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ASLB Cash Basis

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Accounting Standard for Local Bodies (ASLB)

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 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

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.
Compendium of ASLBs

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.

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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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
1.4 GENERAL CONSIDERATIONS 1.4.1 – 1.4.25
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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
Revised Budget 1.9.6

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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 1.10.1 – 1.10.34
Definitions 1.10.1 – 1.10.7
External Assistance 1.10.3 – 1.10.4
Official Resources 1.10.5
External Assistance Agreements 1.10.6 – 1.10.7
External Assistance Received 1.10.8 – 1.10.17
Undrawn External Assistance 1.10.18 – 1.10.20
Receipt of Goods or Services 1.10.21 – 1.10.22
Disclosure of Debt Rescheduled or
Cancelled 1.10.23 – 1.10.24
Disclosure of Non-Compliance with
Significant Terms and Conditions 1.10.25 – 1.10.27
Transitional Provisions for Section 1.10.30 – 1.10.34

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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 – 2.1.40
Comparison with Budgets 2.1.36 – 2.1.40
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 Non-
Governmental Organisations (NGOs) 2.1.64–2.1.65
Recipients of External Assistance 2.1.66–2.1.93

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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 2.2.1 – 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 to 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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Accounting Standard for Local Bodies (ASLB)

Financial Reporting
under the
Cash Basis of Accounting

PART 1: REQUIREMENTS
(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 objective
and 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.

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Financial Reporting under 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, 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 to Appendix A]

1.1.7 [Refer to Appendix A]

3
Refer paragraph 1.3 of the ‘Preface to the Accounting Standards for Local Bodies’.
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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.

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.

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Financial Reporting under the Cash Basis of Accounting

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.

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
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

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(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 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.

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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
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Financial Reporting under the Cash Basis of Accounting

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 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:

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(a) Receivables, payables, borrowings and other liabilities, non-cash
assets and accruing revenues and expenses;

(b) Commitments and contingent liabilities; and

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,
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

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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.

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.
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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. 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)
Others (X)
Total payments (X)
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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)
Others (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 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
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Compendium of ASLBs

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 to Appendix A]

(d) Rents collected on behalf of, and paid over to, the owners of
properties; and

(e) Transfers by a local body to third parties consistent with legislation
or other government authority.

(f) [Refer to 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,
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Financial Reporting under the Cash Basis of Accounting

and the repayment of:

(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
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Compendium of ASLBs

“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. 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

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Financial Reporting under the Cash Basis of Accounting

(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 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
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Compendium of ASLBs

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

(i) Represents faithfully the cash receipts, cash payments
and cash balances of the entity and the other information
disclosed;

(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
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Financial Reporting under the Cash Basis of Accounting

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.

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.

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Compendium of ASLBs

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 to 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 not 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 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;
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Financial Reporting under the Cash Basis of Accounting

(b) A description of the nature of the entity’s operations and
principal activities;

(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 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
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Compendium of ASLBs

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.

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

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Financial Reporting under the Cash Basis of Accounting

disclosed in the financial statements, except in respect of the financial
statements for the reporting period to which 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.

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Compendium of ASLBs

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 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.

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Financial Reporting under the Cash Basis of Accounting

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.

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 to 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.

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Compendium of ASLBs

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 means a group of entities comprising a controlling
entity and 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 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.

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Financial Reporting under the Cash Basis of Accounting

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 to 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 about receipts and
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Compendium of ASLBs

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 to 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.

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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 an
entity 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.
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Compendium of ASLBs

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

(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.

1.7 Foreign Currency
Definitions
1.7.1 The following terms are used in this Standard with the meanings
specified:
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Financial Reporting under the Cash Basis of Accounting

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.

Treatment of Foreign Currency Cash Receipts, Payments and
Balances
1.7.2 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.

1.7.3 Cash balances held in a foreign currency should be reported using
the closing rate.

1.7.4 [Refer to 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 to 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.

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Compendium of ASLBs

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 to Appendix A]

1.8.2-1.8.3 [Shifted to Consolidated Financial Statements section as
paragraphs 1.6.21A & 1.6.21B]

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 a financial 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.

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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.

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 to Appendix A]

1.9.6 Supplemental appropriations may be necessary where the original budget
did not adequately envisage expenditure requirements arising from, for example,
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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 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

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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 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.
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Compendium of ASLBs

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 to 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
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Financial Reporting under the Cash Basis of Accounting

amounts and, if the entity so chooses, differences between the budget and
actual amounts.

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:
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(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 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
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Financial Reporting under the Cash Basis of Accounting

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 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 to 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.

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.
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Compendium of ASLBs

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.

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 to Appendix A]

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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.

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.

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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 to Appendix A]

1.9.48 [Refer to Appendix A]

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.

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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 this Standard apply.

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Compendium of ASLBs

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.
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External Assistance Agreements
1.10.6 Governments seeking particular forms of external assistance may
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

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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
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,

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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 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

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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 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.
370
Financial Reporting under the Cash Basis of Accounting

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
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
371
Compendium of ASLBs

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
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
372
Financial Reporting under the Cash Basis of Accounting

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 to Appendix A]

1.10.29 [Refer to 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.

373
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
Compendium of ASLBs

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

374
PAYMENTS FOR YEAR ENDED MARCH 31, 20XX
(RECEIPTS)
Note 20XX-XX 20XX-XX–1
(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
RECEIPTS
Taxes & Cess
Property tax x — — x — —
Other taxes x — — x — —
Cesses x — — x — —
Assigned revenue x — — x — —
Lease x — — x — —
x — — x — —
External Assistance 10
Multilateral Agencies x x x x x x
Bilateral Agencies x x x x x x
x x x x x x
Other Grants and Aid
Central Government x x x x x x
State Government x x x x x x
x x x x x x
Other Borrowings
Receipts from borrowing 3
- From banks x x
- From Government x x

375
- From financial institutions x x
- others x x
x x
Capital Receipts
Proceeds from disposal
of property, plant and
equipment x x
Investments
Proceeds from maturity
of investments x x
Trading Activities
Receipts from trading
activities x x
Other receipts 4 x x x x
Financial Reporting under the Cash Basis of Accounting

Total receipts x x x x x x
(PAYMENTS)
Note 20XX-XX 20XX-XX–1
(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
Compendium of ASLBs

Operations
Wages, salaries and employee
benefits (x) (x) (x) (x) (x) (x)
Supplies andConsumables (x) (x) (x) (x) (x) (x)
Operations & Maintenance

376
expenses (x) (x) (x) (x) (x) (x)
(x) (x) (x) (x) (x) (x)
Transfers
Grants (x) (x) — (x) (x) —
Other transfer payments (x) (x) — (x) (x) —-
(x) (x) — (x) (x) —
Capital Expenditures
Purchase/construction of
property, plant and equipment (x) (x) (x) (x) (x) (x)
Infrastructure assets (x) (x) - (x) (x) -
(x) (x) (x) (x) (x) (x)
Annuities (x) (x) — (x) (x) —
Loan and Interest Repayments
Repayment of borrowings (x) (x) — (x) (x) —
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 Cash (x) (x) - (x) (x) -
Cash at beginning of year 2 (x) (x) N/A* (x) (x) N/A
Increase/(Decrease) inCash (x) (x) N/A (x) (x) N/A
Cash at end of year 2 (x) (x) N/A (x) (x) N/A

377
* N/A = Not applicable
Financial Reporting under the Cash Basis of Accounting
Compendium of ASLBs

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 agencies x x x x
Other grants and aid x x x x
Borrowing x x x x
Disposal of plant and
equipment x x x x
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 Urban
Poor (x) (x) (x) (x)
Engineering (x) (x) (x) (x)
Projects (x) (x) (x) (x)
General Administration (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.
378
Financial Reporting under the Cash Basis of Accounting

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 20XX–1
(in thousands of Receipts Treasury Receipts Treasury
currency units) controlled Account controlled Account
by entity by entity

RECEIPTS
General Fund x x x x
Water Supply Fund x x x x
Education Fund x x x x
Special Funds x x x x
Trading Funds x x x x

Total receipts x x x x

379
BORROWINGS
Note 20XX-XX 20XX-XX–1
(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
Compendium of ASLBs

BORROWINGS
Domestic Commercial
Institution x x - x x -
Offshore Commercial
Institution x x - x x -
Development Banks and
Similar Lending Agencies x x x x x x

380
Total borrowings 3 x x x x x x

STATEMENT OF PAYMENTS BY PROGRAMS/ACTIVITIES/FUNCTION OF LOCAL BODY
Note 20XX-XX 20XX-XX–1
(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/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
Poor x x x x x x
General Administration x x x x x x
Other x x x x x x
Total payments/expenditure x x x x x x

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

381
General Administration x x x x x x
Other x x x x x x
Total payments/
expenditure x x x x x x
Total Operating and
Capital Accounts x x x x x x
Financial Reporting under the Cash Basis of Accounting
Compendium of ASLBs

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.

382
Financial Reporting under the Cash Basis of Accounting

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:

(Rs. in thousands) 20XX 20XX–1
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)
383
Compendium of ASLBs

(Rs. in thousands) 20XX 20XX–1

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)

(Rs. in thousands) 20XX 20XX–1

Undrawn Borrowing Facilities
Commercial Financial Institutions x x
Banks x x
Total undrawn borrowing facilities x x

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.

384
Financial Reporting under the Cash Basis of Accounting

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 Income and Expenditure Statement. 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 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

385
Compendium of ASLBs

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 Total
inflows outflows
Actual Amount on Comparable Basis as
Presented in the Budget and Actual
Comparative Statement x x
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.

386
Financial Reporting under the Cash Basis of Accounting

20XX 20XX–1
Total Total
Loan Funds
Multilateral Agencies x x
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 20XX–1 20XX–1

Closing balance in
reporting currency x x x x

387
Compendium of ASLBs

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).

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.

388
Financial Reporting under the Cash Basis of Accounting

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.
389
Compendium of ASLBs

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 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.

390
Financial Reporting under the Cash Basis of Accounting

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.

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.

391
Compendium of ASLBs

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 decisions of the entity do not normally influence the occurrence
of that transaction or event.

392
Financial Reporting under the Cash Basis of Accounting

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

393
Compendium of ASLBs

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 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.

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Financial Reporting under the Cash Basis of Accounting

2.1.18 – 2.1.20 [Refer to 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.

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

395
Compendium of ASLBs

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 to 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 to 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);

(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);

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Financial Reporting under the Cash Basis of Accounting

(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.

5
This ASLB is under formulation.
397
Compendium of ASLBs

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

(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” 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

6
This Accounting Standard for Local Bodies is under preparation.
398
Financial Reporting under the Cash Basis of Accounting

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 to Appendix A]

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 to 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

399
Compendium of ASLBs

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.

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);

400
Financial Reporting under the Cash Basis of Accounting

(b) The portion of the purchase or disposal consideration discharged
by means of cash; and

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 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:

401
Compendium of ASLBs

(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”7 This Accounting Standard for Local Bodies is under preparation
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 to 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.

7
This Accounting Standard for Local Bodies is under preparation.
402
Financial Reporting under the Cash Basis of Accounting

Recipients of External Assistance
2.1.66 An entity is encouraged to disclose in notes to the financial statements:

(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

(d) [Refer to 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.

403
Compendium of ASLBs

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.

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;

(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.

404
Financial Reporting under the Cash Basis of Accounting

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 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

405
Compendium of ASLBs

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.

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
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Financial Reporting under the Cash Basis of Accounting

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.

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

407
Compendium of ASLBs

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

408
Financial Reporting under the Cash Basis of Accounting

could be exchanged, or a liability settled, between knowledgeable and willing
parties in an arm’s length transaction.

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.”8

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

8
This Accounting Standard for Local Bodies is under preparation.
409
Compendium of ASLBs

(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 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.

410
Financial Reporting under the Cash Basis of Accounting

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 20XX-XX 20XX-XX-1
Transaction
Cash collected on Library cess X X
behalf of State
Government
Election Commission Enrolment fees X X
X X
Cash transferred to
respective entities (X) (X)
— —

411
Compendium of ASLBs

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
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 Agencies X X
Total borrowings X X

412
Financial Reporting under the Cash Basis of Accounting

REPAYMENTS

To banks (X) (X)
To financial institutions (X) (X)
To Development Banks and
Similar Lending Agencies (X) (X)
Total repayments (X) (X)
Balance at end of year X X

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 X X X
Other taxes X X (X)

Non tax receipts
Fees and fines X X X
Receipts from trading
activities X X X
Others X X X

Grants in aid
Government X X —
International agencies X X —
Other Grants and Aid X X —

413
Compendium of ASLBs

Borrowings
Government X X (X)
Banks X X (X)
Other agencies X X (X)

Capital Receipts
Proceeds from disposal of assets X X X
Other receipts X X X
Total receipts X X X
PAYMENTS
Operations
Wages, salaries and
employee benefits (X) (X) (X)
Other operational expenses (X) (X) (X)

Grants and contributions
Grants (X) (X) -
Other transfers (X) (X) -

Capital Expenditures
Purchase/construction of
fixed assets (X) (X) (X)

Loan and Interest
Repayments
Repayment of borrowings (X) (X) -
Interest payments (X) (X) -

Other payments (X) (X) (X)
Total payments (X) (X) (X)
NET RECEIPTS/
(PAYMENTS) X X X

414
Financial Reporting under the Cash Basis of Accounting

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 Voting
controlling Interest Power
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 Interest
Venture Activity
20XX-XX% 20XX-XX-1%

XX XX

415
Compendium of ASLBs

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 Cash Payments
Receipts by third Receipts by third
parties 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

416
Financial Reporting under the Cash Basis of Accounting

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.

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.

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:

417
Compendium of ASLBs

Development Emergency Other Total
Assistance Assistance
20XX 20XX- 20XX 20XX- 20XX 20XX- 20XX 20XX-
XX-1 XX-1 XX-1 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- 20XX 20XX- 20XX 20XX- 20XX 20XX-
XX-1 XX-1 XX-1 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 - - - - - -
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.
418
Financial Reporting under the Cash Basis of Accounting

Development Emergency Other Total
Assistance Assistance
20XX 20XX- 20XX 20XX- 20XX 20XX- 20XX 20XX-
XX-1 XX-1 XX-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) -
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

419
Compendium of ASLBs

Closing Development Emergency Other Total
balance Assistance Assistance
By
currency
held
20XX 20XX- 20XX 20XX- 20XX 20XX- 20XX 20XX-
XX-1 XX-1 XX-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
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

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.
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Financial Reporting under the Cash Basis of Accounting

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
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

421
Compendium of ASLBs

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 0–4 5–7 Total
Development
Assistance X X X X
Other X - - X
Total X X X X

20XX-XX
Debt Service Payments Including Interest
US Dollar Euro Yen Other Total
Development
Assistance X X X X X
Other X X - - X
Total X X X X X

20XX-XX
Debt Service Payments Including Interest
US Dollar Euro Yen Other Total
Development
Assistance X X X X X
Other X X - - X
Total X X X X X
422
Financial Reporting under the Cash Basis of Accounting

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 Dollar Euro Yen Other Total
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 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.
423
Compendium of ASLBs

Appendix 3
[Refer to Appendix A]

424
Financial Reporting under the Cash Basis of Accounting

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

425
Compendium of ASLBs

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 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.
426
Financial Reporting under the Cash Basis of Accounting

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.

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

427
Compendium of ASLBs

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.

428
Financial Reporting under the Cash Basis of Accounting

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.
429
Compendium of ASLBs

5. [Refer to 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 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

430
Financial Reporting under the Cash Basis of Accounting

(b) [Refer to 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.

Power conditions

(a) [Refer to 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.

431
Compendium of ASLBs

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.

(d) The mandate of the other entity is established and limited by legislation.

(e) [Refer to 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
other entity in the event of a liquidation or in a distribution other than a
liquidation.

(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.

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Financial Reporting under the Cash Basis of Accounting

Establishing Control of another Entity for Financial Reporting Purposes

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.

433
Compendium of ASLBs

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’ Standard for Local Bodies. The purpose of this
Appendix is only to bring out

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 ASLB 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. As per IPSAS on Financial Reporting under Cash Basis of Accounting,
equity investments are excluded from cash equivalents unless they are, in
substance, cash equivalents. But the said requirement has been deleted from
the ASLB on Financial Reporting under Cash Basis of Accounting.

3. 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.

4. 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 recognised as a separate statement or by
way of notes. IPSAS, however, enco based on either their nature or their function.
IPSAS further provides that if an entity follows function-wise classification, it is

434
Financial Reporting under the Cash Basis of Accounting

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.

5. 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.

6. 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.

7. 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.

8. Examples of severe external long term restrictions where a controlled
entity should be excluded from consolidation have been added in paragraph
1.6.6.

9. 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.

10. The IPSAS requires that the difference between the reporting dates of
controlling as well as the controlled entities should be no more than three
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Compendium of ASLBs

months whereas in paragraph 1.2.7(a), 5SLB requires that the difference between
the reporting dates should be not more than six months.

11. 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.

12. 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.

13. 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.

14. 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 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.

15. 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.

16. 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.
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Financial Reporting under the Cash Basis of Accounting

17. 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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