment. The factors that will be considered
in exercising that judgment are outlined in paragraph 1.3.17.
Accounting Policies and Explanatory Notes
Structure of the Notes
1.3.30 The notes to the financial statements of an entity should:
a) Present information about the basis of preparation of the financial
statements and the specific accounting policies selected and
applied for significant transactions and other events; and
b) Provide additional information which is not presented on the face
of the financial statements but is necessary for a fair presentation
of the entity's cash receipts, cash payments and cash balances.
1.3.31 Notes to the financial statements should be presented in a systematic
manner. Each item on the face of the statement of cash receipts and
payments and other financial statements should be cross referenced
to any related information in the notes.
Selection and Disclosure of Accounting Policies
1.3.32 General purpose financial statements should present information
that is:
a) Understandable;
b) Relevant to the decision-making and accountability needs of
users; and
c) Reliable in that it:
i. Represents faithfully the cash receipts, cash payments and cash
balances of the entity and the other information disclosed;
22
ii. Is neutral, that is, free from bias; and
iii. Is complete in all material respects.
1.3.33 The quality of information provided in general purpose financial statements
determines the usefulness of that statement to users. Paragraph 1.3.32
requires the development of accounting policies to ensure that the financial
statements provide information that meets a number of qualitative
characteristics. Appendix 4 of this Standard summarises the qualitative
characteristics of financial reporting. The appendix also notes that the
timeliness of information may impact upon both the relevance and
reliability of the financial information. The maintenance of complete and
accurate accounting records during the reporting period is essential for
timely production of the general purpose financial statement.
1.3.34 The accounting policies section of the notes to the financial
statements should describe each specific accounting policy that is
necessary for a proper understanding of the financial statements,
including the extent to which the entity has applied any transitional
provisions in this Standard.
1.3.35 Inappropriate accounting treatments are not rectified either by
disclosure of the accounting policies used, or by notes or
explanatory material.
1.3.36 In deciding whether a specific accounting policy should be disclosed,
management considers whether disclosure would assist users in
understanding the way in which transactions and events are reflected in
the reported cash receipts, payments and balances. An accounting policy
may be significant even if amounts shown for current and prior periods are
not material. Paragraph 1.3.4 of this Standard specifies that general
purpose financial statements include accounting policies and explanatory
notes. Consequently, the requirements of paragraph 1.3.34 above also
apply to notes to the financial statements.
1.3.37 Where an entity elects to include in its financial statements any
disclosures encouraged in Part 2 of this Standard, those disclosures
should comply with the requirements of paragraph 1.3.32 above.
1.3.38 Part 2 of this Standard encourages the disclosure of additional information
in notes to the financial statements. Where such disclosures are made,
they will need to be understandable and to satisfy the other qualitative
characteristics of financial information.
23
1.4 General Considerations
Reporting Period
1.4.1 The general purpose financial statements should be presented at
least annually. When, in exceptional circumstances, an entity's
reporting date changes and the annual financial statements are
presented for a period longer or shorter than one year, an entity
should disclose in addition to the period covered by the financial
statements:
a) the reason(s) for a period other than one year being used; and
b) the fact that comparative amounts may not be comparable.
1.4.2 The reporting date is the date of the last day of the reporting period to
which the financial statements relate. In exceptional circumstances an
entity may be required to, or decide to, change its reporting date to, for
example, align the reporting cycle more closely with the budgeting cycle.
When this is the case, it is important that the reason for the change in
reporting date is disclosed and that users are aware that the amounts
shown for the current period and the comparative amounts are not
comparable.
1.4.3 [Refer Appendix A]
Timeliness
1.4.4 The usefulness of the financial statements are impaired if they are not
made available to users within a reasonable period after the reporting date.
An entity should be in a position to issue its financial statements within six
months of the reporting date, although a timeframe of no more than three
months is strongly encouraged. Ongoing factors such as the complexity of
an entity's operations are not sufficient reason for failing to report on a
timely basis. More specific deadlines are dealt with by legislation and
regulations.
Authorisation Date
1.4.5 An entity should disclose the date when the financial statements
were authorised for issue and who gave that authorisation. If another
authority has the power to amend the financial statements after
issuance, the entity should disclose that fact.
1.4.6 The authorisation date is the date on which the financial statements have
received approval from the individual or body like the Council with the
authority to finalise those statements for issue. It is important for users to
know when the financial statements were authorised for issue, because
24
the financial statements do not reflect events after this date.
Information about the Entity
1.4.7 An entity should disclose the following if not disclosed elsewhere in
information published with the financial statements:
a) The domicile and legal form of the entity, and the jurisdiction
within which it operates;
b) A description of the nature of the entity's operations and principal
activities;
c) A reference to the relevant legislation governing the entity's
operations, if any; and
d) The name of the controlling entity and the ultimate controlling
entity of the economic entity (where applicable, if any).
1.4.8 The disclosure of the information required by paragraph 1.4.7 will enable
users to identify the nature of the entity's operations and gain an
understanding of the legislative and institutional environment within which
it operates. This is necessary for accountability purposes and will assist
users in understanding and evaluating the financial statements of the
entity.
Restrictions on Cash Balances and Access to Borrowings
1.4.9 An entity should disclose in the notes to the financial statements
together with a commentary, the nature and amount of:
a) Significant cash balances that are not available for use by the
entity;
b) Significant cash balances that are subject to external restrictions;
and
c) Undrawn borrowing facilities that may be available for future
operating activities and to settle capital commitments, indicating
any restrictions on the use of these facilities.
1.4.10 Cash balances held by an entity would not be available for use by the
entity, for example, in the case of court attachments or when the balances
are not available for general use by the entity.
1.4.11 Cash balances controlled by an entity may be subject to restrictions which
limit the purpose or timing of their use. This situation often exists when an
entity receives a grant or donation which must be used for a specific
purpose. It may also exist where, at reporting date, an entity holds in its
25
own bank accounts cash it has collected for other parties in its capacity as
an agent but not yet transferred to those parties. Although these balances
are controlled by the entity and reported as a cash balance of the entity,
separate disclosure of the amount of such items is helpful to readers.
1.4.12 Undrawn borrowing facilities represent a potential source of cash for an
entity. Disclosure of the amount of these facilities by significant type allows
readers to assess the availability of such cash, and the extent to which the
entity has made use of them during the reporting period.
Consistency of Presentation
1.4.13 The presentation and classification of items in the financial
statements should be retained from one period to the next unless:
a) A significant change in the nature of the operations of the entity or
a review of its financial statements presentation demonstrates that
the change will result in a more appropriate presentation of events
or transactions; or
b) A change in presentation is required by an amendment to this
Standard or a change in legislation.
1.4.14 A major restructuring of service delivery arrangements; the creation of a
new, or termination of a major existing entity; a significant acquisition or
disposal; or a review of the overall presentation of the entity's general
purpose financial statements might suggest that the statement of cash
receipts and payments or other individual financial statements should be
presented differently. For example, an amalgamation of local bodies into
one local body. In this case, the presentation of the financial statements
would undergo changes.
1.4.15 Only if the revised structure is likely to continue, or if the benefit of an
alternative presentation is clear, should an entity change the presentation
of its financial statements. When such changes in presentation are made,
an entity reclassifies its comparative information in accordance with
paragraph 1.4.19. Where an entity complies with this Accounting Standard
for Local Bodies, a change in presentation to comply with legislative or
government requirements is permitted as long as the revised presentation
is consistent with the requirements of this Standard.
Comparative Information
1.4.16 Unless a provision of this Standard permits or requires otherwise,
comparative information should be disclosed in respect of the
previous period for all numerical information required by this
Standard to be disclosed in the financial statements, except in
respect of the financial statements for the reporting period to which
26
this Standard is first applied. Comparative information should be
included in narrative and descriptive information when it is relevant
to an understanding of the current period's financial statements.
1.4.17 This Standard requires the presentation of a statement of cash receipts
and payments and specifies certain disclosures that are required to be
made in that statement and notes thereto. This Standard does not
preclude the preparation of additional financial statements. Part 2 of this
Standard encourages certain additional disclosures. Where financial
statements in addition to the statement of cash receipts and payments are
prepared or disclosures encouraged by Part 2 of this Standard are made,
the disclosure of comparative information is also encouraged.
1.4.18 In some cases, narrative information provided in the financial statements
for the previous period(s) continues to be relevant in the current period.
For example, details of a legal dispute, the outcome of which was
uncertain at the last reporting date and is yet to be resolved, may be
disclosed in the current period. Users benefit from knowing that the
uncertainty existed at the last reporting date, and the steps that have been
taken during the period to resolve the uncertainty.
1.4.19 When the presentation or classification of items required to be
disclosed in the financial statements is amended, comparative
amounts should be reclassified, unless it is impracticable to do so, to
ensure comparability with the current period, and the nature, amount
of, and reason for any reclassification should be disclosed. When it is
impracticable to reclassify comparative amounts, an entity should
disclose the reason for not reclassifying and the nature of the
changes that would have been made if amounts were reclassified.
1.4.20 Circumstances may exist when it is impracticable to reclassify comparative
information to achieve comparability with the current period. For example,
data may not have been collected in the previous period(s) in a way which
allows reclassification, and it may not be practicable to recreate the
information. In such circumstances, the nature of the adjustments to
comparative amounts that would have been made is disclosed.
Identification of Financial Statements
1.4.21 The financial statements should be clearly identified and
distinguished from other information in the same published
document.
1.4.22 This Standard applies only to the financial statements, and not to other
information presented in an annual report or other document. Therefore, it
is important that users are able to distinguish information that is prepared
using this Standard from other information that may be useful to users but
27
that is not the subject of this Standard.
1.4.23 Each component of the financial statements should be clearly
identified. In addition, the following information should be
prominently displayed and repeated when it is necessary for a proper
understanding of the information presented:
a) The name of the reporting entity or other means of identification;
b) Whether the financial statements cover the individual entity or the
economic entity;
c) The reporting date or the period covered by the financial
statements, whichever is appropriate to the related component of
the financial statements;
d) The reporting currency; and
e) The level of precision used in the presentation of figures in the
financial statements.
1.4.24 The requirements in paragraph 1.4.23 are normally met by presenting
page headings and abbreviated column headings on each page of the
financial statements. Judgment is required in determining the best way of
presenting such information. For example, when the financial statements
are read electronically, separate pages may not be used. In such cases,
the items identified in paragraph 1.4.23 are presented frequently enough to
ensure a proper understanding of the information given.
1.4.25 Financial statements are often made more understandable by presenting
information in thousands, lakhs, millions or crores of units of the reporting
currency. This is acceptable as long as the level of precision in
presentation is disclosed and relevant information is not lost.
1.5 Correction of Errors
1.5.1 When an error arises in relation to a cash balance reported in the
financial statements, the amount of the error that relates to prior
periods should be reported by adjusting the cash at the beginning of
the period.
1.5.2 An entity should disclose in the notes to the financial statements the
following:
a) The nature of the error; and
b) The amount of the correction.
c) [Refer Appendix A]
28
1.5.3 Errors in the preparation of the financial statements of one or more prior
periods may be discovered in the current period. Errors may occur as a
result of mathematical mistakes, mistakes in applying accounting policies,
misinterpretation of facts, fraud or oversights. When an error is identified in
respect of a previous period, the opening balance of cash is adjusted to
correct the error and the financial statements are presented as if the error
had been corrected in the period in which it was made. An explanation of
the error and its adjustment is included in the notes.
1.5.4 [Refer Appendix A]
1.5.5 This Standard requires the presentation of a statement of cash receipts
and payments, and does not preclude the presentation of other financial
statements. Where financial statements in addition to the statement of
cash receipts and payments are presented, the requirements in
paragraphs 1.5.1 and 1.5.2 for correction of errors will also apply to those
statements.
1.6 Consolidated Financial Statements
Definitions
1.6.1 The following terms are used in this Standard with the meanings
specified:
Consolidated financial statements are the financial statements of an
economic entity presented as that of a single entity.
Control of an entity is the power to govern the financial and operating
policies of another entity so as to benefit from its activities.
Controlled entity is an entity that is under the control of another
entity (known as the controlling entity).
Controlling entity is an entity that has one or more controlled entities.
Economic Entity
1.6.2 The term "economic entity" is used in this Standard to define, for financial
reporting purposes, a group of entities comprising the controlling entity and
any controlled entities.
1.6.3 Other terms sometimes used to refer to an economic entity include
"administrative entity," "financial reporting entity," "consolidated entity" and
"group."
1.6.4 An economic entity may include entities with both social policy and
commercial objectives. For example, a local body XYZ (controlling entity)
may control by way of majority voting power in an entity ABC (controlled
29
entity) that provides services of health care for a nominal charge, as well
as another entity PQR (controlled entity) that provides transport services
on a commercial basis. The group of entities comprising local body XYZ
and the controlled entities, viz., ABC and PQR, is the economic entity.
Scope of Consolidated Financial Statements
1.6.5 A controlling entity, other than a controlling entity identified in
paragraph 1.6.7, should issue consolidated financial statements
which consolidates all controlled entities, other than those referred to
in paragraph 1.6.6.
1.6.6 A controlled entity should be excluded from consolidation when it
operates under severe external long-term restrictions which prevent
the controlling entity from benefiting from its activities. Examples of
severe external long term restrictions could be when the resources of a
controlled entity are assigned for natural calamity relief for a long period of
time. During such period the controlling entity cannot benefit from the
activities of the controlled entity.
1.6.7 A controlling entity that is a wholly owned controlled entity need not
present consolidated financial statements provided users of such
financial statements are unlikely to exist or their information needs
are met by the controlling entity's consolidated financial statements.
1.6.8 [Refer Appendix A]
1.6.9 Users of the financial statements of a controlling entity are usually
concerned with, and need to be informed about, the cash resources
controlled by the economic entity as a whole. This need is served by
consolidated financial statements which present financial information about
the economic entity as a single entity without regard for the legal
boundaries of the separate legal entities.
1.6.10 Paragraph 1.3.4 of this Standard requires that a reporting entity prepare a
statement of cash receipts and payments. Consistent with the
requirements of paragraph 1.6.5 above, the statement of cash receipts and
payments prepared by a reporting entity which is a controlling entity, will
consolidate the cash receipts, cash payments and cash balances of all the
entities it controls. The note disclosures required by Part 1 of this Standard
will also be presented on a consolidated basis. Appendix 5 of this Standard
illustrates the application of the concept of control in determining the
financial reporting entity.
1.6.11 This Standard does not preclude the preparation of financial statements
additional to the statement of cash receipts and payments. Those
additional statements may, for example, disclose additional information
30
about receipts and payments related to certain fund groups or provide
additional details about certain types of cash flows. Part 2 of this Standard
identifies additional disclosures that an entity is encouraged to make. The
additional statements and disclosures will also report consolidated
information where appropriate.
1.6.12 For financial reporting purposes, the reporting entity (financial reporting
entity) may consist of a number of controlled entities including
departments, agencies and special purpose vehicles. Determining the
scope of the financial reporting entity can be difficult due to the large
number of potential entities. For this reason, financial reporting entities are
often determined by legislation. In some cases, the financial reporting
entity required by this Standard may differ from the reporting entity
specified by legislation and additional disclosures may be necessary to
satisfy the legislative reporting requirements.
1.6.13 A controlling entity that is itself wholly owned by another entity (such as an
agency which is wholly owned by a local body), is not required to present
consolidated financial statements when such statements are not required
by its controlling entity and the needs of other users may be best served by
the consolidated financial statements of its controlling entity. However,
many controlling entities that are either wholly owned or virtually wholly
owned represent key sectors or activities of the local body. In these cases,
the information needs of certain users may not be served by the
presentation of a consolidated financial statements at the level of ultimate
controlling entity alone, and the purpose of this Standard is not to exempt
such entities from preparing consolidated financial statements.
1.6.14 [Refer Appendix A]
1.6.15 In some instances, an economic entity will include a number of
intermediate controlling entities. For example, whilst a department of
health may be the controlling entity, there may be intermediate controlling
entities at the local or regional health authority level. Accountability and
reporting requirements prescribed under the laws relevant to local bodies
may specify which entities are required to (or exempted from the
requirement to) prepare a consolidated financial statement. Where there is
no requirement for an intermediate controlling entity to prepare
consolidated financial statements but users of general purpose financial
statements of the economic entity are likely to exist, intermediate
controlling entities are encouraged to prepare and publish such a
statement.
31
Consolidation Procedures
1.6.16 The following consolidation procedures apply:
a) Cash balances and cash transactions between entities within the
economic entity should be eliminated in full;
b) When the financial statements used in a consolidation are drawn
up to different reporting dates, adjustments should be made for
the effects of significant cash transactions that have occurred
between those dates and the date of the controlling entity's
financial statements. In any case, the difference between the
reporting dates should be no more than six months; and
c) Consolidated financial statements should be prepared using
uniform accounting policies for like cash transactions. If it is not
practicable to use uniform accounting policies in preparing the
consolidated financial statements, that fact should be disclosed
together with the proportions of the items in the consolidated
financial statements to which the different accounting policies
have been applied.
1.6.17 The consolidation procedures outlined in paragraph 1.6.16 provide the
basis for preparing consolidated financial statements for all the entities
within the economic entity as a single economic unit.
1.6.18 The consolidated financial statements should only reflect transactions
between the economic entity and other entities external to it. Accordingly,
transactions between entities within the economic entity are eliminated to
avoid double-counting. For example, a local body may sell a physical asset
to a joint venture which it controls. Because the net cash effect on the
reporting entity is zero, this transaction needs to be eliminated to avoid
overstating the cash receipts and cash payments of the reporting entity i.e.
the local body. .
1.6.19 Individual entities within the economic entity may adopt different policies
for the classification of cash receipts and cash payments and the
presentation of their financial statements. Cash receipts or cash payments
arising from like transactions are classified and presented in a uniform
manner in the consolidated financial statements where practicable.
Consolidation Disclosures
1.6.20 The following disclosures should be made in consolidated financial
statements:
a) A listing of significant controlled entities including the name, the
activity or purpose for which the controlled entity operates; and
32
b) The reasons for not consolidating a controlled entity.
Transitional Provisions
1.6.21 Controlling entities that adopt this Standard may have large numbers of
controlled entities with significant volumes of transactions between those
entities. Accordingly, it may be difficult to identify all the transactions and
balances that need to be eliminated for the purpose of preparing the
consolidated financial statements of the economic entity. For this reason,
paragraph 1.6.21A provides relief, during the transitional period, from the
requirement to eliminate all cash balances and transactions between
entities within the economic entity. However, paragraph 1.6.21B requires
that entities which apply the transitional provision should disclose the fact
that not all balances and transactions between entities within the economic
entity have been eliminated.
1.6.21A Entities are not required to comply with the requirement in
paragraph 1.6.16(a) concerning the elimination of cash balances and
transactions between entities within the economic entity for reporting
periods beginning on a date within three years following the date of
first adoption of this Standard.
1.6.21B Where entities apply the transitional provision in paragraph
1.6.21A, they should disclose the fact that not all balances and
transactions between entities within the economic entity have been
eliminated.
Foreign Currency
Definitions
1.6.22 The following terms are used in this Standard with the meanings
specified:
Closing rate is the spot exchange rate at the reporting date.
Exchange difference is the difference resulting from reporting the
same number of units of a foreign currency in the reporting currency
at different exchange rates.
Exchange rate is the ratio for exchange of two currencies.
Foreign currency is a currency other than the reporting currency of
an entity.
Reporting currency is the currency used in presenting the financial
statements.
33
Treatment of Foreign Currency Cash Receipts, Payments and
Balances
1.6.23 Cash receipts and payments arising from transactions in a foreign
currency should be recorded in an entity's reporting currency by
applying to the foreign currency amount the exchange rate between
the reporting currency and the foreign currency at the date of the
receipts and payments.
1.6.24 Cash balances held in a foreign currency should be reported using
the closing rate.
1.7.4 [Refer Appendix A]
1.7.5 An entity should disclose the amount of exchange differences
included as reconciling items between opening and closing cash
balances for the period.
1.7.6 [Refer Appendix A]
1.7.7 Entities may have transactions in foreign currencies such as borrowing an
amount of foreign currency or purchasing goods and services where the
purchase price is designated as a foreign currency amount. In order to
include foreign currency transactions in financial statements the entity must
express cash receipts, payments and balances in reporting currency terms.
1.7.8 Unrealised gains and losses arising from changes in foreign currency
exchange rates are not cash receipts and payments. However, the effect of
exchange rate changes on cash held in a foreign currency is reported in the
statement of cash receipts and payments in order to reconcile cash at the
beginning and the end of the period. This amount is presented separately
from cash receipts and payments and includes the differences, if any, had
those cash receipts, payments and balances been reported at end-of-
period exchange rates.
1.8.1 [Refer Appendix A]
1.8.2-1.8.3 [Shifted to Consolidated Financial Statements section as
paragraphs 1.6.21A & 1.6.21B]
34
1.9 Presentation of Budget Information in Financial
Statements
Definitions
1.9.1 The following terms are used in this Standard with the meanings
specified:
Accounting basis means the accrual or cash basis of accounting as
defined in the Accounting Standards for Local Bodies.
Annual budget means an approved budget for one year. It does not
include published forward estimates or projections for periods
beyond the budget period.
Appropriation is an authorisation granted by the appropriate
authority or government to allocate funds for specific purposes.
Approved budget means the expenditure authority derived from laws,
government orders and other decisions related to the anticipated
revenue or receipts for the budgetary period.
Budgetary basis means the accrual, cash or other basis of
accounting adopted in the budget that has been duly approved.
Comparable basis means the actual amounts presented on the same
accounting basis, same classification basis, for the same entities and
for the same period as the approved budget.
Revised budget is the original budget adjusted for all reserves, carry
over amounts, transfers, allocations, supplemental appropriations,
and other authorised legislative or similar authority, changes
applicable to the budget period.
Original budget is the initial approved budget for the budget period.
Approved Budgets
1.9.2 An approved budget as defined by this Standard reflects the anticipated
revenues or receipts expected to arise in the annual period based on
current plans and the anticipated economic conditions during that budget
period, and expenses or expenditures approved by the appropriate
authority. An approved budget is not a forward estimate or a projection
based on assumptions about future events and possible management
actions which are not necessarily expected to take place. Similarly, an
approved budget differs from prospective financial information which may
be in the form of a forecast, a projection or a combination of both for
example, a one year forecast plus a five year projection.
35
1.9.3 The critical feature of approved budgets is that the authority to withdraw
funds from its own bank account or the government treasury for agreed and
identified purposes is provided by the appropriate authority. The approved
budget establishes the expenditure authority for the specified items. The
expenditure authority is generally considered the legal limit within which an
entity must operate.
1.9.4 If a budget is not approved prior to the beginning of the budget period, the
original budget is the budget that has been approved for a specified period
within the year by the appropriate authority.
Revised Budget
1.9.5 [Refer Appendix A]
1.9.6 Supplemental appropriations may be necessary where the original budget
did not adequately envisage expenditure requirements arising from, for
example, natural disasters. In addition, there may be a shortfall in budgeted
receipts during the period, and internal transfers between budget heads or
line items may be necessary to accommodate changes in funding priorities
during the fiscal period. Consequently, the funds allotted to an entity or
activity may need to be cut back from the amount originally appropriated for
the period in order to maintain fiscal discipline. The revised budget includes
all such authorised changes or amendments.
Actual Amounts
1.9.7 This Standard uses the term actual or actual amounts to describe the
amounts that result from execution of the budget.
Presentation of a Comparison of Budget and Actual Amounts
1.9.8 Subject to the requirements of paragraph 1.9.17, an entity that makes
publicly available its approved budget(s) should present a
comparison of the budget amounts for which it is held publicly
accountable and actual amounts either as a separate additional
financial statement or as additional budget columns in the statement
of cash receipts and payments currently presented in accordance
with this Standard. The comparison of budget and actual amounts
should present separately:
a) The original and revised budget amounts;
b) The actual amounts on a comparable basis; and
c) By way of note disclosure, an explanation of material differences
between the budget for which the entity is held publicly
accountable and actual amounts, unless such explanation is
36
included in other public documents issued in conjunction with the
financial statements, and a cross reference to those documents is
made in the notes.
Scope
1.9.9 This Standard applies to all entities that are required to make publicly
available their approved budget(s). This Standard does not require
approved budgets to be made publicly available, nor does it require that
the financial statements disclose information about, or include
comparisons with, approved budgets which are not made publicly
available.
1.9.10 In some cases, approved budgets will be compiled to encompass all the
activities controlled by an entity. In other cases, separate approved budgets
may be required to be made publicly available for certain activities, groups
of activities or entities included in the financial statements of the entity. This
may occur where, for example, a local body's financial statements
encompass agencies or programs that have operational autonomy and
prepare their own budgets. This Standard applies to all entities which
present financial statements when approved budgets for the entity, or
components thereof, are made publicly available.
Comparison of Budget and Actual Amounts
1.9.11 Presentation in the financial statements of the original and revised budget
amounts and actual amounts on a comparable basis with the budget,
which is made publicly available, will complete the accountability cycle by
enabling users of the financial statements to identify whether resources
were obtained and used in accordance with the approved budget.
Differences between the actual amounts and the budget amounts, whether
original or revised budget (often referred to as the "variance" in
accounting), may also be presented in the financial statements for
completeness.
1.9.12 An explanation of the material differences between actual amounts and the
budget amounts will assist users in understanding the reasons for material
departures from the approved budget for which the entity is held publicly
accountable.
1.9.13 An entity may be required, to make publicly available its original budget, its
revised budget or both its original and revised budget. In circumstances
where both original and revised budget are required to be made publicly
available, the legislation, regulation or other authority will often provide
guidance on whether explanation of material differences between actual
and the original budget amounts, or actual and the revised budget
amounts, is required in accordance with paragraph 1.9.8(c). In the
absence of any such guidance, material differences may be determined by
37
reference to, for example, differences between actual and original budget
to focus on performance against original budget, or differences between
actual and revised budget to focus on compliance with the revised budget.
1.9.14 In many cases, the revised budget amount and the actual amount will be
the same. This is because budget execution is monitored over the
reporting period and the original budget progressively revised to reflect
changing conditions, changing circumstances and experiences during the
reporting period. Paragraph 1.9.23 of this Standard requires the disclosure
of an explanation of the reasons for changes between the original and
revised budget. That disclosure, together with the disclosures required by
paragraph 1.9.8 above, will ensure that entities which make publicly
available their approved budget(s) are held publicly accountable for their
performance against, and compliance with, the relevant approved budget.
1.9.15 Reports like city management reports, annual administrative reports,
management discussion and analysis, or other public reports which
provide commentary on the performance and achievements of the entity
during the reporting period, including explanations of any material
differences from budget amounts, are often issued in conjunction with the
financial statements. In accordance with paragraph 1.9.8(c) of this
Standard, explanation of material differences between actual and budget
amounts will be included in notes to the financial statements unless
included in other public reports or documents issued in conjunction with
the financial statements, and the notes to the financial statements identify
the reports or documents in which the explanation can be found.
1.9.16 [Refer Appendix A]
Presentation
1.9.17 An entity should present a comparison of budget and actual amounts
as additional budget columns in the statement of cash receipts and
payments only where the financial statements and the budget are
prepared on a comparable basis.
1.9.18 Comparisons of budget and actual amounts may be presented in a
separate financial statement ("statement of comparison of budget and
actual amounts" or a similarly titled statement). Alternatively, where the
financial statements and the budget are prepared on a comparable basis
that is, on the same basis of accounting for the same entity and reporting
period, and adopt the same classification structure additional columns
may be added to the statement of cash receipts and payments presented
in accordance with this Standard. These additional columns will identify
original and revised budget amounts and, if the entity so chooses,
differences between the budget and actual amounts.
38
1.9.19 When the budget and financial statements are not prepared on a
comparable basis, a separate statement of comparison of budget and
actual amounts is presented. In these cases, to ensure that readers do not
misinterpret financial information which is prepared on different bases, the
financial statements could usefully clarify that the budget and the
accounting bases differ and the statement of comparison of budget and
actual amounts is prepared on the budget basis.
Level of Aggregation
1.9.20 Budget documents may provide great detail about particular activities,
programs or entities. These details are often aggregated into broad
classes under common budget heads, budget classifications or budget
headings for presentation to, and approval by, the appropriate authority.
The disclosure of budget and actual information consistent with those
broad classes and budget heads or headings will ensure that comparisons
are made at the level of legislative or other authoritative body oversight.
1.9.21 In some cases, the detailed financial information included in approved
budgets may need to be aggregated for presentation in financial
statements in accordance with the requirements of this Standard. Such
aggregation may be necessary to avoid information overload and to reflect
relevant levels of legislative or other authoritative body oversight.
Determining the level of aggregation will involve professional judgment.
That judgment will be applied in the context of the objective of this
Standard and the qualitative characteristics of financial reporting as
identified in paragraph 1.3.32 of this Standard.
1.9.22 Additional budget information, including information about service
achievements, may be presented in documents other than financial
statements. Part 2 of this Standard encourages the inclusion in the financial
statements of a cross reference to such documents.
Changes from Original to Revised Budget
1.9.23 An entity should present an explanation of whether changes between
the original and revised budget are a consequence of reallocations
within the budget, or of other factors, either:
a) By way of note disclosure; or
b) In a report issued before, at the same time as, or in conjunction
with the financial statements, and should include a cross reference
to the report in the notes to the financial statements.
1.9.24 The revised budget includes all changes approved by the appropriate
authority to revise the original budget. Consistent with the requirements of
this Standard, notes to the financial statements or a separate report issued
39
before, in conjunction with or at the same time as the financial statements,
will include an explanation of changes between the original and revised
budget. That explanation will include whether, for example, changes arise
as a consequence of reallocations within the original budget parameters or
as a consequence of other factors, such as changes in the overall budget
parameters, including changes in government policy. Such disclosures are
often made in a management report or similar report on operations issued
in conjunction with, but not as part of, the financial statements. Such
disclosures may also be included in budget outcome reports issued by
governments to report on budget execution. Where such disclosures are
made in a separate report rather than in the notes to the financial
statements, the notes will include a cross reference to that report.
Comparable Basis
1.9.25 All comparisons of budget and actual amounts should be presented
on a comparable basis to the budget.
1.9.26 The comparison of budget and actual amounts will be presented on the
same accounting basis, same classification basis and for the same entities
and period as for the approved budget. This will ensure that the disclosure
of information about compliance with the budget in the financial statements
is on the same basis as the budget itself. In some cases, this may mean
presenting a budget and actual comparison on a different basis of
accounting, for a different group of activities, and with a different
presentation or classification format than that adopted for the financial
statements.
1.9.27 Financial statements consolidate entities and activities controlled by the
entity. As noted in paragraph 1.9.10, separate budgets may be approved
and made publicly available for individual entities or particular activities
that make up the consolidated financial statements. Where this occurs, the
separate budgets may be recompiled for presentation in the financial
statements in accordance with the requirements of this Standard. Where
such recompilation occurs, it will not involve changes or revisions to
approved budgets. This is because this Standard requires a comparison of
actual amounts with the approved budget amounts.
1.9.28 Entities may adopt different bases of accounting for the preparation of their
financial statements and for their approved budgets. For example, in some,
albeit rare, cases an entity may adopt the modified cash basis4 for its
4
The modified cash basis of accounting recognises as disbursements and receipts in a reporting
period those amounts expended and received respectively, during the reporting period plus those
cash flows in a specified period following the reporting date (e.g., 60 days) that relate to events or
transactions occurring during the reporting period. In effect, under this basis the books are kept open
at the year end to identify payables and receivables that relate to events or transactions occurring
during the reporting period.
40
financial statements and the cash basis for its budget. However, the budget
entity and financial reporting entity will often be the same. Similarly, the
period for which the budget is prepared and the classification basis adopted
for the budget will often be reflected in financial statements. This will
ensure that the accounting system records and reports financial information
in a manner which facilitates the comparison of budget and actual data for
management and for accountability purposes for example, for monitoring
progress of execution of the budget during the budget period and for
reporting to the government, the public and other users on a relevant and
timely basis.
1.9.29-1.9.32 [Refer Appendix A]
Note Disclosures of Budgetary Basis, Period and Scope
1.9.33 An entity should explain in notes to the financial statements the
budgetary basis and classification basis adopted in the approved
budget.
1.9.34 There may be differences between the accounting basis, for example,
cash basis used in preparation and presentation of the budget and the
modified cash basis used in the financial statements. These differences
may occur when the accounting system and the budget system compile
information from different perspectives the budget may focus on cash
flows, while the financial statements report cash receipts and cash
payments plus certain accruals and commitments in notes to financial
statements.
1.9.35 Formats and classification schemes adopted for presentation of the
approved budget may also differ from the formats adopted for the financial
statements. An approved budget may classify items on the same basis as
is adopted in the financial statements, for example, expenditures by
economic nature (compensation of employees, supplies and consumables,
grants and transfers, etc) or function (health, education, etc). Alternatively,
the budget may classify items by specific programs (for example, poverty
reduction or control of contagious diseases) or program components linked
to performance outcome objectives (for example, length of motorable
roads, pass percentage of students), which differ from classifications
adopted in the financial statements. Further, a revenue budget for ongoing
operations (for example, education or health) may be approved separately
from a capital budget (for example, infrastructure or buildings).
1.9.36 Disclosure of the budgetary basis and classification basis adopted for the
preparation and presentation of approved budgets will assist users to
better understand the relationship between the budget and accounting
information disclosed in the financial statements.
41
1.9.37 An entity should disclose in notes to the financial statements the
period of the approved budget.
1.9.38 Financial statements are presented at least annually. Entities approve
budgets for an annual period. Disclosure of the period covered by the
approved budget where that period differs from the reporting period
adopted for the financial statements will assist the user of those financial
statements to better understand the relationship of the budget data and
budget comparison to the financial statements. Disclosure of the period
covered by the approved budget where that period is the same as the
period covered by the financial statements will also serve a useful
confirmation role, particularly where interim budgets and financial
statements and reports are also prepared.
1.9.39 An entity should identify in notes to the financial statements the
entities included in the approved budget.
1.9.40 [Refer Appendix A]
Reconciliation of Actual Amounts on a Comparable Basis and
Actual Amounts in the Financial Statements
1.9.41 The actual amounts presented on a comparable basis to the budget
in accordance with paragraph 1.9.25 should, where the financial
statements and the budget are not prepared on a comparable basis,
be reconciled to total cash receipts and total cash payments,
identifying separately any basis, timing and entity differences. The
reconciliation should be disclosed on the face of the statement of
comparison of budget and actual amounts or in the notes to the
financial statements.
1.9.42 Differences between the actual amounts identified consistent with the
comparable basis and the actual amounts recognised in the financial
statements can be classified into the following:
a) Budgetary basis differences, which occur when the approved budget is
prepared on a basis other than the accounting basis. For example,
where the budget is prepared on the cash basis and the financial
statements are prepared on the modified cash basis;
b) Timing differences, which occur when the budget period differs from the
reporting period reflected in the financial statements; and
c) Entity differences, which occur when the budget omits programs or
entities that are part of the entity for which the financial statements are
prepared.
42
There may also be differences in formats and classification schemes
adopted for presentation of financial statements and the budget.
1.9.43 The reconciliation required by paragraph 1.9.41 of this Standard will
enable the entity to better discharge its accountability obligations by
identifying major sources of difference between the actual amounts on a
budget basis and the total cash receipts and total cash payments
recognised in the statement of cash receipts and payments. This Standard
does not preclude reconciliation of each major total and subtotal, or each
class of items, presented in a comparison of budget and actual amounts
with the equivalent amounts in the financial statements.
1.9.44 For entities adopting the cash basis of accounting for preparation of both
the budget documents and the financial statements, a reconciliation will not
be required where the budget is prepared for the same period,
encompasses the same entities and adopts the same presentation format
as the financial statements. For other entities adopting the same basis of
accounting for the budget and the financial statements, there may be a
difference in presentation format, reporting entity or reporting period for
example, the approved budget may adopt a different classification or
presentation format to the financial statements. A reconciliation would be
necessary where there are presentation, timing or entity differences
between the budget and the financial statements prepared on the same
accounting basis.
1.9.45 The disclosure of comparative information in respect of the previous
period in accordance with the requirements of this Standard is not
required.
1.9.46 This Standard requires a comparison of budget and actual amounts to be
included in the financial statements of entities which make publicly
available their approved budget(s). It does not require the disclosure of a
comparison of actual amounts of the previous period with the budget of
that previous period, nor does it require that the related explanations of
differences between the actuals and budget of that previous period be
disclosed in the financial statements of the current period.
1.9.47 [Refer Appendix A]
1.9.48 [Refer Appendix A]
43
1.10 Recipients of External Assistance
Definitions
1.10.1 The following terms are used in this Standard with the meaning
specified:
Assigned External Assistance means any external assistance,
including external assistance grants, technical assistance,
guarantees or other assistance, received by an entity that is assigned
by the recipient to another entity.
Bilateral External Assistance Agencies are agencies established
under national law, regulation or other authority of a nation for the
purpose of, or including the purpose of, providing some or all of that
nation's external assistance.
External Assistance means all official resources which the recipient
can use or otherwise benefit from in pursuit of its objectives.
Multilateral External Assistance Agencies are all agencies
established under international agreement or treaty for the purpose
of, or including the purpose of, providing external assistance.
Non-Governmental Organisations (NGOs) are all foreign or national
agencies established independent of control by any government for
the purpose of providing assistance to government(s), government
agencies, other organisations or to individuals.
Official Resources means all loans, grants, technical assistance,
guarantees or other assistance provided or committed under a
binding agreement by multilateral or bilateral external assistance
agencies or by a government, or agencies of a government, other
than to a recipient of the same nation as the government or
government agency providing, or committing to provide, the
assistance.
Re-Lent External Assistance Loans means external assistance loans
received by an entity that are lent by the recipient to another entity.
1.10.2 Different organisations may use different terminology for external
assistance or classes of external assistance. For example, some
organisations may use the term external aid or aid, rather than external
assistance. In these cases, the different terminology is unlikely to cause
confusion. However, in other cases, the terminology may be substantially
different. In these cases, preparers, auditors and users of general purpose
financial statements will need to consider the substance of the definitions
rather than just the terminology in determining whether the requirements of
44
this Standard apply.
External Assistance
1.10.3 External assistance is defined in paragraph 1.10.1 as all official resources
which the recipient can use or otherwise benefit from in pursuit of its
objectives. Official resources as defined in paragraph 1.10.1 does not
encompass assistance provided by non-governmental organisations
(NGOs), even if such assistance is provided under a binding agreement.
Assistance received from NGOs, whether in the form of cash donations or
third party settlements, will be presented in the financial statements and
disclosed in explanatory notes in accordance with the requirements of
Sections 1.1 to 1.9 of Part 1 of this Standard. Paragraph 2.1.64
encourages, but does not require, application of the disclosures required
by paragraphs 1.10.1 to 1.10.27 to assistance received from NGO's where
practicable.
1.10.4 NGOs as defined in paragraph 1.10.1 are foreign or national agencies
established independent of control by any government. In some rare
cases, it may not be clear whether the donor organisation is a bilateral or
multilateral external assistance agency or a NGO, and therefore
independent of control by any government. Where such a donor
organisation provides, or commits to provide, assistance under the terms
of a binding agreement, the distinction between official resources as
defined in this Standard and resources provided by a NGO may become
blurred. In these cases, professional judgment will need to be exercised to
determine whether the assistance received satisfies the definition of
external assistance and, therefore, is subject to the disclosure
requirements specified in this section.
Official Resources
1.10.5 Official resources are defined in paragraph 1.10.1 to be resources
committed under a binding agreement by multilateral or bilateral external
assistance agencies or governments or government agencies, other than
to a recipient of the same nation as the provider of the assistance.
Governments as referred to in the definition of official resources may
include national, state, provincial or local governments in any nation.
Therefore, assistance provided by, for example, a national government or
state government agency of one nation to a state or local government of
another nation is external assistance as defined in this Standard. However,
assistance provided by a national or state government to another level of
government within the same nation does not satisfy the definition of official
resources, and therefore is not external assistance.
External Assistance Agreements
1.10.6 Governments seeking particular forms of external assistance may
45
participate in formal meetings or rounds of meetings with donor
organisations. These may include meetings to discuss the government's
macroeconomic plans and its development assistance needs, or bilateral
discussions at governmental level regarding finance military assistance,
balance of payments and other forms of assistance. They may also include
separate meetings to consider the country's emergency assistance needs
as those needs arise. Initial discussions may result in statements of intent
or pledges which are not binding on the government or the external
assistance agency. However, subsequently binding agreements may be
set in place to make available assistance loans or grants provided
restrictions on access to the funds, if any, are met and agreed conditions
or covenants are adhered to by the recipient entity. External assistance
agreements may also include the provision of goods or services in-kind to
the recipient.
1.10.7 External assistance agreements may provide for the entity to:
a) Draw down in cash the full proceeds of the loan or grant or a tranche of
the loan or grant;
b) Seek reimbursement(s) for qualifying payments made by the entity to a
third party settling in cash an obligation(s) of the entity, as defined by
the loan or grant agreement; or
c) Request the external assistance agency to make payments directly to a
third party settling in cash an obligation(s) of the recipient entity as
defined by the loan or grant agreement, including an obligation of the
recipient entity for goods or services provided or to be provided by a
NGO.
External Assistance Received
1.10.8 The entity should disclose separately on the face of the Statement of
Cash Receipts and Payments, total external assistance received in
cash during the period.
1.10.9 The entity should disclose separately, either on the face of the
Statement of Cash Receipts and Payments or in the notes to the
financial statements, total external assistance paid by third parties
during the period to directly settle obligations of the entity or
purchase goods and services on behalf of the entity, showing
separately:
a) Total payments made by third parties which are part of the
economic entity to which the reporting entity belongs; and
b) Total payments made by third parties which are not part of the
economic entity to which the reporting entity belongs. These
46
disclosures should only be made when, during the reporting
period, the entity has been formally advised by the third party or
the recipient that such payment has been made, or has otherwise
verified the payment.
1.10.10 Where external assistance is received from more than one provider,
the significant classes of providers of assistance should be
disclosed separately, either on the face of the Statement of Cash
Receipts and Payments or in the notes to the financial statements.
1.10.11 Where external assistance is received in the form of loans and
grants, the total amount received during the period as loans and the
total amount received as grants should be shown separately, either
on the face of the Statement of Cash Receipts and Payments or in the
notes to the financial statements.
1.10.12 External assistance may be provided directly to the reporting entity in the
form of cash. Alternatively, a third party may provide external assistance
by settling an obligation of the reporting entity or purchasing goods and
services for the benefit of the reporting entity. In some cases:
a) The third party may be part of the economic entity to which the reporting
entity belongs this will occur where, for example, external assistance
in the form of cash is provided for the benefit of a program run by a
particular department of a local body where the local body manages the
expenditure of its individual departments and other entities through a
centralised treasury function or a "single account" arrangement. In these
cases, the treasury or other central agency receives the external
assistance and makes payments of amounts provided by way of
external assistance on behalf of the department, after appropriate
authorisation and documentation from the department; or
b) The third party may not be part of the economic entity to which the
reporting entity belongs this will occur where, for example, an aid
agency makes a debt repayment to a regional development bank on
behalf of a local body, pays a construction company directly for building
a road for a particular local body rather than providing the funds directly
to the local body itself, or funds the operation of a health or education
program of an independent local body by directly paying service
providers and acquiring on behalf of the local body the necessary
supplies during the period.
1.10.13 Disclosure of the amount of external assistance received in the form of
cash and in the form of third party payments made on behalf of the entity
will indicate the extent to which the operations of the reporting entity are
funded from taxes and/or internal sources, or are dependent upon external
assistance. Consistent with the requirements of paragraph 1.3.24 of this
47
Standard, external assistance paid by third parties should only be
disclosed in the statement of Cash Receipts and Payments when the
reporting entity has been formally advised that such payments have been
made during the reporting period or otherwise verifies their occurrence.
Disclosure of the significant classes of external assistance received is also
encouraged, but not required (see paragraph 2.1.66).
1.10.14 Disclosure of the significant classes of providers of assistance such as, for
example, multilateral donors, bilateral donors, international assistance
organisations, national assistance organisations or other major classes as
appropriate for the reporting entity will identify the extent of the entity's
dependence on particular classes of providers and will be relevant to an
assessment of the sustainability of the assistance. This Standard does not
require the disclosure of the identity of each provider of assistance or the
amount of assistance each provides. However, disclosure of the amount
provided by each provider in the currency provided is encouraged (see
paragraph 2.1.70).
1.10.15 External assistance is often denominated in a currency other than the
reporting currency of the entity. Cash receipts, or payments made by third
parties on behalf of the entity arising from transactions in a foreign
currency, will be recorded or reported in the entity's reporting currency by
applying to the foreign currency amount the exchange rate between the
reporting currency and the foreign currency at the date of the receipts or
payments in accordance with paragraph 1.7.2 of this Standard.
1.10.16 Governments usually retain the exclusive right to enter into external
assistance agreements with multilateral or bilateral external assistance
agencies. In many of these cases, the project or activity is implemented by
another entity. The government may re-lend or assign the funds received
to the other entity. The terms and conditions of the re-lent or assigned
funds may be the same as received from the external assistance agency
or may be different than initially received. In some cases, a small fee or
interest spread is charged to cover the government's administrative costs.
An entity which enters into an external assistance agreement and passes
the benefits as well as the terms and conditions of the agreement through
to another entity by way of a subsidiary agreement will recognise or report
the external assistance as it is received. It will also record payments to the
second entity in accordance with its normal classification of payments
adopted in the financial statements.
1.10.17 Where the initial recipient of a loan or grant passes the proceeds and the
terms and conditions of the loan or grant through to another entity, the
initial entity may simply be administering the loan or grant on behalf of the
end user. Netting of transactions where the terms and conditions are
substantially the same may be appropriate in the financial statements of
48
the administrator, in accordance with the provisions of paragraph 1.3.13 of
this Standard.
Undrawn External Assistance
1.10.18 The entity should disclose in the notes to the financial statements the
balance of undrawn external assistance loans and grants available at
reporting date to fund future operations when, and only when, the
amount of the loans or grants available to the recipient is specified in
a binding agreement and the satisfaction of any substantial terms
and conditions that determine, or affect access to, that amount is
highly likely, showing separately in the reporting currency:
a) Total external assistance loans; and
b) Total external assistance grants.
Significant terms and conditions that determine, or affect access to,
the amount of the undrawn assistance should also be disclosed.
1.10.19 The amount of external assistance currently committed under a binding
agreement(s) but not yet drawn may be significant. In some cases, the
amount of the assistance loan(s) or grant(s) is specified in a binding
agreement and the satisfaction of any substantial conditions that need to
be satisfied to access that amount is highly likely. This may occur in
respect of undrawn balances of project funding for projects currently under
development where conditions have been, and continue to be, satisfied
and the project is anticipated to continue under the terms of the
agreement. Where such undrawn balances are provided in a foreign
currency, opening and closing balances will be determined by applying to
the foreign currency amount the exchange rate on the reporting dates in
accordance with the provisions of paragraph 1.7.3 of this Standard.
1.10.20 In some cases, a donor entity may express an intention to provide ongoing
assistance to the reporting entity, but not specify in a binding agreement
the amount of the assistance loan(s) or grant(s) to be provided in future
periods for example, this may occur where the amount of assistance to
be provided is dependent on the annual budget of the donor or other
sources of funding that may be secured by the recipient. In other cases,
the amount of assistance may be specified but be subject to terms and
conditions, the satisfaction of which cannot be assessed as being highly
likely at the reporting date for example, this may occur in respect of
emergency assistance to be provided subject to the amount of assistance
provided by other agencies. In these cases, disclosure of the undrawn
amounts is not made. In some cases, professional judgment may need to
be exercised in assessing whether the satisfaction of the substantial terms
and conditions that determine, or effect access to, the external assistance
49
is highly likely.
Receipt of Goods or Services
1.10.21 Where an entity elects to disclose the value of external assistance
received in the form of goods or services, it should also disclose in
the notes to the financial statements the basis on which that value is
determined.
1.10.22 Paragraph 2.1.90 of this Standard encourages an entity to disclose
separately in the notes to the financial statements the value of external
assistance received in the form of goods or services. Paragraph 1.3.38 of
this Standard explains that where encouraged disclosures are included in
notes to the financial statements, they will need to be understandable and
to satisfy the other qualitative characteristics of financial information.
Where an entity elects to make such disclosures, it is required to disclose
in the notes to the financial statements the basis on which that value is
determined. Such disclosure will enable users to assess whether, for
example, the value is determined by reference to donor valuation, fair
value determined by reference to prices in the world or domestic markets,
by management assessment or on another basis.
Disclosure of Debt Rescheduled or Cancelled
1.10.23 An entity should disclose in the notes to the financial statements the
amount of external assistance debt rescheduled or cancelled during
the period, together with any related terms and conditions.
1.10.24 An entity experiencing difficulty in servicing its external assistance debt
may seek renegotiation of the terms and conditions of the debt or
cancellation of the debt. Disclosure of the amount of external assistance
debt rescheduled or cancelled, together with any related terms and
conditions will alert users of the financial statements that such
renegotiation or cancellation has occurred. This will provide useful input to
assessments of financial condition of the entity and changes therein.
Disclosure of Non Compliance with Significant Terms and
Conditions
1.10.25 An entity should disclose, in notes to the financial statements,
significant terms and conditions of external assistance loan or grant
agreements or guarantees that have not been complied with during
the period when non compliance resulted in cancellation of the
assistance or has given rise to an obligation to return assistance
previously provided. The amount of external assistance cancelled or
to be returned should also be disclosed.
1.10.26 External assistance agreements will usually include terms and conditions
50
that must be complied with for ongoing access to assistance funds, as well
as some procedural terms and conditions.
1.10.27 The disclosures required by paragraph 1.10.25 will enable readers to
identify the instances of non compliance that have adversely affected the
funds that are available to support the entity's future operations. It will also
provide input to assessments of whether re-establishment of compliance
with the agreement may occur in the future. Disclosure of non-compliance
with significant terms and conditions in other cases is also encouraged, but
not required (see paragraph 2.1.83).
Transitional Provisions for Section 1.10
1.10.28 [Refer Appendix A]
1.10.29 [Refer Appendix A]
1.10.30 Entities are not required to disclose separately in the notes to the
financial statements the balance of undrawn external assistance as
specified in paragraph 1.10.18 for a period of two years from the
date of first application of this Standard.
1.10.31 When an entity applies the transitional provisions in paragraph
1.10.30, it should disclose that it has done so.
1.10.32 In the first year of application of the requirements of this Standard, an
entity may not have the information necessary to enable it to disclose the
closing balance of undrawn external assistance as required by paragraph
1.10.18.
1.10.33 Paragraph 1.10.30 provides relief from the requirement to apply
paragraph 1.10.18 for a period of two years from initial application of that
paragraph.
1.10.34 To ensure users are informed of the extent to which the requirements of
this Standard have been complied with, paragraph 1.10.31 requires that
entities that make use of these transitional provisions disclose that they
have done so.
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Appendix 1
Illustration of the Requirements of Part 1 of the Standard
This Appendix is illustrative only and does not form part of the Standard. It illustrates
an extract of a Statement of Receipts and Payments and relevant note disclosures for
an entity that has received external assistance loans and grants during the current
and preceding periods. Its purpose is to assist in clarifying the meaning of the
standards by illustrating their application in the preparation and presentation of
general purpose financial statements under the cash basis of accounting. The
receipts and payments heads in these formats may be modified to make them
consistent with those given in the budget of the local body.
CONSOLIDATED FINANCIAL STATEMENTS FOR LOCAL BODY A
CONSOLIDATED STATEMENT OF CASH RECEIPTS AND PAYMENTS
FOR YEAR ENDED MARCH 31, 20XX
(RECEIPTS)
Note 20XX-XX 20XX-XX1
(in thousands Receipts/ Treasury Payments Receipts/ Treasury Payments
of currency (Payments) Account by third (Payments) Account by third
units) controlled parties controlled parties
by entity by entity
RECEIPTS
Taxes &
Cess
Property x - - x - -
tax
Other - - - -
taxes x x
Cesses x - - x - -
Assigned x - - x - -
revenue
x - - x - -
External 10
Assistance
Multilateral x x x x x x
Agencies
Bilateral x x x x x x
Agencies
x x x x x x
Other
Grants and
52
Aid
Central x x x x x x
Government
State x x x x x x
Government
x x x x x x
Other
Borrowings
Receipts 3
from
borrowing
- From x x
banks
- From x x
Government
- From x x
financial
institutions
- others
x x
x x
Capital
Receipts
Proceeds ¤ x x
from
disposal of
property,
plant and
equipment
Investments
Proceeds x x
from
maturity of
investments
Trading
Activities
Receipts x x
from
trading
activities
Other 4 x x x x
receipts
Total x x x x x x
receipts
53
(PAYMENTS)
Note 20XX-XX 20XX-XX1
(in thousands of Receipts/ Treasury Payments Receipts/ Treasury Payments
currency units) (Payments) Account by third (Payments) Account by third
controlled parties controlled parties
by entity by entity
PAYMENTS
Operations
Wages, salaries and (x) (x) (x) (x) (x) (x)
employee benefits
Supplies and (x) (x) (x) (x) (x) (x)
Consumables
Operations & (x) (x) (x) (x) (x) (x)
Maintenance
expenses
(x) (x) (x) (x) (x) (x)
Transfers
Grants (x) (x) - (x) (x) -
Other transfer (x) (x) - (x) (x) -
payments
(x) (x) - (x) (x) -
Capital Expenditures
Purchase/construction (x) (x) (x) (x) (x) (x)
of property, plant and
equipment
Infrastructure assets (x) (x) - (x) (x) -
(x) (x) (x) (x) (x) (x)
Annuities (x) (x) - (x) (x) -
Loan and Interest
Repayments
Repayment of (x) (x) - (x) (x) -
borrowings
Interest payments (x) (x) - (x) (x) -
(x) (x) - (x) (x) -
Investments (x) (x) - (x) (x) -
Other payments 5 (x) (x) (x) (x) (x) (x)
Total payments (x) (x) (x) (x) (x) (x)
Increase/(Decrease) in (x) (x) - (x) (x) -
Cash
Cash at beginning of 2 (x) (x) N/A* (x) (x) N/A
year
Increase/(Decrease) in (x) (x) N/A (x) (x) N/A
Cash
Cash at end of year 2 (x) (x) N/A (x) (x) N/A
* N/A = Not applicable.
54
STATEMENT OF COMPARISON OF BUDGET AND ACTUAL AMOUNT (BUDGET
VARIANCE STATEMENT)
For Local Body X for the Year Ended March 31, 20XX
Budget Approved on the Cash Basis
(Classification of Payments by Functions)
(in thousands of *Actual Revised Original **Difference:
currency units) Amounts Budget Budget Revised
Budget and
Actual
CASH INFLOWS
Taxation x x x x
Government grants x x x x
Scheme grants x x x x
International x x x x
agencies
Other grants and aid x x x x
Borrowing x x x x
Disposal of plant and x x x x
equipment
Trading activities x x x x
Other receipts x x x x
Total receipts x x x x
CASH OUTFLOWS
Health (x) (x) (x) (x)
Education (x) (x) (x) (x)
Storm Water Drains (x) (x) (x) (x)
Welfare (x) (x) (x) (x)
Horticulture (x) (x) (x) (x)
Basic Services for (x) (x) (x) (x)
Urban Poor
Engineering (x) (x) (x) (x)
Projects (x) (x) (x) (x)
Other (x) (x) (x) (x)
Total payments (x) (x) (x) (x)
NET CASH FLOWS x x x x
* Actual amounts encompass both cash and third party settlements.
** The "Difference..." column is not required. However, a comparison between actual
and the original or the revised budget, clearly identified as appropriate, may be
included.
55
ADDITIONAL FINANCIAL STATEMENTS (OPTIONAL)
Additional financial statements may be prepared to provide details of amounts included in the
consolidated statement of cash receipts and payments: for example, to disclose information
by major funds or to disclose expenditures by major functions or programs, or to provide
details of sources of borrowings. Columns disclosing budgeted amounts may also be
included.
STATEMENT OF CASH RECEIPTS BY FUND CLASSIFICATION
20XX 20XX1
(in thousands of currency units) Treasury Treasury
Receipts Account Receipts Account
controlled controlled by
by entity entity
RECEIPTS
General Fund x x x x
Water Supply Fund x x x x
Special Funds x x x x
Trading Funds x x x x
Total receipts x x x x
BORROWINGS
Note 20XX 20XX1
(in thousands of Cash Treasury Resulting Receipts Treasury Resulting
currency units) Receipts Account from controlled Account from
controlled Payments by entity Payments
by entity by third by third
parties parties
BORROWINGS
Domestic x x - x x -
Commercial
Institution
Offshore x x - x x -
Commercial
Institution
Development x x x x x x
Banks and Similar
Lending Agencies
Total borrowings 3 x x x x x x
56
STATEMENT OF PAYMENTS BY PROGRAMS/ACTIVITIES/FUNCTION OF LOCAL BODY
Note 20XX 20XX1
(in thousands of currency Payments Treasury Payments Payments Treasury Payments
units) controlled Account by third controlled Account by third
by entity parties by entity parties
PAYMENTS/EXPENDITURE
Operating Account
Education Services x x x x x x
Health Services x x x x x x
Welfare x x x x x x
Engineering x x x x x x
Horticulture x x x x x x
Basic Services for Urban x x x x x x
Poor
General Administration x x x x x x
Other x x x x x x
Total x x x x x x
payments/expenditure
PAYMENTS/EXPENDITURE
Capital Account
Education Services x x x x x x
Health Services x x x x x x
Welfare x x x x x x
Projects x x x x x x
Storm Water Drains x x x x x x
General Administration x x x x x x
Other x x x x x x
Total x x x x x x
payments/expenditure
Total Operating and x x x x x x
Capital
Accounts
57
Notes to the Financial Statements
1. Accounting Policies
Basis of preparation
The financial statements have been prepared in accordance with ASLB on Financial
Reporting under the Cash Basis of Accounting.
The accounting policies have been applied consistently throughout the period.
Reporting entity
The financial statements are for the ______ local body. The financial statements encompass
the reporting entity as specified in the relevant legislation (______________). This comprises:
i. Departments of the local body; and
ii. Joint ventures that are under the control of the local body.
The consolidated financial statements include all entities controlled during the year. A list of
significant controlled entities is shown in Note 7 to the financial statements.
Certain receipts and payments of the local body are made by the State Treasury. Payments
made on this account in respect of the local body are disclosed in the Treasury Account
column in the Statement of Cash Receipts and Payments and other financial statements.
Payments by Third Parties
The local body also benefits from goods and services purchased on its behalf as a result of
cash payments made by third parties during the period by way of loans and contributions. The
payments made by the third parties do not constitute cash receipts or payments by the local
body but do benefit the local body. They are disclosed in the Payments by third parties
column in the Consolidated Statement of Cash Receipts and Payments and other financial
statements.
Reporting currency
The reporting currency is Indian Rupees.
2. Cash
Cash comprises cash on hand, demand deposits and cash equivalents. Demand deposits and
cash equivalents consist of balances with banks and short term investments. Cash included in
the statement of cash receipts and payments comprise the following amounts:
58
(Rs. in thousands) 20XX 20XX1
Cash on hand and balances with banks x x
Short-term investments x x
x x
Included in the amount stated above is Rs. XX have been provided by the International
Agency XX that is restricted to the construction of road infrastructure.
3. Borrowings
Borrowings comprise cash inflows from banks, similar lending agencies and commercial
institutions and amounts owing in respect of non-cash assistance provided by third parties.
4. Other Receipts
Included in other receipts are fees, fines, penalties and miscellaneous receipts.
5. Other Payments/Expenditure
Included in other payments are miscellaneous payments which cannot be classified under
specific heads.
6. Undrawn Borrowing Facilities Other than Undrawn External Assistance
(See note 10 for undrawn external assistance)
(Rs. in thousands) 20XX 20XX1
Movement in Undrawn Borrowing Facilities
Undrawn borrowing facilities at 1.4.XX x x
Additional loan facility x x
Total available x x
Amount drawn (x) (x)
Facility closure/cancellations (x) (x)
Undrawn borrowing facilities at 31.3.XX. x x
(Rs. in thousands) 20XX 20XX1
Undrawn Borrowing Facilities
Commercial Financial Institutions x x
Banks x x
Total undrawn borrowing facilities x x
59
7. Significant Controlled Entities
Entity Activity or
Purpose
Entity A x
Entity B x
Entity C x
Entity D x
8. Authorisation Date
The financial statement was authorised for publication on XX Month 20XX by a resolution
passed by the Council.
9. Original and Revised Approved Budget and Comparison of Actual and Budget
Amounts
The budget is approved on a cash basis by functional classification. The approved budget
covers the fiscal period from April 1, 20XX to March 31, 20XX and includes all local body
departments these are identified in Note 7 above.
The original budget was approved by a council resolution dated ______ and a supplemental
appropriation of XXX for disaster relief support was approved by a council resolution dated
______ due to the earthquake in the town on (date). The original budget objectives and
policies, and subsequent revisions are explained more fully in the City Management Report
issued in conjunction with the financial statements.
The excess of actual expenditure over the revised budget of 15% (25% over original budget)
for the health function was due to expenditures above the level approved by a council
resolution dated ______ in response to the earthquake. There were no other material
differences between the revised approved budget and the actual amounts.
The budget and the accounting bases differ. The financial statements for the local body are
prepared on the modified cash basis using a classification based on the nature of expenses in
the statement of financial performance. The financial statements are consolidated statements
which include all controlled entities, including joint ventures for the fiscal period from April 1,
20XX to March 31 20XX. The budget is approved on the cash basis by functional
classification and deals only with the local body which excludes joint ventures and certain
other non-market government entities and activities.
The amounts in the statement of cash receipts and payments were adjusted to be consistent
with the cash basis and reclassified by functional classification to be on the same basis as the
revised approved budget. In addition, adjustments to amounts in the statement of cash
receipts and payments for timing differences associated with the continuing appropriation and
60
differences in the entities covered (joint ventures and other entities) were made to express the
actual amounts on a comparable basis to the revised approved budget.
A reconciliation between the actual inflows and outflows as presented in the statement of
comparison of budget and actual amounts and the amounts of total cash receipts and total
cash payments reported in the statement of cash receipts and payments for the year ended
March 31, 20XX is presented below.
Total inflows Total
outflows
Actual Amount on Comparable Basis as Presented in the x x
Budget and Actual Comparative Statement
Basis Differences x x
Timing Differences - -
Entity Differences x x
Total Cash receipts x
Total Cash Payments x
The financial statements and budget documents are prepared for the same period. There is
an entity difference: the budget is prepared for the local body only and the financial
statements consolidate all entities controlled by the local body. There is also a basis
difference: the budget is prepared on a cash basis and the financial statements on the
modified cash basis. This reconciliation could be included on the face of the Statement of
Comparison of Budget and Actual Amounts or as a note disclosure.
10. External Assistance
Payments by Third Parties
All payments made by third parties are made by third parties which are not part of the
economic entity.
External Assistance
External assistance was received in the form of loans and grants from multilateral and
bilateral donor agencies under agreements specifying the purposes for which the assistance
will be utilised. The following amounts are presented in the reporting currency of the entity.
20XX 20XX1
Total Total
Loan Funds
Multilateral Agencies x x
61
Bilateral Agencies x x
Total x x
Grant Funds
Multilateral Agencies x x
Bilateral Agencies x x
Total x x
Total External Assistance x x
Non Compliance with significant terms and conditions and rescheduled and cancelled
debt
There have been no instances of non compliance with terms and conditions which have
resulted in cancellation of external assistance loans.
External assistance grants of X domestic currency units were cancelled during the reporting
period. The cancellation resulted from over estimation of the cost of specified development
projects and consequentially expenditure of an amount less than that committed for the period
by the donor entity.
Undrawn External Assistance
Undrawn external assistance loans and grants at reporting date are amounts specified in a
binding agreement which relate to funding for projects currently under development, where
conditions have been satisfied, and their ongoing satisfaction is highly likely, and the project is
anticipated to continue to completion.
Loans Grants Loans Grants
20XX 20XX 20XX1 20XX1
Closing balance in reporting currency x x x x
The significant terms and conditions that determine or affect access to the amount of undrawn
assistance relate to the achievement of the following specified construction targets for
development of health and education infrastructure: (Entity to identify significant construction
targets).
62
PART 2: FINANCIAL REPORTING UNDER THE CASH BASIS OF ACCOUNTING
ENCOURAGED ADDITIONAL DISCLOSURES
This part of the Standard is not mandatory. It sets out encouraged additional disclosures for
reporting under the cash basis. It should be read together with Part 1 of this Standard, which
sets out the requirements for reporting under the cash basis of accounting. The encouraged
disclosures, which have been set in italic, should be read in the context of the commentary
paragraphs in this part of the Standard, which are in plain type.
63
FINANCIAL REPORTING UNDER THE CASH BASIS OF ACCOUNTING PART 2:
ENCOURAGED ADDITIONAL DISCLOSURES
2.1 Encouraged Additional Disclosures
Definitions
2.1.1 The following terms are used in this part of the Standard with the meanings specified:
Accrual basis means a basis of accounting under which transactions and other events
are recognised when they occur (and not only when cash or its equivalent is received
or paid). Therefore, the transactions and events are recorded in the accounting records
and recognised in the financial statements of the periods to which they relate. The
elements recognised under accrual accounting are assets, liabilities, net assets/equity,
revenue and expenses.
Assets are resources controlled by an entity as a result of past events and from which
future economic benefits or service potential are expected to flow to the entity.
Borrowing costs are interest and other expenses incurred by an entity in connection
with the borrowing of funds.
Closing rate is the spot exchange rate at the reporting date.
Expenses are decreases in economic benefits or service potential during the reporting
period in the form of outflows or consumption of assets or incurrences of liabilities that
result in decreases in net assets/equity, other than those relating to distributions to
owners.
Extraordinary items are (for the purposes of this Standard) cash flows that arise from
events or transactions that are clearly distinct from the ordinary activities of the entity,
are not expected to recur frequently or regularly and are outside the control or influence
of the entity.
A financial asset is any asset that is:
a) Cash;
b) A contractual right to receive cash or another financial asset from another entity;
c) A contractual right to exchange financial instruments with another entity under
conditions that are potentially favourable; or
d) An equity instrument of another entity.
Liabilities are present obligations of the entity arising from past events, the settlement
of which is expected to result in an outflow from the entity of resources embodying
64
economic benefits or service potential.
Ordinary activities are any activities which are undertaken by an entity as part of its
service delivery or trading activities. Ordinary activities include such related activities in
which the entity engages in furtherance of, incidental to, or arising from these activities.
Revenue is the gross inflow of economic benefits or service potential during the
reporting period when those inflows result in an increase in net assets/equity, other
than increases relating to contributions from owners.
Terms defined in Part 1 of this Standard are used in this part of the Standard with their
defined meaning.
Future Economic Benefits or Service Potential
2.1.2 Assets, including cash and other resources, provide a means for entities to achieve
their objectives. Assets that are used to deliver goods and services in accordance with
an entity's objectives but which do not directly generate net cash inflows are often
described as embodying "service potential." Assets that are used to generate net cash
inflows are often described as embodying future economic benefits. To encompass all
the purposes to which assets may be put, this Standard uses the term "future
economic benefits or service potential" to describe the essential characteristic of
assets.
Going Concern
2.1.3 When preparing the financial statements of an entity, those responsible for the
preparation of the financial statements are encouraged to make an assessment of the
entity's ability to continue as a going concern. When those responsible for the
preparation of the financial statements are aware, in making their assessment, of
material uncertainties related to events or conditions which may cast significant doubt
upon the entity's ability to continue as a going concern, the disclosure of those
uncertainties is encouraged.
2.1.4 In assessing whether the entity is a going concern, those responsible for the
preparation of the financial statements:
a) Will need to take into account all available information for the foreseeable future
which will include, but will not necessarily be limited to, twelve months from the
approval of the financial statements; and
b) May need to consider a wide range of factors surrounding current and expected
performance, potential and announced restructurings of organisational units,
estimates of receipts or the likelihood of continued government funding, and
potential sources of financing before it is appropriate to conclude that the entity is a
going concern.
65
2.1.5 There may be circumstances where the usual going concern tests of liquidity and
solvency as applied to business enterprises appear unfavorable, but other factors
suggest that the entity is nonetheless a going concern. For example:
a) In assessing whether the entity is a going concern, the power to levy rates or taxes
may enable some entities to be considered as a going concern even though their
cash payments may exceed their cash receipts for extended periods; and
b) For an individual entity, an assessment of its cash flows for a reporting period may
suggest that the entity is not a going concern. However, there may be multi-year
funding agreements in place with the government that will ensure the continued
operation of the entity.
Extraordinary Items
2.1.6 An entity is encouraged to separately disclose the nature and amount of each
extraordinary item. The disclosure may be made on the face of the statement of cash
receipts and payments, or in other financial statements or in the notes to the financial
statements.
2.1.7 Extraordinary items are characterised by the fact that they arise from events or
transactions that are distinct from an entity's ordinary activities, are not expected to
recur frequently or regularly and are outside the control or influence of the entity.
Accordingly, extraordinary items are rare, unusual and material.
Distinct from Ordinary Activities
2.1.8 Whether an event or transaction is clearly distinct from the ordinary activities of the
entity is determined by the nature of the event or transaction in relation to the activities
ordinarily carried on by the entity rather than by the frequency with which such events
are expected to occur. An event or transaction may be extraordinary for one entity, but
not extraordinary for another entity, because of the differences between their
respective ordinary activities.
Not Expected to Recur in the Foreseeable Future
2.1.9 The event or transaction will be of a type that would not reasonably be expected to
recur in the foreseeable future, taking into account the environment in which the entity
operates. The nature of extraordinary items is such that they would not normally be
anticipated at the beginning of a reporting period and therefore would not be included
in a budget. Inclusion of an item in a budget suggests that the occurrence of the
specific item is foreseen and therefore not extraordinary.
Outside the Control or Influence of the Entity
2.1.10 The event or transaction will be outside the control or influence of the entity. A
transaction or event is presumed to be outside the control or influence of an entity if the
66
decisions of the entity do not normally influence the occurrence of that transaction or
event.
Identifying Extraordinary Items
2.1.11 Whether or not an item is extraordinary will be considered in the context of the entity's
operating environment. Judgment will be exercised in each case.
2.1.12 Examples of cash flows associated with events or transactions that may, although not
necessarily, give rise to extraordinary items for some entities are:
a) Short-term cash flows associated with the provision of services to refugees where
the need for such services was unforeseen at the beginning of the period, outside
the ordinary scope of activities for the entity and outside the control of the entity. If
such services were predictable or occurring in more than one reporting period they
would not generally be classified as extraordinary; and
b) The cash flows associated with the provision of services following a natural or man-
made disaster, for example, the provision of shelter to homeless people following
an earthquake. In order for a particular earthquake to qualify as an extraordinary
event it would need to be of a magnitude that would not normally be expected in
either the geographic area in which it occurred or the geographic area associated
with the entity, and the provision of emergency services or the restoration of
essential services would need to be outside the scope of ordinary activities of the
entity concerned. Where an entity has responsibility for providing assistance to
those affected by natural disasters, the costs associated with this activity would not
generally meet the definition of an extraordinary item.
2.1.13 The restructuring of activities is an example of an event which would normally not be
extraordinary for the entity. All three criteria within the definition of an extraordinary item
must be satisfied before an item can be classified as extraordinary. A restructuring may
clearly be distinct from the ordinary activities of the entity. It is only in circumstances
where the restructuring is imposed by government or by an external regulator or other
external authority that it could be classified as outside the control or influence of the
entity.
2.1.14 The disclosure of the nature and amount of each extraordinary item may be made on
the face of the statement of cash receipts and payments or other financial statements
that might be prepared or in the notes to those financial statements. An entity may also
decide to disclose only the total amount of extraordinary items on the face of the
statement of cash receipts and payments and the details in the notes.
Administered Transactions
2.1.15 An entity is encouraged to disclose in the notes to the financial statements, the amount
and nature of cash flows and cash balances resulting from transactions administered
67
by the entity as an agent on behalf of others where those amounts are outside the
control of the entity.
2.1.16 The cash flows associated with transactions administered by an entity acting as an
agent on behalf of others may not pass through a bank account controlled by the
reporting entity. In these cases, the entity cannot use, or otherwise benefit from, the
cash it administers in the pursuit of its own objectives. These cash flows are not
controlled by the entity and therefore are not included in the totals shown on the face of
the statement of cash receipts and payments or other financial statements that might
be prepared. However, disclosure of the amount and nature of these transactions by
major type is encouraged because it provides useful information on the scope of the
entity's activities and it is relevant for an assessment of an entity's performance.
2.1.17 Where such cash receipts and payments pass through a bank account controlled by
the entity, they are treated as cash flows and balances of the entity itself and included
in the totals shown on the face of the statement of cash receipts and payments.
Paragraph 1.3.13(a) of Part 1 of this Standard permits such cash receipts and
payments to be reported on a net basis. Paragraphs 2.1.21 to 2.1.22 below provide
guidance on the cash receipts, payments and balances that:
a) May be controlled by a entity and will be reported in the statement of cash receipts
and payments in accordance with Part 1 of this Standard; and
b) Are administered transactions which will not be included on the face of the
statement of cash receipts and payments or other financial statements that might
be prepared but for which disclosure is encouraged.
2.1.18 2.1.20 [Refer Appendix A]
"Pass-through" Cash Flows
2.1.21 In some cases, the administrative arrangements in place in respect of the revenue
collection activities a government or government entity undertakes as an agent of
another party may provide for the cash collected to be initially deposited in the entity's
own bank account before it is transferred to the ultimate recipient. Cash flows arising
as a consequence of these transactions are sometimes termed "pass-through" cash
flows. In these cases, the entity will:
a) Control the cash it collects in its capacity as an agent for the, usually short, period
the cash is deposited in the entity's bank account prior to transfer to third parties;
b) Usually benefit from any interest arising from amounts deposited in interest bearing
accounts prior to its transfer to the other entity; and
c) Have an obligation to transfer the cash collected to third parties in accordance with
legislative requirements or administrative arrangements.
68
When cash inflows from administered transactions pass through a bank account
controlled by the reporting entity, the cash receipts, cash transfers and cash balances
arising from the collection activity will be included in the entity's statement of cash
receipts and payments in accordance with paragraph 1.3.4(a)(i) of Part 1 of this
Standard. Paragraph 1.3.13(a) of Part 1 of this Standard specifies that cash receipts
and payments which arise from transactions the entity administers on behalf of other
parties and which are recognised in the financial statements may be reported on a net
basis.
Transfer Payments
2.1.22 Consistent with a government's objectives and with legislation or other authority,
amounts appropriated to an entity may include amounts to be transferred to third
parties in respect of, for example, pensions. In some cases, these amounts will pass
through a bank account controlled by the entity. Where this occurs, the entity will
recognise the cash appropriated for transfer during the reporting period as a cash
receipt, the amounts transferred during that reporting period as a cash payment and
any amounts held at the end of the reporting period for transfer in the future as part of
closing balance of cash.
Disclosure of Major Classes of Cash Flows
2.1.23 An entity is encouraged to disclose, either on the face of the statement of cash receipts
and payments or other financial statements or in the notes to those statements:
a) [Refer Appendix A]
b) proceeds from borrowings. In addition, the amount of borrowings may be further
classified into type and source.
2.1.24 -2.1.29 [Refer Appendix A]
2.1.30 Paragraph 1.3.12 of Part 1 of this Standard requires the disclosure of total cash
receipts of the entity showing separately a sub-classification of total cash receipts using
a classification basis appropriate to the entity's operations. The sub-classification of
cash receipts into appropriate classes will depend upon the size, nature and function of
the amounts involved. In addition to disclosure of the amount of receipts from external
assistance and borrowings, the following sub-classifications may be appropriate:
a) Receipts from taxation (these may be further sub-classified into types of taxes);
b) Receipts from fees, fines, penalties and licenses;
c) Receipts from exchange transactions including receipts from the sale of goods and
services and user charges (where these are classified as exchange transactions);
69
d) The purposes for which external assistance grants and loans are provided, the
providers of that assistance and the amount provided;
e) Receipts from other grants, transfers, or budget appropriations (possibly classified
by source and purpose);
f) Receipts from interest and dividends; and
g) Receipts from gifts and donations.
Related Party Disclosures
2.1.31 An entity is encouraged to disclose in the notes to the financial statements information
required by Accounting Standard for Local Bodies on "Related Party Disclosures."5
2.1.32 ASLB 20, in the accrual based series of ASLBs, defines related parties and other
relevant terms, requires the disclosure of related party relationships where control
exists and requires the disclosure of certain information about related party
transactions, including information about aggregate remuneration of key management
personnel.
Disclosure of Assets, Liabilities and Comparison with Budgets
2.1.33 An entity is encouraged to disclose in the notes to the financial statements:
a) Information about the assets and liabilities of the entity; and
b) A comparison with budgets
2.1.34 Entities control significant resources in addition to cash and deploy those resources in
the achievement of service delivery objectives. They also borrow to fund their activities,
incur other debts and liabilities in the course of their operations and make commitments
to expend money in the future on the acquisition of capital assets. Non-cash assets
and liabilities will not be reported on the face of the statement of cash receipts and
payments or other financial statements that might be prepared under the cash basis of
accounting. However, entities maintain records of, and monitor and manage, their debt
and other liabilities and their non-cash assets. The disclosure of information about
assets and liabilities and the costs of particular programs and activities will enhance
accountability and is encouraged by this Standard.
2.1.35 Entities that make such disclosures are encouraged to identify assets and liabilities by
type, for example, by classifying:
a) Assets as receivables, investments or property plant and equipment; and
5
Formulation of this Accounting Standard for Local Bodies is yet to be taken up.
70
b) Liabilities as payables, borrowings by type or source and other liabilities.
While such disclosures may not be comprehensive in the first instance, entities are
encouraged to progressively develop and build on them. In order to comply with the
requirements of paragraphs 1.3.5 and 1.3.37 of Part 1 of this Standard, these
disclosures will need to comply with qualitative characteristics of financial information
and should be clearly described and readily understood. Accrual based ASLBs
including ASLB on, "Leases" 6, ASLB 17 on, "Property, Plant and Equipment" and
ASLB on "Provisions, Contingent Liabilities and Contingent Assets"7 can provide useful
guidance to entities disclosing additional information about assets and liabilities.
Comparison with Budgets
2.1.36 Entities are typically subject to budgetary limits in the form of appropriations or other
budgetary authority which may be given effect through authorising legislation. One of
the objectives of financial reporting by these entities is to report on whether cash was
obtained and used in accordance with the legally adopted budget. In some
jurisdictions, this requirement is reflected in legislation. Entities which make publicly
available their approved budgets are required to comply with the requirements of
paragraphs 1.9.1 to 1.9.46 of Part 1 of this Standard. This Standard encourages other
entities (that is, entities which do not make publicly available their approved budgets) to
include in their financial statements the disclosure of a comparison of actual with the
budgeted amounts for the reporting period where the financial statements and the
budget are on the same basis of accounting. Reporting against budgets for these other
entities may be presented in different ways, including:
a) The preparation of a note with separate columns for budgeted amounts and actual
amounts. A column showing any variances from the budget or appropriation may
also be presented for completeness; and
b) Disclosure that the budgeted amounts have not been exceeded. If any budgeted
amounts or appropriations have been exceeded, or payments made without
appropriation or other form of authority, then details may be disclosed by way of
note to the relevant item in the financial statements.
2.1.37 Entities which disclose in their financial statements a comparison of actual with
budgeted amounts are encouraged to include in the financial statements a cross
reference to reports which include information about service achievements.
2.1.38 [Refer Appendix A]
6
This Accounting Standard for Local Bodies is under preparation.
7
This Accounting Standard for Local Bodies is under preparation.
71
2.1.39 Additional budget information, including information about service achievements, may
be presented in documents other than financial statements. Entities which disclose in
their financial statements a comparison of actual with budgeted amounts are
encouraged to include in their financial statements a cross reference to such
documents, particularly to link budget and actual data to non-financial budget data and
service achievements.
2.1.40 [Refer Appendix A]
Consolidated Financial Statements
2.1.41 An entity is encouraged to disclose in the notes to the financial statements:
a) The proportion of ownership interest in controlled entities and, where that interest is
in the form of shares, the proportion of voting power held (only where this is
different from the proportionate ownership interest);
b) Where applicable:
i. The name of any controlled entity in which the controlling entity holds an
ownership interest and/or voting rights of 50% or less, together with an
explanation of how control exists; and
ii. The name of any entity in which an ownership interest of more than 50% is held
but which is not a controlled entity, together with an explanation of why control
does not exist; and
c) In the controlling entity's separate financial statements, a description of the method
used to account for controlled entities.
2.1.42 A controlling entity which does not present a consolidated statement of cash receipts
and payments is encouraged to disclose the reasons why the consolidated financial
statements have not been presented together with the basis on which controlled
entities are accounted for in its separate financial statements. It is also encouraged to
disclose the name and the principal address of its controlling entity that publishes
consolidated financial statements.
2.1.43 Paragraph 1.6.20(b) of Part 1 of this Standard requires that the reasons for non-
consolidation of a controlled entity should be disclosed. Paragraph 1.6.7 of Part 1 of
the Standard also provide that a controlling entity that is itself a wholly owned entity or
a controlling entity that is virtually wholly owned, need not present a consolidated
financial statement. When this occurs, the disclosure of the information in paragraph
2.1.42 above is encouraged.
72
Acquisitions and Disposals of Controlled Entities and Other Operating Units
2.1.44 An entity is encouraged to disclose and present separately the aggregate cash flows
arising from acquisitions and from disposals of controlled entities or other operating
units.
2.1.45 An entity is encouraged to disclose in the notes to the financial statements, in
aggregate in respect of both acquisitions and disposals of controlled entities or other
operating units during the period, each of the following:
a) The total purchase or disposal consideration (including cash or other assets);
b) The portion of the purchase or disposal consideration discharged by means of
cash; and
c) The amount of cash in the controlled entity or operating unit acquired or disposed
of.
2.1.46 The separate presentation of the cash flow effects of acquisitions and disposals of
controlled entities and other operations, together with the separate disclosure of the
amounts of assets and liabilities acquired or disposed of, helps to distinguish those
cash flows from cash receipts and payments arising from the other activities of the
entity. To enable users to identify the effects of both acquisitions and disposals, the
cash flow effects of disposals should not be deducted from those acquisitions.
2.1.47 The aggregate amount of the cash paid or received as purchase or sale consideration
is reported in the statement of cash receipts and payments net of cash acquired or
disposed of.
2.1.48 Paragraph 2.1.33 encourages the disclosure of assets and liabilities of the entity.
Assets and liabilities other than cash of a controlled entity or operating unit acquired or
disposed of may also be separately disclosed, summarised by each major category.
Consistent with the requirement of paragraph 1.3.37 of Part 1 of this Standard, where
such disclosure is made, the assets and liabilities should be clearly identified and the
basis on which they are recognised and measured explained.
Joint Ventures
2.1.49 An entity is encouraged to make disclosures about joint ventures which are necessary
for a fair presentation of the cash receipts and payments of the entity during the period
and the balances of cash as at reporting date.
2.1.50 Many entities establish joint ventures to undertake a variety of activities. The nature of
these activities range from commercial undertakings to provision of community services
at no charge. The terms of a joint venture are set out in a contract or other binding
arrangement and usually specify the initial contribution from each joint venturer and the
73
share of revenues or other benefits (if any) and expenses of each of the joint venturers.
Entities which report on a cash basis will generally report:
a) As cash payments, the cash expended in the acquisition of an interest in a joint
venture and in the ongoing operations of the joint venture; and
b) As cash receipts, the cash received from the joint venture.
Disclosures about joint ventures may include a listing and description of interests in
significant joint ventures. Accounting Standard for Local Bodies on "Interests in Joint
Ventures" 8 in the accrual based series of ASLBs provides guidance on the different
forms and structures that joint ventures may take and potential additional disclosures
that might be made.
2.1.51-2.1.63 [Refer Appendix A]
Assistance Received From Non-Governmental Organisations (NGOs)
2.1.64 Where practicable, an entity is encouraged to apply to assistance received from non-
governmental organisations (NGOs), the required disclosures identified in paragraphs
1.10.1 to 1.10.27 of Part 1 of this Standard and the encouraged disclosures identified in
paragraphs 2.1.66 to 2.1.93 below.
2.1.65 Reporting entities are not required to make the disclosures identified in paragraphs
1.10.1 to 1.10.27 of Part 1 in respect of assistance received from non-governmental
organisations (NGOs). This is because the costs of collecting and aggregating the
information necessary to comply with those requirements may be greater than its
benefits. However, making the disclosures about assistance received from NGOs
which are identified in paragraphs 1.10.1 to 1.10.27, together with the disclosures
encouraged in paragraphs 2.1.66 to 2.1.93 below can provide additional input to
assessments of the extent to which the reporting entity is dependent on assistance
from these organisations to support its activities. Accordingly, reporting entities are
encouraged to apply the disclosures identified in this Standard to assistance received
from NGOs, where it is practicable to do so.
Recipients of External Assistance
2.1.66 An entity is encouraged to disclose in notes to the financial statements:
8
This Accounting Standard for Local Bodies is under preparation.
74
a) The purposes for which external assistance was received during the reporting
period, showing separately amounts provided by way of loans and grants; and
b) The purposes for which external assistance payments were made during the
reporting period.
2.1.67 An entity may receive external assistance for many purposes including assistance to
support its:
a) Economic development or welfare objectives, often termed development
assistance;
b) Emergency relief objectives, often termed emergency assistance; and
c) [Refer Appendix A]
d) [Refer Appendix A]
e) Trading activities, including export credits or loans offered by export/import banks
or other government agencies, often termed trade finance.
2.1.68 Part 1 of this Standard requires disclosure of the total amount of external assistance
received during the reporting period showing separately the total amount received by
way of grants and loans. Disclosure of external assistance received by way of loan or
grant will enable users to determine the purposes for which assistance was provided
during the period, the amounts thereof and whether the entity has an obligation to
repay the assistance provided at some time in the future.
2.1.69 Disclosure of the purposes for which external assistance payments were made during
the reporting period will further enhance the entity's accountability for its use of external
assistance received.
2.1.70 An entity is encouraged to identify in notes to the financial statements each provider of
external assistance during the reporting period and the amount provided, excluding any
undrawn amounts, showing separately amounts provided by way of loans and grants in
the currency provided.
2.1.71 Disclosure of each provider of external assistance and the amount provided by way of
loan and grant will indicate the extent of diversification of sources of assistance. This
will assist readers of the financial statements to determine, for example, whether the
entity is dependent on particular agencies for assistance, the extent of that dependency
and the currency in which it was provided, and whether the assistance is provided by
way of a grant or a loan which will need to be repaid in the future. The disclosure
encouraged by this paragraph excludes amounts that have not been drawn down
during the period. Paragraph 2.1.72 encourages disclosure of information about
undrawn amounts of external assistance in certain circumstances.
75
2.1.72 In respect of external assistance that is undrawn at reporting date and is disclosed in
accordance with paragraph 1.10.18 of Part 1 of this Standard, an entity is encouraged
to disclose in notes to the financial statements:
a) Each provider of loan assistance and grant assistance and the amount provided by
each;
b) The purposes for which the undrawn loan assistance and undrawn grant
assistance may be used;
c) The currency in which the undrawn assistance is held or will be made available;
and
d) Changes in the amount of undrawn loan assistance and undrawn grant assistance
during the period.
2.1.73 Undrawn external assistance balances are required to be disclosed in certain
circumstances by paragraph 1.10.18 of Part 1 of this Standard. The disclosures
encouraged by paragraph 2.1.72 will enable readers of the financial statements to
determine the purposes for which such undrawn assistance may be used in the future,
the currency in which that undrawn assistance is held or will be made available, and
whether the amount of undrawn loan and grant assistance declined or increased during
the period.
2.1.74 As is appropriate for the reporting entity, the disclosures could usefully identify such
matters as the opening balance of undrawn loans and grants, the amount of new loans
and new grants approved or otherwise made available during the period, the total
amount of loans and grants drawn or utilised during the period, the total amounts of
loans and grants cancelled or expired during the period, and the closing balance of
undrawn loans and grants. Such disclosures will assist users in identifying not only the
amount of the change in undrawn balances, but also the components of that change.
2.1.75 Where disclosures of changes in the amount of undrawn assistance are made in the
entity's reporting currency, external assistance denominated in a foreign currency will
be reported in the entity's reporting currency by applying to the foreign currency
amount the exchange rate on the date of each applicable transaction, consistent with
the requirements of Part 1 of this Standard.
2.1.76 An entity is encouraged to disclose in notes to the financial statements the terms and
conditions of external assistance agreements that determine or affect access to, or limit
the use of, external assistance.
2.1.77 Some external assistance agreements limit or specifically define the use or purpose
for which the external assistance may be used, or limit the sources from which goods
or services may be purchased. This type of external assistance term or condition may
76
specify that the funds are available only to purchase specific inputs for the construction
of specified facilities at a specified location, or that the goods or services purchased
under the external assistance agreement must originate from a specified country or
countries.
2.1.78 Some external assistance may be released on specific dates, or may be released upon
the entity:
a) Undertaking actions specified in an external assistance agreement, such as
implementing specific policy changes; or
b) Achieving ongoing performance targets, such as budget deficit targets or other
broad economic objectives.
2.1.79 Disclosure of terms and conditions that determine or affect access to external
assistance will indicate the extent to which external assistance is time bound and/or is
dependent upon the entity taking certain actions and achieving certain performance
objectives, and what those actions and performance objectives are.
2.1.80 An entity is encouraged to disclose in notes to the financial statements:
a) The outstanding balance of any external assistance loans for which principal and/or
interest payments have been guaranteed by third parties, any terms and conditions
related to those loans, and any additional terms and conditions arising from the
guarantee; and
b) The amount and terms and conditions of external assistance loans and grants for
which performance of related terms and conditions have been guaranteed by third
parties, and any additional terms and conditions arising from the guarantee.
2.1.81 The balance of external assistance loans borrowed by an entity and payment of
interest thereon may be guaranteed, in total or up to a specified amount. Terms and
conditions associated with the loans may also require the recipient to take certain
actions, or achieve agreed outcomes such as setting tariffs according to an agreed
formula, the performance of which are guaranteed by third parties. External assistance
grants may also be subject to similar terms and conditions, the performance of which
are guaranteed by third parties.
2.1.82 Disclosure of the amounts of external assistance loans and grants guaranteed by
third parties will indicate the extent of support from another entity to obtain the
benefits of the external assistance agreement. Disclosure of the terms and conditions
of external assistance loans and grants that have been guaranteed, and any
additional terms and conditions imposed to effect that guarantee, will indicate the
additional performance requirements or conditions that arise as a consequence of
securing the guarantee.
77
2.1.83 An entity is encouraged to disclose in notes to the financial statements other
significant terms and conditions associated with external assistance loans, grants or
guarantees that have not been complied with, together with the consequence of the
non compliance.
2.1.84 Paragraph 1.10.25 of Part 1 of this Standard requires the disclosure of significant
terms and conditions that have not been complied with when non compliance has
resulted in cancellation of the assistance or given rise to an obligation to return
assistance previously provided. External assistance agreements may also include
other significant terms and conditions that are to be complied with, as well as some
procedural terms and conditions. Consequences of non compliance with these other
significant terms and conditions may include a reduction in the amount, or variation in
the timing, of funds that may be drawn or made available in the future until the default
is corrected. They may also include an increase in the interest rate charged on loan
funds.
2.1.85 Identifying these other significant terms and conditions which have not been complied
with is likely to require professional judgment. That judgment will be exercised in the
context of the entity's particular circumstances and by reference to the qualitative
characteristics of financial statements. These terms and conditions are likely to be
those where non compliance is likely to affect the amount or timing of funds that will
be available to support the entity's future operations.
2.1.86 An entity is encouraged to disclose in the notes to the financial statements, a
summary of the repayment terms and conditions of outstanding external assistance
debt. Where disclosures of future debt service payments denominated in a foreign
currency are made, the entity is encouraged to report them in the entity's reporting
currency by applying to the foreign currency amount of those payments the closing
rate.
2.1.87 External assistance debt agreements will include terms and conditions relating to
such matters as the grace period, interest rate, current debt service payments, future
debt service payments, remaining term of the loan, currency of debt service
payments, principal repayment requirements (where repayment of the principal is
deferred until the end of the loan term, or some other future date), and other
significant repayment terms.
2.1.88 Debt service payments may be a significant cash outlay for the entity and will impact
on cash available to fund current and additional operations. Disclosure of repayment
terms and conditions of outstanding external assistance debt will enable readers of
the financial statements to determine when debt service payments (principal and
interest or service charges) will commence, and the amount of principal and interest
or service charge payable.
78
2.1.89 Disclosure of information about repayment terms and conditions may require the
estimation of, for example, the interest rate to be applied to variable rate debt. The
estimated interest rate will usually be determined by reference to applicable interest
rates at the closing date. In accordance with the requirements of paragraphs 1.3.30 to
1.3.37 of Part 1 of this Standard, when an entity elects to make disclosures which
involve estimates, the accounting policies selected and applied in developing such
estimates will be disclosed where necessary for a proper understanding of the
financial statements.
2.1.90 An entity is encouraged to disclose separately in the notes to the financial statements
the value of external assistance received in the form of goods or services.
2.1.91 Significant resources may be received under external assistance agreements in the
form of goods or services. This will occur when new or used goods such as vehicles,
computers or other equipment are transferred to the entity under an external
assistance agreement. It will also occur when food aid is provided to a local body for
distribution to its citizens under an external assistance agreement. For some
recipients, goods or services may be the major form in which external assistance is
received.
2.1.92 Disclosure of the value of external assistance received as goods and services will
assist readers of the financial statements to better understand the full extent of
external assistance received during the reporting period. However, in some cases
and for some recipients, determining the value of such goods and services can be a
difficult, time consuming and costly process. This is particularly so where a domestic
market price for those goods and services cannot be readily determined, where the
goods and services provided are not widely traded in international markets or where
they are of an unique nature, such as often occurs in respect of emergency
assistance.
2.1.93 This Standard does not specify the basis on which the value of the goods or services
is to be determined. Therefore, their value may be determined as the depreciated
historical cost of physical assets at the time the assets are transferred to the recipient
or the price paid for the food by the external assistance agency. It may also be
determined on the basis of an assessment of the value by management of the
transferor, or the recipient, or by a third party. Where the value of external assistance
in the form of goods or services is disclosed, paragraph 1.10.21 of Part 1 of this
Standard requires the disclosure of the basis on which that value is determined.
Where such is described as fair value it will conform with the definition of fair value
that is, the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable and willing parties in an arm's length transaction.
79
2.2 Governments and Other Public Sector Entities Intending to
Migrate to the Accrual Basis of Accounting
Presentation of the Statement of Cash Receipts and Payments
2.2.1 An entity which intends to migrate to the accrual basis of accounting is encouraged to
present a statement of cash receipts and payments in the same format as that
required by Accounting Standard for Local Bodies (ASLB) on, "Cash Flow
Statements." 9
2.2.2 Part 2 of this Standard encourages disclosure of information additional to that
required by ASLB 2. Entities which adopt the format of ASLB 2 for the presentation of
the statement of cash receipts and payments are encouraged to also make the
additional disclosures identified in Part 2 of this Standard.
Scope of Consolidated Statements - Exclusions from the Economic Entity
2.2.3 When an entity adopts the accrual basis of accounting in accordance with the accrual
ASLBs, it will not consolidate entities in which control is intended to be temporary
because the controlled entity is acquired and held exclusively with a view to its
subsequent disposal in the near future. Temporary control may occur where, for
example, a local body intends to transfer its interest in a controlled entity to a
government or another entity.
2.2.4 Part 1 of this Standard does not provide for such entities to be excluded from the
consolidated financial statements prepared under the cash basis. This is because:
a) The cash of an entity which is controlled on only a temporary basis can be used
for the benefit of the economic entity during the period of temporary control; and
b) The potentially complex consolidation adjustments that may be necessary under
the accrual basis will not arise under the cash basis.
2.2.5 For this exemption from consolidation to apply under the accrual ASLBs, the
controlling entity must be demonstrably committed to a formal plan to dispose of, or
no longer control, the entity that is subject to temporary control. For the exemption to
apply at more than one successive reporting date, the controlling entity must
demonstrate an ongoing intent to dispose of, or no longer control, the entity that is
subject to temporary control. An entity is demonstrably committed to dispose of, or no
longer control, another entity when it has a formal plan to do so and there is no
realistic possibility of withdrawal from that plan.
2.2.6 Entities preparing to migrate to the accrual basis will need to be aware of this
9
This Accounting Standard for Local Bodies is under preparation.
80
difference in consolidation requirements of the accrual and cash basis ASLBs, and to
determine whether, for any controlled entities included in the consolidated statement
of receipts and payments, control is temporary.
81
Appendix 2
Illustration of Certain Disclosures Encouraged in Part 2 of the Standard
This appendix is illustrative only. The purpose of the appendix is to illustrate the application of
the encouragements and to assist in clarifying their meaning.
Extract from notes to financial statements of Entity ABC
Administered Transactions (paragraph 2.1.15)
Administered transactions comprise cash flows resulting from transactions administered by
the Entity as an agent on behalf of the government and specific government bodies. All cash
collected in the capacity of an agent is deposited in a separate bank account. These accounts
are not controlled by the Entity and the cash deposited in them cannot be used by the Entity
without specific authorisation by the relevant government body.
(Rupees in lakhs)
Nature of Transaction 20XX-XX 20XX-XX-
1
Cash collected on behalf of Library cess X X
State Government
Election Commission Enrolment fees X X
X X
Cash transferred to (X) (X)
respective entities
- -
Extract from notes to financial statements of Local Body X
Assets and Liabilities (paragraph 2.1.33(a))
Property, plant and equipment
The local body commenced the process of identifying and valuing major classes of its
property, plant and equipment. The assets are stated at historical cost, wherever available, or
valuation. The valuations were performed by an independent professional valuer.
(rupees in lakhs) 200X 200X-1
Plant and equipment X X
82
Land and buildings
Land X X
Buildings X X
X X
(Extract from notes to financial statements of Local Body X: Assets and Liabilities (paragraph
2.1.33(a) continued)
Borrowings
The borrowings of the Government are listed below:
(rupees in lakhs) 20XX-XX 20XX-XX-1
Balance at beginning of year X X
BORROWINGS
From banks X X
From financial institutions X X
From Development Banks and Similar Lending X X
Agencies
Total borrowings X X
REPAYMENTS
To banks (X) (X)
To financial institutions (X) (X)
To Development Banks and Similar Lending (X) (X)
Agencies
Total repayments (X) (X)
Balance at end of year X X
83
Extract from notes to financial statements of local Body X continued)
Comparison with budget (paragraph 2.1.33(b)
(rupees in lakhs) Actual Budgeted Variance
RECEIPTS
Tax receipts
Property tax X X X
Advertisement tax
Other taxes X X (X)
X X X
Non tax receipts
Fees and fines X X X
Receipts from trading activities X X X
Others X X X
X X X
Grants in aid
Government
International agencies X X -
Other Grants and Aid X X -
X X -
Borrowings
Government X X (X)
Banks X X (X)
Other agencies X X (X)
X X (X)
Capital Receipts
Proceeds from disposal of assets X X X
Other receipts X X X
Total receipts X X X
84
(rupees in lakhs) Actual Budgeted Variance
PAYMENTS
Operations
Wages, salaries and employee benefits (X) (X) (X)
Other operational expenses (X) (X) (X)
(X) (X) (X)
Grants and contributions
Grants (X) (X) -
Other transfers (X) (X) -
(X) (X) -
Capital Expenditures
Purchase/construction of fixed assets (X) (X) (X)
(X) (X) (X)
Loan and Interest Repayments
Repayment of borrowings (X) (X) -
Interest payments (X) (X) -
(X) (X) -
Other payments (X) (X) (X)
Total payments (X) (X) (X)
NET RECEIPTS/(PAYMENTS) X X X
85
Extract from notes to financial statements of Entity XYZ
Controlled Entities (paragraphs 2.1.41, 2.1.44 and 2.1.45)
Entity XYZ has the power to govern the financial and operating policies so as to benefit from
the activities of other entities. These are controlled entities. All controlled entities are included
in the consolidated financial statements. (Paragraph 1.6.20(a) in Part 1 of this Standard
requires that a list of significant controlled entities be disclosed.)
Enterprise Nature of Ownership Interest Voting Power
controlling (%) (%)
interest
Enterprise A XX XX
Enterprise B XX XX
Enterprise C XX XX
Enterprise D XX XX
Enterprise E XX XX
Significant Joint Ventures (paragraph 2.1.49)
Name of Joint Principal Activity Interest
Venture 20XX-XX 20XX-XX-1
% %
XX XX
XX XX
86
Extract From Notes to the Financial Statements of Local body C
Assistance Provided by Non-Governmental Organisations (NGOs) (Paragraph
2.1.64)
Assistance from NGOs is included in the amount of "Other Grants and Aid" in the
Statement of Cash Receipts and Payments. The amount of assistance from NGOs
received during the reporting period in the reporting currency is:
20XX 20XX-XX-1
Cash Payments by Cash Payments by
Receipts third parties Receipts third parties
Grant Funds X X X -
Loan Funds - - - -
Total X X X -
Assistance was received from NGOs under agreements specifying that the
assistance would be utilised for the following purposes:
Development Emergency Other Total
Assistance Assistance
20XX 20XX- 20XX 20XX- 20XX 20XX- 20XX 20XX-
XX-1 XX-1 XX-1 XX-1
NGO 1 X X - - - X X X
NGO 2 - - X - - - X -
NGO 3 X X X - - - X X
Total X X X - - X X X
USD X X X X - X X X
Euro X X X - - - X X
Yen - - X X - - X X
The currency in which external assistance was provided was as follows:
· NGO 1 US Dollars to the amount of YYY and other currency being
(specify currency) to the amount of X
· NGO 2 Euros to the amount of YYY
· NGO 3 Yen to the amount of YYY
The assistance was fully used for the purposes specified.
87
While NGO 1, 2 and 3 have indicated their intention to provide ongoing emergency
assistance as the need arises and their resources allow, the extent of the assistance
is not subject to binding written agreements. It will be determined on the basis of an
assessment of needs and the capacity of each NGO to provide ongoing assistance.
During 200X, NGO 1 provided medical teams and medical equipment in support of
earthquake victims in the ZZZ region. Temporary shelter, food and clothing were also
supplied by NGO 2. The value of the goods and services received has been
estimated at XX rupees. The value of the specialised emergency assistance provided
has been determined based on cost estimates provided by the NGOs involved.
There have been no instances of non-compliance with terms and conditions which
have resulted in cancellation of assistance grants.
There were no amounts of undrawn assistance from NGOs in 20XX or 20XX-XX-1.
88
Extract From Notes to the Financial Statements of Local body C
Classes of External Assistance (Paragraph 2.1.66 and 2.1.70)
During the reporting period external assistance was received from multilateral and bilateral external assistance agencies under
agreements specifying that the assistance would be utilised for the following purposes:
Development Assistance Emergency Assistance Other Total
20XX 20XX-XX-1 20XX 20XX-XX-1 20XX 20XX-XX-1 20XX 20XX-XX-
1
Loan Funds X X - - X - X X
Grant Funds X - X X - - X X
Total X X X X X - X X
Amount utilised X X X X X - X X
% utilised X X X X X - X X
Agency 1 Agency 2 Agency 3 Agency 4
20XX 20XX-XX-1 20XX 20XX-XX-1 20XX 20XX-XX-1 20XX 20XX-XX-
1
Loan Funds X X - - X - X X
Grant Funds X - X X - X X X
Total X X X X X X X X
Currency: US Dollar X X - - - - - -
89
Euro - - X X - - - -
Yen - - - - X X - -
Other - - - - - - X X
Undrawn External Assistance (Paragraph 2.1.72)
Undrawn external assistance loans and grants consist of amounts which have been specified in a binding agreement with external
assistance agencies but have not been utilised at reporting date, and are subject to terms and conditions that have been satisfied in
the past and it is anticipated will be satisfied in the future. External assistance loans cancelled or expired due to non-incurrence of
budgeted expenditure on development projects. Changes in the amount of undrawn assistance loans and grants are presented in
rupees.
Development Emergency Other Total
Assistance Assistance
20XX 20XX-XX-1 20XX 20XX-XX- 20XX 20XX-XX-1 20XX 20XX-
1 XX-1
Opening balance
Loans X X - - X X X X
Grants X X - X - - X X
Approved during the period
Loans X X - - X - X X
Grants X X X X X X X X
Total available X X X X X X X X
Loans drawn (X) (X) - - (X) (X) (X) -
90
Grants drawn (X) (X) (X) (X) - - (X) (X)
Loans cancelled/expired (X) (X) - - - - (X) (X)
Grants cancelled/expired - - - - - - - -
Exchange difference X X - - X X X X
Closing balance Loans X X - - X X X X
Closing balance - Grants X X - - X X X X
Closing balance Development Emergency Other Total
By currency held Assistance Assistance
20XX-XX 20XX-XX-1 20XX-XX 20XX-XX- 20XX-XX 20XX-XX-1 20XX-XX 20XX-
1 XX-1
US Dollar X X - X X X X X
Euro X X - X X X X X
Yen X X - - X X X X
Other X X - - - - X -
in rupees
Loans
Agency 1 X X - - X X X X
Agency 4 X X - - X X X X
91
Grants
Agency 2 X X - X X X X X
Agency X X - X X X X X
Total X X - X X X X X
92
Significant terms and conditions (Paragraph 2.1.76)
General Restrictions
The balance of commitments for and undrawn balances of, external assistance is
subject to, or restricted by, performance of agreed actions or the maintenance of
agreed economic or financial performance levels.
The Local body has prepared an economic development plan for receipt of
development assistance. The plan includes a poverty reduction strategy which is
supported by the donor community. The Local body and the donors have agreed the
following major targets within the poverty reduction strategy: (Entity to identify major
targets).
The Local body and the donor community have agreed on methods to monitor
progress to achieve the agreed targets and will meet annually to review progress.
Loans and grants to support specific projects include financial performance targets for
all electricity and water utilities to ensure adequate revenue to cover the cost of
providing services, to properly maintain existing utility assets and to contribute to a
program of asset replacement and renewal.
Procurement Restrictions
Certain development assistance received is subject to restrictions in regards to the
nature of goods or services that may be purchased or the country in which the goods
or services may be purchased. All multilateral development bank loans or grants are
restricted in that (a) they prohibit the use of their funds for the purchase of military
goods or services, luxury goods or environmentally damaging goods; and (b) the
purchase of goods or services must be from their respective member countries.
External assistance from bilateral agencies is either unrestricted or limited to
purchases of goods or services from the country providing the funds.
Non Compliance with other significant terms and conditions (Paragraph 2.1.83)
The Local Body's expenditures on primary education did not meet the target level
primarily due to construction delays caused by an earthquake. Expenditures were X
percent below the target. Steps have been taken to correct the under investment and
the relevant donors support the corrective actions planned. The Local Body has
complied with all procurement regulations applicable under all outstanding external
assistance loans and grants.
Guarantees of external assistance loans and grants (Paragraph 2.1.80)
The State Government has guaranteed an infrastructure loan from XXX Bank of
rupees X lakhs. (20XX-XX-1: Nil). The principal is to be repaid in XX years. The
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interest rate applicable to the outstanding balance is Y percent. Interest payments are
to be made annually. No additional terms or conditions arise from the guarantee. No
other external assistance loans or grants are subject to guarantees by third parties.
Repayment Terms and Conditions-Debt Service Obligations (Paragraph 2.1.86)
The terms of development assistance loans include grace periods which range from 0
to a maximum of 7 years. Interest rates include both fixed rates and variable rates. All
development assistance loans are denominated in US Dollars or Euros. Interest rates
on fixed rate loans as at fiscal year ending 20XX-XX, range from X percent to Y
percent with a weighted average of Z percent. For the fiscal year ending 20XX-XX-1,
they range from A percent to B percent with a weighted average of C percent. Interest
rates on variable rate loans range from LIBOR plus P percent to LIBOR plus Q
percent with a weighted average at the end of fiscal year 20XX-XX of R percent and
at the end of fiscal year 20XX-XX-1 of S percent.
Other external assistance loans do not include a grace period, and are denominated
in a range of currencies including US Dollars, Euros and Yen.
20XX-XX
Outstanding Debt by Remaining Grace
Period Years
Expired 04 57 Total
Development Assistance X X X X
Other X - - X
Total X X X X
20XX-XX-1
Outstanding Debt by Remaining Grace
Period Years
Expired 04 57 Total
Development Assistance X X X X
Other X - - X
Total X X X X
94
20XX-XX
Debt Service Payments Including Interest
US Euro Yen Other Total
Dollar
Development Assistance X X X X X
Other X X - - X
Total X X X X X
20XX-XX-1
Debt Service Payments Including Interest
US Euro Yen Other Total
Dollar
Development Assistance X X X X X
Other X X - - X
Total X X X X X
All debt service payments for subsequent years are based on payment of a fixed
amount comprising principal plus accrued interest. The interest payment or service
charge component is based on the outstanding principal of each loan at the end of
the current year, and for variable interest rate loans, at interest rates prevailing at that
date. Debt service payments denominated in foreign currency have been determined
by applying the closing rate of exchange on the reporting date of the financial
statements.
20XX-XX + 1 and N Subsequent Years
Debt Service Payments Including Interest
US Euro Yen Other Total
Dollar
Development Assistance X X X X X
Other X X - - X
Total X X X X X
Receipt of Goods and Services (Paragraph 2.1.90 and 1.10.21 of part 1)
During 20XX-XX, a severe earthquake occurred in the ZZZ region inflicting serious
damage to property of a local body and private property, and significant loss of life.
Multilateral agencies and bilateral agencies of several nations donated personnel and
equipment to assist in locating and rescuing individuals trapped in the rubble. In
addition, specialised medical teams trained in trauma treatment together with medical
95
equipment, were flown into the region. Temporary shelter and food were also
supplied. The value of goods and services received has been estimated at XX
rupees. The value of the emergency assistance provided has been determined based
on cost estimates provided by the bilateral aid agencies involved because local prices
for equivalent goods or services were not available.
Fifty thousand tons of rice was received as food aid during the year. It has been
valued at XX rupees which represents the wholesale price of similar rice in domestic
wholesale markets.
Goods and services received during the year have not been recorded in the
Statement of Cash Receipts and Payments, which reflects only cash received
(directly or indirectly) or paid by the Government. Goods and services-in-kind were
received as part of the emergency assistance and are reflected in this note.
96
Appendix 3
[Refer Appendix A]
97
Appendix 4
Qualitative Characteristics of Financial Reporting
Paragraph 1.3.32 of Part 1 of this Standard requires that the financial statements
provide information that meets a number of qualitative characteristics. This appendix
summarises the qualitative characteristics of financial reporting.
Qualitative characteristics are the attributes that make the information provided in
financial statements useful to users. They are applicable to financial statements,
regardless of the basis of accounting used to prepare the financial statements. The
four principal qualitative characteristics are understandability, relevance, reliability
and comparability.
Understandability
Information is understandable when users might reasonably be expected to
comprehend its meaning. For this purpose, users are assumed to have a reasonable
knowledge of the entity's activities and the environment in which it operates, and to
be willing to study the information.
Information about complex matters should not be excluded from the financial
statements merely on the grounds that it may be too difficult for certain users to
understand.
Relevance
Information is relevant to users if it can be used to assist in evaluating past, present
or future events or in confirming, or correcting, past evaluations. In order to be
relevant, information must also be timely.
Materiality
The relevance of information is affected by its nature and materiality.
Information is material if its omission or misstatement could influence the decisions of
users or assessments made on the basis of the financial statement. Materiality
depends on the nature or size of the item or error judged in the particular
circumstances of its omission or misstatement. Thus, materiality provides a threshold
or cut-off point rather than being a primary qualitative characteristic which information
must have if it is to be useful.
Reliability
Reliable information is free from material error and bias, and can be depended on by
users to represent faithfully that which it purports to represent or could reasonably be
98
expected to represent.
Faithful Representation
For information to represent faithfully transactions and other events, it should be
presented in accordance with the substance of the transactions and other events, and
not merely their legal form.
Substance Over Form
If information is to represent faithfully the transactions and other events that it
purports to represent, it is necessary that they are accounted for and presented in
accordance with their substance and economic reality and not merely their legal form.
The substance of transactions or other events is not always consistent with their legal
form.
Neutrality
Information is neutral if it is free from bias. Financial statements are not neutral if the
information they contain has been selected or presented in a manner designed to
influence the making of a decision or judgment in order to achieve a predetermined
result or outcome.
Prudence
Prudence is the inclusion of a degree of caution in the exercise of the judgments
needed in making the estimates required under conditions of uncertainty, such that
assets or revenue are not overstated and liabilities or expenses are not understated.
Completeness
The information in financial statements should be complete within the bounds of
materiality and cost.
Comparability
Information in financial statements is comparable when users are able to identify
similarities and differences between that information and information in other reports.
Comparability applies to the:
· Comparison of financial statements of different entities; and
· Comparison of the financial statements of the same entity over periods
of time.
An important implication of the characteristic of comparability is that users need to be
informed of the policies employed in the preparation of financial statements, changes
to those policies and the effects of those changes.
99
Because users wish to compare the performance of an entity over time, it is important
that the financial statements show corresponding information for preceding periods.
Constraints on Relevant and Reliable Information
Timeliness
If there is an undue delay in the reporting of information it may lose its relevance. To
provide information on a timely basis it may often be necessary to report before all
aspects of a transaction are known, thus impairing reliability. Conversely, if reporting
is delayed until all aspects are known, the information may be highly reliable but of
little use to users who have had to make decisions in the interim. In achieving a
balance between relevance and reliability, the overriding consideration is how best to
satisfy the decision-making needs of users.
Balance between Benefit and Cost
The balance between benefit and cost is a pervasive constraint. The benefits derived
from information should exceed the cost of providing it. The evaluation of benefits and
costs is, however, substantially a matter of judgment. Furthermore, the costs do not
always fall on those users who enjoy the benefits. Benefits may also be enjoyed by
users other than those for whom the information was prepared. For these reasons, it
is difficult to apply a benefit-cost test in any particular case. Nevertheless, standard
setters, as well as those responsible for the preparation of financial statements and
users of financial statements, should be aware of this constraint.
Balance between Qualitative Characteristics
In practice a balancing, or trade-off, between qualitative characteristics is often
necessary. Generally the aim is to achieve an appropriate balance among the
characteristics in order to meet the objectives of financial statements. The relative
importance of the characteristics in different cases is a matter of professional
judgment.
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Appendix 5
Establishing Control of Another Entity for Financial Reporting Purposes
1. Whether an entity controls another entity for financial reporting purposes is a
matter of judgment based on the definition of control in this Standard and the
particular circumstances of each case. That is, consideration needs to be given
to the nature of the relationship between the two entities. In particular, the two
elements of the definition of control in this Standard need to be considered.
These are the power element (the power to govern the financial and operating
policies of another entity) and the benefit element (which represents the ability
of the controlling entity to benefit from the activities of the other entity).
2. For the purposes of establishing control, the controlling entity needs to benefit
from the activities of the other entity. For example, an entity may benefit from
the activities of another entity in terms of a distribution of its surpluses (such as
a dividend) and is exposed to the risk of a potential loss. In other cases, an
entity may not obtain any financial benefits from the other entity but may benefit
from its ability to direct the other entity to work with it to achieve its objectives. It
may also be possible for an entity to derive both financial and non-financial
benefits from the activities of another entity.
Control for Financial Reporting Purposes
3. For the purposes of financial reporting, control stems from an entity's power to
govern the financial and operating policies of another entity and does not
necessarily require an entity to hold a majority shareholding or other equity
interest in the other entity. The power to control must be presently exercisable.
That is, the entity must already have had this power conferred upon it by
legislation or some formal agreement. The power to control is not presently
exercisable if it requires changing legislation or renegotiating agreements in
order to be effective. This should be distinguished from the fact that the
existence of the power to control another entity is not dependent upon the
probability or likelihood of that power being exercised.
4. Similarly, the existence of control does not require an entity to have
responsibility for the management of (or involvement in) the day-to-day
operations of the other entity. In many cases, an entity may only exercise its
power to control another entity where there is a breach or revocation of an
agreement between a controlled entity and its controlling entity.
5. [Refer Appendix A]
6. The existence of separate legislative powers does not, of itself, preclude an
entity from being controlled by another entity. The existence of control does not
101
require an entity to have responsibility over the day-to -day operations of another
entity or the manner in which professional functions are performed by the entity.
7. The power of one entity to govern decision-making in relation to the financial and
operating policies of another entity is insufficient, in itself, to ensure the
existence of control as defined in this Standard. The controlling entity needs to
be able to govern decision-making so as to be able to benefit from its activities,
for example by enabling the other entity to operate with it as part of an economic
entity in pursuing its objectives. This will have the effect of excluding from the
definitions of a "controlling entity" and "controlled entity" relationships which do
not extend beyond, for instance, that of a liquidator and the entity being
liquidated, and would normally exclude a lender and borrower relationship.
Similarly, a trustee whose relationship with a trust does not extend beyond the
normal responsibilities of a trustee would not be considered to control the trust
for the purposes of this Standard.
Regulatory and Purchase Power
8. Governments and government entities have the power to regulate the behavior
of many entities by use of their sovereign or legislative powers. Regulatory and
purchase powers do not constitute control for the purposes of financial reporting.
To ensure that the financial statements of a entity include only those resources
(cash, including cash equivalents) that it controls and can benefit from, the
meaning of control for the purposes of this Standard does not extend to:
a) The power of the legislature to establish the regulatory framework within
which entities operate and to impose conditions or sanctions on their
operations. For example, a pollution control authority may have the power
to close down the operations of entities that are not complying with
environmental regulations. However, this power does not constitute control
because the pollution control authority only has the power to regulate; or
b) [Refer Appendix A]
Determining Whether Control Exists for Financial Reporting Purposes
9. Public sector entities may create other entities to achieve some of their
objectives. In some cases, it may be clear that an entity is controlled, and hence
should be consolidated. In other cases it may not be clear. Paragraphs 10 and
11 below provide guidance to help determine whether or not control exists for
financial reporting purposes.
10. In examining the relationship between two entities, control is presumed to exist
when at least one of the following power conditions and one of the following
benefit conditions exists, unless there is clear evidence of control being held by
another entity.
102
Power conditions
a) [Refer Appendix A]
b) The entity has the power, either granted by or exercised within existing
legislation, to appoint or remove a majority of the members of the
governing body of the other entity.
c) The entity has the power to cast, or regulate the casting of, a majority of
the votes that are likely to be cast at a meeting of the other entity.
d) The entity has the power to cast the majority of votes at meetings of the
board of directors or equivalent governing body.
Benefit conditions
a) The entity has the power to dissolve the other entity and obtain a
significant level of the residual economic benefits or bear significant
obligations. For example, the benefit condition may be met if an entity had
responsibility for the residual liabilities of another entity.
b) The entity has the power to extract distributions of assets from the other
entity, and/or may be liable for certain obligations of the other entity.
11. When one or more of the conditions listed in paragraph 10 do not exist, the
following factors are likely, either individually or collectively, to be indicative of
the existence of control.
Power indicators
a) The entity has the ability to veto operating and capital budgets of the other
entity.
b) The entity has the ability to veto, overrule, or modify governing body
decisions of the other entity.
c) The entity has the ability to approve the hiring, reassignment and removal
of key personnel of the other entity.
d) The mandate of the other entity is established and limited by legislation.
e) [Refer Appendix A]
Benefit indicators
a) The entity holds direct or indirect title to the net assets/equity of the other
entity with an ongoing right to access these.
b) The entity has a right to a significant level of the net assets/equity of the
103
other entity in the event of a liquidation or in a distribution other than a
liquidation.
c) The entity is able to direct the other entity to co-operate with it in achieving
its objectives.
d) The entity is exposed to the residual liabilities of the other entity.
12. The following diagram indicates the basic steps involved in establishing control
of another entity. It should be read in conjunction with paragraphs 1 to 11 of this
appendix.
104
Establishing Control of another Entity for Financial Reporting Purposes
Does the entity benefit from
the activities of the other No
entity?
(Paragraphs 2, 10 and 11)
Yes
Does the entity have the
power to govern the No
financial and operating
policies of the other
entity?
(Paragraphs 3, 10 and 11)
Yes
Is the power to govern the
financial and operating No
policies presently
exercisable?
(Paragraphs 3-5)
Yes
Control does not
Entity controls other entity. appear to exist.
13. Sometimes a controlled entity is excluded from consolidation when its activities
are dissimilar to those of other entities within the economic entity, Exclusion on
these grounds is not justified because better information would be provided by
consolidating such controlled entities and disclosing additional information in the
consolidated financial statements about the different activities of controlled
entities.
105
Appendix - A
Note: This Appendix is not a part of the Accounting Standard for Local Bodies. The
purpose of this Appendix is only to bring out the major differences, if any, between
Accounting Standard for Local Bodies (ASLB) and the corresponding International
Public Sector Accounting Standard (IPSAS) on `Financial Reporting under Cash
Basis of Accounting'
Comparison with IPSAS on `Financial Reporting under the Cash Basis of
Accounting'
1. Paragraphs 1.1.6 and 1.1.7 of IPSAS on Financial Reporting under Cash Basis of
Accounting which provide information on definition of Government Business
Enterprises (GBEs) and use of IFRSs by these enterprises have been deleted as
these are not relevant for ALSB on Financial Reporting under Cash Basis of
Accounting, which is applicable to Local Bodies. However, these paragraph
numbers have been retained in the ASLB, in order to maintain consistency with
IPSAS.
2. Examples have been added in paragraph 1.2.7(a) to clarify the situation where
cash is collected by a local body on behalf of government or another entity.
3. IPSAS on Financial Reporting under Cash Basis of Accounting requires that the
statement of cash receipts and payments should present total cash payments of
the entity showing separately a sub-classification of total cash payments using a
classification basis appropriate to the entity's operations. IPSAS in its Part 2
encourages an entity to disclose, either on the face of the statement of cash
receipts and payments or in other financial statements or in the notes to those
statements, an analysis of total cash payments and payments by third parties
using a classification based on either their nature or their function. IPSAS further
provides that if an entity follows function-wise classification, it is encouraged to
disclose additional information on the basis of nature of payments. ALSB on
Financial Reporting under Cash Basis of Accounting in its Part 1 requires that the
statement of cash receipts and payments should present total cash payments of
the entity showing separately a sub-classification of total cash payments using a
classification based on either the nature of the payments or their function
appropriate to the entity's operations. It further provides that whichever basis is
adopted, the entity should disclose the total cash payments as per the other basis
of classification either as a separate statement or by way of notes. To give effect
to the above change, paragraphs 1.3.12, 1.3.25 and 2.1.23 have been amended,
paragraphs 1.3.12A and 1.3.17A have been added and paragraphs 2.1.23(a),
2.1.24-2.1.29 have been deleted.
4. The IPSAS permits the periodicity, for example, of 52 weeks for preparation of
financial statements. ASLB does not permit so, therefore, paragraph 1.4.3 has
been deleted.
106
5. ASLB on Financial Reporting under Cash Basis of Accounting includes an
exception to the principle of consistency of presentation and classification of
items in the financial statements i.e. when there is a change in legislation. The
IPSAS on Financial Reporting under Cash Basis of Accounting, however, does
not contain any such exception. Necessary amendments have been made in
paragraph 1.4.13.
6. Paragraph 1.5 of the IPSAS requires an entity to restate its comparative
information, in case an error arises in relation to a cash balance reported in the
financial statements which relates to prior periods. ASLB does not require
restatement of comparative information in such a case.
7. Examples of severe external long term restrictions where a controlled entity
should be excluded from consolidation have been added in paragraph 1.6.6.
8. Paragraphs 1.6.8 and 1.6.14 of the IPSAS require that a controlling entity that is
virtually wholly owned controlled entity need not present consolidated financial
statements provided it obtains the approval of minority share holders. ASLB does
not contain such provisions since these provisions are not relevant for local
bodies in India.
9. The IPSAS requires that the difference between the reporting dates of controlling
as well as the controlled entities should be no more than three months whereas
ASLB requires that the difference between the reporting dates should be not
more than six months.
10. Paragraph 1.7.4 of the IPSAS provides provisions related to translation of foreign
controlled entities. Further, paragraph 1.7.5 deals with a situation where reporting
currency is different from the currency of the country in which the entity is
domiciled. This ASLB does not contain such provisions since these provisions are
not relevant for local bodies in India.
11. Paragraphs 1.9.31, 1.9.32, 2.1.38 and 2.1.40 of the IPSAS which deal with
Multiyear Budgets have not been included in ASLB keeping in view that these are
not relevant for local bodies in India. However, paragraph numbers have been
retained in order to maintain consistency with IPSAS.
12. Paragraphs 2.1.51-2.1.63 of the IPSAS provides encouraged disclosures in the
context of hyperinflationary economies. These disclosures have not been
included in this ASLB since the Indian economy is not hyperinflationary.
However, paragraph numbers have been retained in the ASLB, in order to
maintain consistency with the IPSAS.
13. Appendix 3 to the IPSAS provides a summary of key aspects of IPSAS 2, Cash
Flow Statements, and guidance on its application for financial reporting under this
Standard relating to `Presentation of Statement of Cash Receipts and Payments'.
This Appendix has been deleted in this ASLB and it has been mentioned that
107
ASLB 2 on `Cash Flow Statements' may be referred for the format of the
Statement of Cash Receipts and Payments and guidance. However, the
Appendix number has been retained in the ASLB in order to maintain consistency
with the IPSAS.
14. Paragraph 1.10.29 providing relief from the requirement to disclose comparative
information for the previous period on initial application of paragraphs 1.10.1 to
1.10.34 of this Standard has been deleted since paragraph 1.4.16 of the
Standard already provides relief in this regard for all the sections of the Standard.
Necessary changes have been made in other paragraphs in this regard.
15. Paragraphs 1.8.1, 1.9.47-1.9.48, 1.10.28, related to `Effective Date' have been
removed as Part 1 of ASLB would become mandatory for Local Bodies in a state
from the date specified by the State Government concerned. Paragraph numbers
have been retained in order to maintain consistency with the relevant IPSAS.
16. Certain paragraphs such as paragraph numbers 1.3.20(b),(c) & (f), 1.9.5, 1.9.16,
1.9.29-1.9.30, 1.9.40, 2.1.18-2.1.20, 2.1.67(c) & (d) and paragraph 5, 8(b), 10(a),
11(e) of Appendix 5 have been removed from the ASLB, as these are not
considered to be relevant for Local Bodies. However, paragraph numbers have
been retained in order to maintain consistency with the IPSAS. To address the
conditions prevailing in local bodies in India, various amendments in certain
paragraphs and Appendices have been made.
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