ASLB Conceptual Framework
The Conceptual Framework for General Purpose
Financial Reporting by Local Bodies
Contents
Introduction
Preface
Chapter 1: Role and Authority of the Conceptual Framework
Chapter 2: Objectives and Users of General Purpose Financial Reporting
Chapter 3: Qualitative Characteristics
Chapter 4: Reporting Entity
Chapter 5: Elements in Financial Statements
Chapter 6: Recognition in Financial Statements
Chapter 7: Measurement of Assets and Liabilities in Financial Statements
Chapter 8: Presentation in General Purpose Financial Reports
Appendix 1: Comparison with IPSASB‘s Conceptual Framework
Compendium of Accounting Standards for Local Bodies (ASLBs)
Introduction
The Conceptual Framework establishes and makes explicit the concepts that
are to be applied in developing Accounting Standards for Local Bodies
(ASLBs).
The Conceptual Framework acknowledges that, to respond to users‘
information needs, GPFRs may include financial statements and information
that enhances, complements, and supplements the financial statements.
Chapters 1, 2, 3, 4 and 8 deal with concepts that are applicable to all matters
that may be encompassed within the scope of GPFRs. Chapters 5, 6 and 7
deal with concepts applicable to the financial statements and do not apply to
more comprehensive areas of financial reporting outside the financial
statements.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
The Preface to the Conceptual Framework for
General Purpose Reporting by Local Bodies
Introduction
1. The Conceptual Framework for General Purpose Financial Reporting
by Local Bodies (the Conceptual Framework) establishes the concepts
that are to be applied in developing Accounting Standards for Local
Bodies (ASLBs) that are applicable to the preparation and presentation
of General Purpose Financial Reports (GPFRs) of Local Bodies.
2. The primary objective of local bodies is to deliver services to the
public, rather than to make profits and generate a return on equity to
investors. Consequently, the performance of such entities can be only
partially evaluated by examination of financial position, financial
performance and cash flows. GPFRs provide information to users for
accountability and decision-making purposes. Therefore, users of the
GPFRs of local bodies need information to support assessments of
such matters as:
Financial position of a local body,
Resources controlled by a local body and restriction and
conditions attached to their use,
Overall Financial solvency of a local body,
Whether the entity provided its services to constituents in an
efficient and effective manner; and
Ability of a local body to continue to provide efficient and
effective services.
3. The 73rd and 74th Constitutional Amendment Acts envisage a key role
for the Panchayati Raj Institutions (PRIs) and the Urban Local Bodies
(ULBs) in respect of various functions such as education, health, rural,
housing and drinking water, etc. The State Governments are required
to devolve powers and responsibilities upon the PRIs and the ULBs
with respect to preparation of plans for economic development and
social justice, and for the implementation of development schemes as
may be required to enable them to function as institutions of self-
government. Due to such devolution of powers and responsibilities, the
role of the PRIs and ULBs varies across various States.
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Compendium of Accounting Standards for Local Bodies (ASLBs)
Article 243G and 243W of the 73rd and 74th Constitutional
Amendment Acts, respectively, deals with powers, authority and
responsibilities of Panchayats and Municipalities, etc., subject to the
provisions of this Constitution, the Legislature of a State may, by law,
endow-
(a) The Panchayat and Municipalities, etc., with such powers and
authority as may be necessary to enable them to function as
institutions of Self-Government and such law may contain
provisions for the devolution of powers and responsibilities upon
Municipalities, subject to such conditions as may be specified
therein, with respect to-
(i) The preparation of plans for economic development and
social justice;
(ii) The performance of functions and the implementation of
schemes as may be entrusted to them including those in
relation to the matters listed in the Eleventh and Twelfth
Schedule respectively for Panchayat and Municipalities;
(b) The Committees with such powers and authority as may be
necessary to enable them to carry out the responsibilities
conferred upon them including those in relation to the matters
listed in the Twelfth Schedule.
3A. Powers to impose taxes by, and Funds of, the Local Bodies:
Article 243H and 243X of the 73 rd and 74 th Constitutional Amendment
Acts, respectively, of the Constitution states that the legislature of a
State may, by law:
Authorise a Panchayat/ Municipality to levy, collect and
appropriate such taxes, duties, tolls and fees in accordance with
such procedure and subject to such limits;
Assign to a Panchayat/ Municipality such taxes, duties, tolls and
fees levied and collected by the State Government for such
purposes and subject to such conditions and limits;
Provide for making such grants-in-aid to the Panchayats/
Municipality from the Consolidated Fund of the State; and
Provide for Constitution of such funds for crediting all moneys
received, respectively, by or on behalf of the Panchayats/
Municipality and also for the withdrawal of such moneys.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
3B. Accounting Reforms as Engines of Good Governance:
An integral part of the new expectations of governance is for Public
Information – without which there cannot be meaningful participation
or shared decision-making. The public expects a fair account of how
the government is faring in its job.
It is necessary that accounting system has to satisfy the following
basic objectives: (i) be accurate in capturing the underlying
transactions, (ii) enhance transparency, and (iii) be user-friendly to
facilitate understanding of the accounting statements by most users.
The prevailing single entry/ cash-based accounting system in India is
deficient on the dimensions of transparency and user-friendliness and
therefore it becomes necessary to reform the accounting system.
The Supreme Court of India in the year 2001, while hearing a Public
Interest Litigation (PIL) relating to the functioning of ULBs, opined that
Urban Local Bodies in India should take immediate steps to get their
accounts converted from cash basis to accrual basis.
The Accrual System of accounting is an improvement over the present
single entry/ cash system of accounting and not a mere replacement of
the existing system. While cash accounts serve the purpose of
legislative control over public finances, an accrual system is helpful in
expanding the efficacy of fiscal management. The appropriate
accounting system provides all the information that is available in the
present dispensation, besides providing such additional information
which will make the accounting records more complete from a users‘
perspective.
Further, Article 243J and Article 243Z of the 73 rd and 74 th
Constitutional Amendment Acts, respectively, of the Constitution
states that the Legislature of a State may, by law, make provisions
with respect to the maintenance of accounts by the Panchayats and
the auditing of such accounts.
3C. The term ‗Local Body‘ may be defined as a local self-government at
the third tier of governance in an administrative and geographical
vicinity, e.g., a municipal corporation, a municipality or a panchayat. In
many cases, the Local Bodies delegate their functions such as building
of schools, city roads, parks, running transport services, providing
water supply etc., to some other bodies that may or may not be
controlled by the Local Bodies, e.g., development authorities, boards,
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Compendium of Accounting Standards for Local Bodies (ASLBs)
parastatals, etc. Such bodies may be constituted, in partnership with
private sector or otherwise, directly or indirectly by or on behalf of a
Local Body to promote or carry out some specific objective(s) or
function(s) of the Local Bodies. Such entities may be constituted under
a statute. The term ‗Local Body‘ would also encompass all such
entities.
4. The following sections highlight peculiar characteristics of the local
body that the CP&GFM has considered in the development of the
Conceptual Framework.
The Volume and Financial Significance of Non-Exchange
Transactions
5. In a non-exchange transaction, an entity either receives/ gives value
from/to another party without directly giving/ receiving any value in
exchange, such transactions are common in the local body. The level
and quality of services received by an individual, or group of
individuals, is not normally directly related to the level of taxes
assessed as they have to pay a charge or fee and/or may make
specified contributions to access certain services. However, such
transactions are, generally, of a non-exchange nature, because the
amount that an individual or group of individuals obtains in benefits will
not be equal to the amount of any fees paid or contributions made by
the individual or group. The nature of non-exchange transactions may
have an impact on how they are recognised, measured, presented and
disclosed to best support assessments of the entity by service
recipients and resource providers.
6. Taxation is a legally mandated, compulsory non-exchange transaction
between individuals or entities and the local-self-government. Tax-
raising powers can vary considerably, dependent upon the relationship
between the powers of the state government and those of local self-
governments.
7. Local Bodies are accountable to resource providers, particularly to
those that provide resources through taxes and other compulsory
transactions. The accountability objective of financial reporting
Chapter 2, Objectives and Users of General Purpose Financial
Reporting, discusses the accountability objective of financial
reporting.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
The Importance of the Approved Budget
8. Mostly local bodies prepare budgets and make them publicly available
as per the requirement of the relevant legislature (or equivalent).
Legislation, i.e., relevant act/ law often defines the contents of that
documentation. The governing body, i.e., the elected representatives
exercises oversight, and hold the entity‘s management financially
accountable through the budget and other mechanisms. The approved
budget is often the basis for setting taxation levels, and is part of the
process for obtaining governing body‘s approval for spending.
9. Because of the approved budget‘s significance, information that
enables users to compare financial results with the budget facilitates
an assessment of the extent to which an entity has met its financial
objectives. Such information promotes accountability and informs
decision making in subsequent budgets. Reporting against budget is
commonly the mechanism for demonstrating compliance with legal
requirements relating to the public finances. The needs of users for
budget information is discussed in Chapter 2.
The Nature of Local Body Programmes and
Interpretation of Going Concern principle
10. Many local body programmes are long term and the ability to meet
commitments depends upon future taxation and contribution. Many
commitments arising from local body programmes and powers to levy
future taxation do not meet the definitions of a liability and an asset
which is discussed in Chapter 5, Elements in Financial Statements.
Therefore, such commitments and powers are not recognised in the
financial statements.
11. Consequently, the balance sheet and income and expenditure
statement cannot provide all the information that users need on long-
term programmes, particularly those delivering social benefits. The
financial consequences of many decisions will have an impact many
years or even decades into the future, so GPFRs containing
prospective financial information on the long-term sustainability of an
entity‘s finances and key programmes are necessary for accountability
and decision-making purposes as discussed in Chapter 2.
12. Many times, due to changes in political control the Local Bodies may
encounter severe financial difficulties, and may default on sovereign
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Compendium of Accounting Standards for Local Bodies (ASLBs)
debt obligations, still local bodies continue to exist. If Local Bodies get
into financial difficulties, other level of governments might act as
lenders of last resort or provide large scale guarantees. The main
service delivery commitments of entities may continue to be funded by
a higher level of government. In other cases, entities that are unable to
meet their liabilities as they fall due may continue to exist by
restructuring their operations.
13. The going concern principle underlie the preparation of the financial
statements. Interpretation of the principle needs to reflect the issues
discussed in paragraphs 11 and 12.
The Nature and Purpose of Assets and Liabilities in the
Local Body
14. In the local body, the primary reason for holding property, plant and
equipment and other assets is for their service potential rather than
their ability to generate cash flows 1. Because of the types of services
provided, a significant proportion of assets used by local bodies is
specialised—for example, roads, sewage plant and water treatment
plant. There may be a limited market for such assets and, even then,
they may need considerable adaptation in order to be used by other
operators. These factors have implications for the measurement of
such assets. Chapter 7, Measurement of Assets and Liabilities in
Financial Statements, discusses measurement bases for assets.
15. Local Bodies may hold items that contribute to the historical and
cultural character - for example, art treasures, historical buildings, and
other artifacts. They may also be responsible for national parks and
other areas of natural significance with native flora and fauna. Such
items and areas are not generally held for sale, even if markets exist.
Rather, entities have a responsibility to preserve and maintain them for
current and future generations.
16. Local bodies may have powers over natural and other resources such
as mineral reserves, water, fishing grounds, and forests. These
powers allow them to grant licenses for the use of such resources or to
obtain royalties and taxes from their use. The definition of an asset,
1 Many local body assets will generate cash flows, but this is often not the main reason
for holding them.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
recognition criteria and measurement bases for assets are discussed
in Chapters 5, 6 & 7.
17. Local Bodies incur liabilities related to their service delivery objectives.
Many liabilities arise from non-exchange transactions and include
those related to programmes that operate to deliver social benefits.
Liabilities may also arise from any obligations to transfer resourc es to
those affected by disasters. The definition of a liability and recognition
criteria are discussed in Chapters 5 and 6.
The Regulatory Role of Local Bodies
18. Local Bodies have powers to regulate in many cases entities operating
in certain sectors of the economy, either directly or through specifically
created agencies. In addition to this, Local Bodies have powers to
regulate granting permission for land use and approval of construction
activity/ building plan etc. The underlying public policy rationale for
regulation is to safeguard the public interest in accordance with
specified public policy objectives. Such regulatory activities are carried
out in accordance with legal processes.
19. Local bodies may also regulate themselves and other entities
controlled by them. Judgment may be necessary to determine whether
such regulations create rights of, and obligations on, entities that
require recognition as assets and liabilities, or whether amendment of
such regulations has an impact on how such rights and obligations are
accounted for. Chapter 5 considers rights and obligations.
20-24. [Refer to Appendix 1]
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Compendium of Accounting Standards for Local Bodies (ASLBs)
Chapter 1
Role and Authority of the Conceptual Framework
Contents
Paragraphs
Role of the Conceptual Framework 1.1
Authority of the Conceptual Framework 1.2 – 1.3
General Purpose Financial Reports 1.4 – 1.7
Applicability of the Conceptual Framework 1.8
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The Conceptual Framework for General Purpose Financial Reporting by LBs
Chapter 1
Role and Authority of the Conceptual Framework
Role of the Conceptual Framework
1.1 The Conceptual Framework for General Purpose Financial Reporting
by Local Bodies (the Conceptual Framework) establishes the concepts
that underlie general purpose financial reporting (financial reporting)
by local bodies that adopt the accrual basis of accounting. The
Committee on Public and Government Financial Management
(CP&GFM) will apply these concepts in developing Accounting
Standards for Local Bodies (ASLBs) that are applicable to the
preparation and presentation of General Purpose Financial Reports
(GPFRs) of Local Bodies.
Authority of the Conceptual Framework
1.2 The Conceptual Framework does not establish authoritative
requirements for financial reporting by local bodies that apply ASLBs,
nor does it override the requirements of ASLBs. Authoritative
requirements relating to the recognition, measurement and
presentation of transactions and other events and activities that are
reported in GPFRs are specified in ASLBs.
1.3 The Conceptual Framework can provide guidance in dealing with
financial reporting issues not dealt with by ASLBs. In these
circumstances, preparers and others can refer to and consider the
applicability of the definitions, recognition criteria, measurement
principles, and other concepts covered in the Conceptual Framework.
General Purpose Financial Reports
1.4 GPFRs are a central component of, and support and enhance,
transparent financial reporting by local bodies. GPFRs are financial
reports intended to meet the information needs of users.
1.5 Some users of financial information may have the authority to require
the preparation of reports tailored to meet their specific information
needs. While such parties may find, the information provided by
GPFRs useful for their purposes, GPFRs are not developed to
specifically respond to their particular information needs.
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Compendium of Accounting Standards for Local Bodies (ASLBs)
1.6 GPFRs are likely to comprise multiple reports, each responding more
directly to certain aspects of the objectives of financial reporting and
matters. GPFRs encompass financial statements including their notes
(hereafter, referred to as financial statements, unless specified
otherwise), and the presentation of additional information by the entity
that enhances, complements and supplements the financial
statements which is useful for the users for accountability, decision
making purposes and for assessment of future service delivery
capacity.
1.7 The scope of financial reporting establishes the boundary around the
transactions, other events and activities that may be reported in
GPFRs. The scope of financial reporting is determined by the
information needs of the primary users of GPFRs and the objectives of
financial reporting. The factors that determine what may be
encompassed within the scope of financial reporting are outlined in the
next chapter.
Applicability of the Conceptual Framework
1.8 The Conceptual Framework, applies to financial reporting by entities
described as local bodies in the ‗Preface to the Accounting Standards
for Local Bodies‘ that apply ASLBs.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
Chapter 2
Objectives and Users of General Purpose
Financial Reporting
Contents
Paragraphs
Objectives of Financial Reporting 2.1 – 2.2
Users of General Purpose Financial Reports 2.3 – 2.6
Accountability and Decision Making 2.7 – 2.10
Information Needs of Service Recipients and Resource
Providers 2.11- 2.13
Information Provided by General Purpose Financial Reports 2.14 – 2.28
Financial Statements and Information that Enhances,
Complements and Supplements
The Financial Statements 2.29 – 2.30
Other Sources of Information 2.31
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Compendium of Accounting Standards for Local Bodies (ASLBs)
Chapter 2
Objectives and Users of General Purpose
Financial Reporting
Objectives of Financial Reporting
2.1 The objectives of financial reporting by local bodies are to provide
information about the entity that is useful to users of GPFRs for
accountability purposes and for decision-making purposes (hereafter
referred to as ―useful for accountability and decision-making
purposes‖).
2.2 The objectives of financial reporting are determined by reference to
the users of GPFRs, and their information needs.
Users of General Purpose Financial Reports
2.3 Local Bodies raise resources from taxpayers, grantors, lenders and
other resource providers for use in the provision of services to citizens
and other service recipients. These entities are accountable for their
management and use of resources to those that provide them with
resources, and to those that depend on them to use those resources
to deliver necessary services. Those that provide the resources and
receive, or expect to receive, the services also require information as
input for decision-making purposes.
2.4 Consequently, GPFRs of local bodies are developed primarily to
respond to the information needs of service recipients and resource
providers who do not possess the authority to require a local body to
disclose the information they need for accountability and decision-
making purposes. The governing body, i.e., the elected
representatives are also primary users of GPFRs, and make extensive
and ongoing use of GPFRs when acting in their capacity as
representatives of the interests of service recipients and resource
providers. Therefore, for the purposes of the Conceptual Framework,
the primary users of GPFRs are service recipients and their
representatives and resource providers and their representatives
(hereafter referred to as ―service recipients and resource providers‖,
unless identified otherwise).
2.5 Citizens receive services from, and provide resources to, the local
bodies. Therefore, citizens are primary users of GPFRs. Some service
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The Conceptual Framework for General Purpose Financial Reporting by LBs
recipients and some resource providers that rely on GPFRs for the
information they need for accountability and decision-making purposes
may not be citizens―for example, residents who pay taxes and/or
receive benefits but are not citizens; multilateral or bilateral external
assistance/ grantor agencies and many lenders that provide resources
to, and transact with, a local body.
2.6 GPFRs prepared to respond to the information needs of service
recipients and resource providers for accountability and decision -
making purposes may also provide information useful to other parties
and for other purposes. For example, statisticians, analysts, the
media, financial advisors, public interest and advocacy groups and
others may find the information provided by GPFRs useful for their
own purposes organisations/ bodies that have the authority to require
the preparation of financial reports tailored to meet their own specific
information needs may also use the information provided by GPFRs
for their own purposes―for example, regulatory and oversight bodies,
local body audit departments, sub-committees of the governing body,
and, in some cases, lending institutions and providers of development
and other assistance. While these other parties may find the
information provided by GPFRs useful, they are not the primary users
of GPFRs. Therefore, GPFRs are not developed to specifically
respond to their particular information needs.
Accountability and Decision Making
2.7 The primary function of local bodies is to provide services that
enhance or maintain the well-being of citizens and other eligible
residents. Those services include, for example, welfare programmes
and policing, public education, health and transportation services. In
most cases, these services are provided as a result of a non-exchange
transaction2 and in a non-competitive environment.
2.8 Local Bodies are accountable to resource providers, and dependent
users during the reporting period and over the longer term which
2 Exchange transactions are transactions in which the entity transfers goods or
services, or use of assets, and receives some value (primarily in the form of cash,
goods, services or has liabilities extinguished) from another entity in exchange. Non-
exchange transactions are transactions in which an entity receives value from
another entity without directly giving any value in exchange or gives value to the
another entity without receiving any value in exchange.
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Compendium of Accounting Standards for Local Bodies (ASLBs)
requires the provision of information about the entity‘s management of
the resources entrusted to it and its compliance with legislation,
regulation, or other authority that governs its service delivery and other
operations.
2.9 Service recipients and resource providers will also require information
as input for making decisions. For example:
Lenders, creditors, grantors and others that provide resources
on a voluntary basis, including in an exchange transaction,
make decisions about whether to provide resources to support
the current and future activities of the local body. In some
circumstances, members of the governing body who depend on
GPFRs for the information they need, can make or influence
decisions about the service delivery objectives of the entity, its
departments, agencies or programmes and the resources
allocated to support their achievement; and
Taxpayers do not usually provide funds to the local body on a
voluntary basis or as a result of an exchange transaction. In
addition, in many cases, they do not have the discretion to
choose whether or not to accept the services provided by a local
body or to choose an alternative service provider.
Consequently, they have little direct or immediate capacity to
make decisions about whether to provide resources to the local
body, the resources to be allocated for the provision of services
by a particular entity or whether to purchase or consume the
services provided. However, service recipients and resource
providers can make decisions about their voting preferences,
and representations they make to elected representatives―
these decisions may have resource allocation consequences for
certain local bodies.
2.10 Information provided in GPFRs for accountability purposes will
contribute to, and inform, decision making. For example, information
about the costs, efficiency and effectiveness of past service
delivery activities, the amount and sources of cost recovery, and the
resources available to support future activities will be necessary for
the discharge of accountability. This information will also be useful for
decision making by users of GPFRs, including decisions that grantors
and other financial supporters make about providing resources to
the entity.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
Information Needs of Service Recipients and Resource
Providers
2.11 For accountability and decision-making purposes, service recipients
and resource providers will need information about the
performance, liquidity, solvency, sustainability and capacity of the
entity that supports the assessments of such entity.
2.12 The information service recipients and resource providers need for
these purposes is likely to overlap in many respects. For example,
service recipients will require information as input to assessments of
such matters as whether:
The entity is using resources economically, efficiently,
effectively and as intended, and whether such use is in their
interest;
The range, volume and cost of services provided during the
reporting period are appropriate, and the amounts and sources
of their cost recoveries; and
Current levels of taxes or other resources raised are sufficient to
maintain the volume and quality of services currently provided.
Service recipients will also require information about the
consequences of decisions made, and activities undertaken, by the
entity during the reporting period on the resources available to support
the provision of services in future periods, the entity‘s anticipated
future service delivery activities and objectives, and the amounts and
sources of cost recoveries necessary to support those activities.
2.13 Resource providers will require information as input to assessments of
such matters as whether the entity:
Is achieving the objectives established as the justification for the
resources raised during the reporting period;
Funded current operations from funds raised in the current
period from taxpayers or from borrowings or other sources; and
Is likely to need additional (or less) resources in the future, and
the likely sources of those resources.
While lenders and creditors will require information as input to
assessments of the liquidity, repayment capability; grantors will require
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Compendium of Accounting Standards for Local Bodies (ASLBs)
information about economical, efficient and effective use of resources
as intended.
Information Provided by General Purpose Financial
Reports
Financial Position, Financial Performance, and Cash Flows
2.14 Information about financial position, financial performance and cash
flows are typically presented in financial statements. Information about
the financial position of a local body will enable users to identify the
resources of the entity and claims to those resources at the reporting
date. This will provide information useful as input to assessments of
such matters as:
The extent to which management has discharged its
responsibilities for safekeeping and managing the resources of
the entity;
The extent to which resources are available to support future
service delivery activities, and changes during the reporting
period in the amount and composition of those resources and
claims to those resources; and
The amounts and timing of future cash flows necessary to
service and repay existing claims to the entity‘s resources.
2.15 Information about the financial performance of a local body will inform
assessments of matters such as whether the entity has acquired
resources economically, and used them efficiently and effectively to
achieve its service delivery objectives.
2.16 Information about the cash flows of a local body contributes to
assessments of financial performance and the entity‘s liquidity and
solvency. It indicates how the entity raised and used cash during the
period, from operating, financing and investing activities.
2.17 To assist users to better understand, interpret and place in context the
information presented in the financial statements, GPFRs may also
provide financial and non-financial information that enhances,
complements and supplements the financial statements, including
information about such matters as the local body‘s:
Compliance with approved budgets and other authority
governing its operations;
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The Conceptual Framework for General Purpose Financial Reporting by LBs
Service delivery activities and achievements during the
reporting period; and
Expectations regarding service delivery and other activities in
future periods, and the long-term consequences of decisions
made and activities undertaken during the reporting period,
including those that may impact expectations about the future.
This information may be presented in the notes to the financial
statements or in separate reports included in GPFRs.
Budget Information and Compliance with Legislation or Other Authority
Governing the Raising and Use of Resources
2.18 Typically, a governing body of the local body approves and makes
publicly available an annual budget. The approved budget provides
interested parties with financial information about the entity‘s
operational plans for the forthcoming period, its capital needs and,
often, its service delivery objectives and expectations. It is used to
justify the raising of resources from taxpayers and other resource
providers, and establishes the authority for expenditure of resources.
2.19 Some resources to support the activities of local bodies may be
received from grantors, lenders or as a result of exchange
transactions. However, resources to support the activities of local
bodies are predominantly provided in non-exchange transactions by
taxpayers and others.
2.20 GPFRs provide information about the financial results (described as
―surplus or deficit‖), performance and cash flows of the entity during
the reporting period, its assets and liabilities at the reporting date and
the change therein during the reporting period, and its service delivery
achievements.
2.21 The inclusion within GPFRs of information that assists users in
assessing the extent to which revenues, expenses, cash flows and
financial results of the entity comply with the estimates reflected in
approved budgets, and the entity‘s adherence to relevant legislation or
other authority governing the raising and use of resources, is important
in determining how well a local body has met its financial objectives.
Service Delivery Achievements
2.22 The primary objective of local bodies is to provide needed services to
constituents. Consequently, the financial performance of local bodies
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Compendium of Accounting Standards for Local Bodies (ASLBs)
will not be fully or adequately reflected in any measure of financial
results. Therefore, their financial results will need to be assessed in
the context of the achievement of service delivery objectives.
2.23 In some cases, quantitative measures of the outputs and outcomes of
the entity‘s service delivery activities during the reporting period will
provide relevant information about the achievement of service delivery
objectives―for example, information about the cost, volume, and
frequency of service delivery, and the relationship of services provided
to the resource base of the entity.
2.24 Reporting non-financial as well as financial information about service
delivery activities, achievements and/or outcomes during the reporting
period will provide input to assessments of the economy, efficiency,
and effectiveness of the entity‘s operations. Reporting such
information is necessary for a local body to discharge its obligation to
be accountable―that is, to account for, and justify the use of, the
resources raised from, or on behalf of, constituents and for future
allocation of resources.
Prospective Financial and Non-financial Information
2.25 Given the longevity of local body programmes, the financial
consequences of many decisions made in the reporting period may
only become clear many years into the future. Financial statements
which present information about financial position at a point in time
and financial performance and cash flows over the reporting period will
then need to be assessed in the context of the long term.
2.26 Decisions made by a local body in a particular period about
programmes for delivering and funding services in the future can have
significant consequences for:
Constituents who will be dependent on those services in the
future; and
Current and future generations of taxpayers and other
involuntary resource providers who will provide the taxes and
levies to fund the planned service delivery activities and related
financial commitments.
2.27 Information about the entity‘s anticipated future service delivery
activities and objectives, their likely impact on the future resource
needs of the entity and the likely sources of funding for such
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The Conceptual Framework for General Purpose Financial Reporting by LBs
resources, will be necessary as input to any assessment of the ability
of the local body to meet its service delivery and financial
commitments in the future.
Explanatory Information
2.28 Information about the major factors underlying the financial and
service delivery performance of the entity during the reporting period
and the assumptions that underlie expectations about, and factors that
are likely to influence, the entity‘s future performance may be
presented in GPFRs in notes to the financial statements or in separate
reports. Such information will assist users to better understand and
place in context the financial and non-financial information included in
GPFRs, and enhance the role of GPFRs in providing information
useful for accountability and decision-making purposes.
Financial Statements and Information that Enhances,
Complements and Supplements the Financial Statements
2.29 The scope of financial reporting establishes the boundary around the
transactions, other events and activities that may be reported in
GPFRs. To respond to the information needs of users, the Conceptual
Framework reflects a scope for financial reporting that is more
comprehensive than that encompassed by financial statements. It
provides for the presentation within GPFRs of additional information
that enhances, complements, and supplements those statements.
2.30 While the Conceptual Framework reflects a scope of financial reporting
that is more comprehensive than that encompassed by financial
statements, information presented in financial statements remains at
the core of financial reporting. How the elements of financial
statements are defined, recognised and measured, and forms of
presentation and communication that might be adopted for information
included within GPFRs, is considered in other chapters of the
Conceptual Framework and in the development of individual ASLBs,
as appropriate.
Other Sources of Information
2.31 GPFRs play a significant role in communicating information necessary
to support the discharge of a local body‘s obligation to be accountable,
as well as providing information useful as input for decision-making
purposes. However, it is unlikely that GPFRs will provide all the
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Compendium of Accounting Standards for Local Bodies (ASLBs)
information users need for accountability and decision-making
purposes. For example, while comparison of actual with budget
information for the reporting period may be included in GPFRs, the
budgets and financial forecasts issued by local bodies provide more
detailed financial and non-financial information about the financial
characteristics of the plans of local bodies over the short and medium
terms. Local Bodies and their agencies also issue reports on the need
for, and sustainability of, existing service delivery initiatives and
anticipated economic conditions and changes in the jurisdiction‘s
demographics over the medium and longer term that will influence
budgets and service delivery needs in the future. Consequently,
service recipients and resource providers may also need to consider
information from other sources, including reports on current and
anticipated economic conditions, local body budgets and forecasts,
and information about local body policy initiatives not reported in
GPFRs.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
Chapter 3
Qualitative Characteristics
Contents
Paragraphs
Introduction 3.1 – 3.5
Relevance 3.6 – 3.9
Faithful Representation 3.10 – 3.16
Understandability 3.17 – 3.18
Timeliness 3.19 – 3.20
Comparability 3.21 – 3.25
Verifiability 3.26 – 3.31
Constraints on Information Included in General
Purpose Financial Reports 3.32 – 3.42
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Compendium of Accounting Standards for Local Bodies (ASLBs)
Chapter 3:
Qualitative Characteristics
Introduction
3.1 GPFRs present financial and non-financial information about economic
and other events. The qualitative characteristics of information
included in GPFRs are the attributes that make that information useful
to users and support the achievement of the objectives of financial
reporting. The objectives of financial reporting are to provide
information useful for accountability and decision-making purposes.
3.2 The qualitative characteristics of information included in GPFRs of
local bodies are relevance, faithful representation, understandability,
timeliness, comparability, and verifiability.
3.3 Pervasive constraints on information included in GPFRs are
materiality, cost-benefit, and achieving an appropriate balance
between the qualitative characteristics.
3.4 Each of the qualitative characteristics is integral to, and works with,
the other characteristics to provide in GPFRs information useful for
achieving the objectives of financial reporting. However, in practice, all
qualitative characteristics may not be fully achieved, and a balance or
trade-off between certain of them may be necessary.
3.5 The qualitative characteristics apply to all financial and non-financial
information reported in GPFRs, including historic and prospective
information, and explanatory information. However, the extent to which
the qualitative characteristics can be achieved may differ depending
on the degree of uncertainty and subjective assessment or opinion
involved in compiling the financial and non-financial information.
Relevance
3.6 Financial and non-financial information is relevant if it is capable of
making a difference in achieving the objectives of financial reporting.
Financial and non-financial information is capable of making a
difference when it has confirmatory value, predictive value, or both. It
may be capable of making a difference, and thus be relevant, even if
some users choose not to take advantage of it or are already aware of
it.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
3.7 Financial and non-financial information has confirmatory value if it
confirms or changes past (or present) expectations. For example,
information will be relevant for accountability and decision-making
purposes if it confirms expectations about such matters as the extent
to which managers have discharged their responsibilities for the
efficient and effective use of resources, and compliance with relevant
budgetary, legislative and other requirements.
3.8 GPFRs may present information about an entity‘s anticipated future
service delivery activities, objectives and costs, and the amount and
sources of the resources that are intended to be allocated to providing
services in the future. Such future oriented information will have
predictive value and be relevant for accountability and decision-
making purposes. Information about economic and other events that
exist or have already occurred can also have predictive value which
helps to form expectations about the future.
3.9 The confirmatory and predictive roles of information are
interrelated―for example, information about the current level and
structure of an entity‘s resources and claims to those resources helps
users to confirm the outcome of resource management strategies
during the period, and to predict an entity‘s ability to respond to
changing circumstances and anticipated future service delivery needs.
Faithful Representation
3.10 To be useful in financial reporting, information must be a faithful
representation of the economic and other events. Faithful
representation is attained when the depiction of the event is complete,
neutral, and free from material error. Information that faithfully
represents an economic or other event depicts the substance of the
underlying transaction, other event, activity or circumstance―which is
not necessarily always the same as its legal form.
3.11 Pervasive efforts should be made so that the information presented in
GPFRs is complete, neutral, and free from error.
3.12 An omission of some information can cause the representation of an
economic or other event to be false or misleading, and thus not useful
to users of GPFRs. For example, a complete depiction of the item
―plant and equipment‖ in GPFRs will include a numeric representation
of the aggregate amount of plant and equipment together with other
quantitative, descriptive and explanatory information necessary to
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Compendium of Accounting Standards for Local Bodies (ASLBs)
faithfully represent that class of assets. In some cases, this may
include the disclosure of information about such matters as the major
classes of plant and equipment, factors that have affected their use in
the past or might impact on their use in the future, and the basis and
process for determining their numeric representation.
3.13 Neutrality in financial reporting is the absence of bias which requires
reporting without any intention of attaining a particular predetermined
result―for example, to influence in a particular way users‘ assessment
of the discharge of accountability by the entity or a decision or
judgment that is to be made, or to induce particular behavior.
3.14 Neutral information faithfully represents the economic and other
events that it intents purports to represent. However, to require
information included in GPFRs to be neutral does not mean that it is
not without purpose or that it will not influence behavior.
3.15 The economic and other events represented in GPFRs generally occur
under conditions of uncertainty and often include estimates that are
generally based on the management‘s judgment which shall be
supported by appropriate input and best available information. It may
sometimes be necessary to explicitly disclose the degree of
uncertainty in financial and non-financial information to faithfully
represent economic and other events.
3.16 Free from material error does not mean complete accuracy in all
respects. Free from material errors means there are no errors or
omissions that are individually or collectively material in the description
of the event and the process used to produce the reported information
has been applied as described. In some cases, it may be possible to
determine the accuracy of some information included in GPFRs―for
example, the amount of a cash transfer to another level of
government, the volume of services delivered or the price paid for the
acquisition of plant and equipment. However, in other cases it may
not―for example, the accuracy of an estimate of the value or cost of
an item or the effectiveness of a service delivery programme may not
be able to be determined. In these cases, the estimate will be free
from material error if the amount is clearly described as an estimate,
the nature and limitations of the estimation process are explained, and
no material errors have been identified in selecting and applying an
appropriate process for developing the estimate.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
Understandability
3.17 Understandability is the quality of information that enables users to
comprehend its meaning. GPFRs of local bodies should present
information in a classified, concise, comparable and in a manner that
responds to the needs and knowledge base of users, and to the nature
of the information presented. For example, explanations of financial
and non-financial information and commentary on service delivery and
other achievements during the reporting period and expectations for
future periods should be written in plain language, and presented in a
manner that is readily understandable by users.
3.18 Users of GPFRs are assumed to have a reasonable knowledge of the
entity‘s activities and the environment in which it operates, to be able
and prepared to read GPFRs, and to review and analyse the
information presented with reasonable diligence. All efforts should be
undertaken to represent economic and other events included in
GPFRs in a manner that is understandable to a wide range of users.
However, information should not be excluded from GPFRs solely
because it may be too complex or difficult for some users to
understand without assistance.
Timeliness
3.19 Timeliness means having information available for users before it
loses its capacity to be useful for accountability and decision-making
purposes. Availability of information timely can enhance its usefulness
as input to assessments of accountability and its capacity to inform
and influence decisions that need to be made. A lack of timeliness can
render information less useful.
3.20 Some items of information may continue to be useful long after the
reporting period or reporting date. For example, for accountability and
decision-making purposes, users of GPFRs may need to assess
trends in the financial and service delivery performance of the entity
and its compliance with budgets over a number of reporting periods.
Comparability
3.21 Comparability is the quality of information that enables users to
identify similarities in, and differences between, two sets of events.
Comparability is not a quality of an individual item of information, but
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Compendium of Accounting Standards for Local Bodies (ASLBs)
rather a quality of the relationship between two or more items of
information.
3.22 Comparability differs from consistency. Consistency refers to the use
of the same accounting principles or policies and basis of preparation,
either from period to period within an entity or in a single period across
more than one entity. Comparability is the goal, and consistency helps
in achieving that goal. In some cases, the accounting principles or
policies adopted by an entity may be revised to better represent a
particular transaction or event in GPFRs. In these cases, the inclusion
of additional disclosures or explanation may be necessary to satisfy
the characteristics of comparability.
3.23 Comparability also differs from uniformity. For information to be
comparable, like things must look alike and different things must look
different. An over-emphasis on uniformity may reduce comparability by
making unlike things look alike. Comparability of information in GPFRs
is not enhanced by making unlike things look alike, any more than it is
by making like things look different.
3.24 Information about the entity‘s financial position, financial performance,
cash flows, compliance with approved budgets and relevant legislation
or other authority governing the raising and use of resources, service
delivery achievements, and its future plans is necessary for
accountability purposes and useful as input for decision-making
purposes.
3.25 Consistent application of accounting principles, policies and basis of
preparation to prospective financial and non-financial information and
actual outcomes will enhance the usefulness of any comparison of
projected and actual results. Comparability with other entities may be
less significant for explanations of management‘s perception or
opinion of the factors underlying the entity‘s current performance.
Verifiability
3.26 Verifiability is the quality of information that helps assure users that
information in GPFRs faithfully represents the economic and other
events that it purports to represent. Supportability is sometimes used
to describe this quality when applied in respect of explanatory
information and prospective financial and non-financial quantitative
information disclosed in GPFRs―that is, the quality of information that
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The Conceptual Framework for General Purpose Financial Reporting by LBs
helps assure users that explanatory or prospective financial and non -
financial quantitative information faithfully represents the economic
and other events that it purports to represent. Whether referred to as
verifiability or supportability, the characteristic implies that different
knowledgeable and independent observers could reach general
consensus, although not necessarily complete agreement, that either:
The information represents the economic and other events that
it purports to represent without material error or bias; or
An appropriate recognition, measurement, or representation
method has been applied without material error or bias.
3.27 To be verifiable, information need not be a single point estimate. A
range of possible amounts and the related probabilities also can be
verified.
3.28 Verification may be direct or indirect. With direct verification, an
amount or other representation is itself verified, such as by (a)
counting cash, (b) observing marketable securities and their prices, or
(c) confirming that the factors identified as influencing past service
delivery performance were present and operated with the effect
identified. With indirect verification, the amount or other representation
is verified by checking the inputs and recalculating the outputs using
the same accounting convention or methodology. An example is
verifying the carrying amount of inventory by checking the inputs
(quantities and costs) and recalculating the ending inventory using the
same cost flow assumption (for example, average cost or first-in-first-
out).
3.29 The quality of verifiability (or supportability if such term is used to
describe this characteristic) is not an absolute―some information may
be more or less capable of verification than other information.
However, the more verifiable is the information included in GPFRs, the
more it will assure users that the information faithfully represents the
economic and other events that it purports to represent.
3.30 GPFRs of local bodies may include financial and other quantitative
information and explanations about (a) key influences on the entity‘s
performance during the period, (b) the anticipated future effects or
outcomes of service delivery programmes undertaken during the
reporting period, and (c) prospective financial and non-financial
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Compendium of Accounting Standards for Local Bodies (ASLBs)
information. It may not be possible to verify the accuracy of all
quantitative representations and explanations of such information unti l
a future period, if at all.
3.31 To help assure users that prospective financial and non-financial
quantitative information and explanations included in GPFRs faithfully
represents the economic and other events that they purport to
represent, the assumptions that underlie the information disclosed, the
methodologies adopted in compiling that information, and the factors
and circumstances that support any opinions expressed or disclosures
made should be transparent. This will enable users to form judgments
about the appropriateness of those assumptions and the method of
compilation, measurement, representation and interpretation of the
information.
Constraints on Information Included in General Purpose
Financial Reports
Materiality
3.32 Information is material if its omission or misstatement could influence
the discharge of accountability by the entity, or the decisions that
users make on the basis of the entity‘s GPFRs prepared for that
reporting period. Materiality depends on both the nature and amount of
the item judged in the particular circumstances of each entity. GPFRs
may encompass qualitative and quantitative information about service
delivery achievements during the reporting period, and expectations
about service delivery and financial outcomes in the future.
Consequently, it is not possible to specify a uniform quantitative
threshold at which a particular type of information becomes material.
3.33 Assessments of materiality will be made in the context of the
legislative, institutional and operating environment within which the
entity operates and, in respect of prospective financial and non -
financial information, the preparer‘s knowledge and expectations about
the future. Disclosure of information about compliance or non-
compliance with legislation, regulation or other authority may be
material because of its nature―irrespective of the magnitude of any
amounts involved. In determining whether an item is material in these
circumstances, consideration will be given to such matters as the
nature, legality, sensitivity and consequences of past or anticipated
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The Conceptual Framework for General Purpose Financial Reporting by LBs
transactions and events, the parties involved in any such transactions
and the circumstances giving rise to them.
3.34 Materiality is classified as a constraint on information included in
GPFRs in this Conceptual Framework. In developing ASLBs, the
CASLB will consider the materiality of the consequences of application
of a particular accounting policy, basis of preparation or disclosure of a
particular item or type of information. Subject to the requirements of
any ASLB, entities preparing GPFRs will also consider the materiality
of, for example, the application of a particular accounting policy and
the separate disclosure of particular items of information.
Cost-Benefit
3.35 Financial reporting imposes costs. The benefits of financial reporting
should justify those costs. Assessing whether the benefits of providing
information justify the related costs is often a matter of judgment,
because it is often not possible to identify and/or quantify all the costs
and all the benefits of information included in GPFRs.
3.36 The costs of providing information include the costs of collecting and
processing the information, the costs of verifying it and/or presenting
the assumptions and methodologies that support it, and the costs of
disseminating it. Users incur the costs of analysis and interpretation.
Omission of useful information also imposes costs, including the costs
that users incur to obtain needed information from other sources and
the costs that result from making decisions using incomplete data
provided by GPFRs.
3.37 Preparers expend the majority of the effort to provide information in
GPFRs. However, service recipients and resource providers ultimately
bear the cost of those efforts―because resources are redirected from
service delivery activities to preparation of information for inclusion in
GPFRs.
3.38 Information provided by GPFRs are not only used by users but also
used internally by management for better decision making. The
disclosure of information in GPFRs consistent with the concepts
identified in the Conceptual Framework and ASLBs will enhance and
reinforce perceptions of the transparency of financial reporting by local
bodies.
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Compendium of Accounting Standards for Local Bodies (ASLBs)
3.39 Application of the cost-benefit constraint involves assessing whether
the benefits of reporting information are likely to justify the costs
incurred to provide and use the information. When making this
assessment, it is necessary to consider whether one or more
qualitative characteristic might be sacrificed to some degree to reduce
cost.
3.40 [Refer to Appendix 1]
Balance between the Qualitative Characteristics
3.41 The qualitative characteristics work together to contribute to the
usefulness of information. For example, neither a depiction that
faithfully represents an irrelevant event, nor a depiction that
unfaithfully represents a relevant event, results in useful information.
Similarly, to be relevant, information must be timely and
understandable.
3.42 In some cases, a balancing or trade-off between qualitative
characteristics may be necessary to achieve the objectives of financial
reporting. The relative importance of the qualitative characteristics in
each situation is a matter of professional judgment. The aim is to
achieve an appropriate balance among the characteristics in order to
meet the objectives of financial reporting.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
Chapter 4
Reporting Entity
Contents
Paragraphs
Introduction 4.1 - 4.2
Key Characteristics of a Reporting Entity 4.3 - 4.11
33
Compendium of Accounting Standards for Local Bodies (ASLBs)
Chapter 4
Reporting Entity
Introduction
4.1 A reporting entity is a local body, its programme or identifiable area of
activity (hereafter referred to as an entity or local body) that prepares
GPFRs.
4.2 A reporting entity may comprise two or more separate entities that
present GPFRs as if they are a single entity—such a reporting entity is
referred to as a group reporting entity.
Key Characteristics of a Reporting Entity
4.3 Key characteristics of a reporting entity are that:
It is an entity that raises resources from, or on behalf of,
constituents and/or uses resources to undertake activities for
the benefit of, or on behalf of, those constituents; and
There are service recipients or resource providers dependent on
GPFRs of the entity for information for accountability or
decision-making purposes.
4.4 A local body may operate through or delegate its functions to some
other bodies such as development authorities, boards, societies,
parastatals, etc. Such bodies may be constituted, in partnership with
private sector or otherwise, directly or indirectly by or on behalf of a
Local Body to promote or carry out some specific objective(s) or
function(s) of the Local Bodies. Such entities may be constituted under
a statute. Such entities, may also undertake certain activities through,
and may benefit from and be exposed to a financial burden or loss as
a result of, the activities of entities with a separate legal identity or
operational autonomy.
4.5 GPFRs are prepared to report information useful to users for
accountability and decision-making purposes. Service recipients and
resource providers are the primary users of GPFRs. Consequently, a
key characteristic of a reporting entity, including a group reporting
entity, is the existence of service recipients or resource providers who
are dependent on GPFRs of that entity or group of entities for
information for accountability or decision-making purposes.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
4.6 GPFRs encompass financial statements and information that
enhances, complements and supplements the financial statements.
Financial statements present information about the resources of the
reporting entity or group reporting entity and claims to those resources
at the reporting date, and changes to those resources and claims and
cash flows during the reporting period. Therefore, to enable the
preparation of financial statements, a reporting entity will raise
resources and/or use resources previously raised to undertake
activities for the benefit of, or on behalf of, its constituents.
4.7 The factors that are likely to signal the existence of users of GPFRs of
an entity or group of entities include an entity having the responsibility
or capacity to raise or deploy resources, acquire or manage public
assets, incur liabilities, or undertake activities to achieve service
delivery objectives. The greater the resources that an entity raises,
manages and/or has the capacity to deploy, the greater the liabilities it
incurs and the greater the economic or social impact of its activities,
the more likely it is that there will exist service recipients or resource
providers who are dependent on GPFRs for information about it for
accountability and decision-making purposes. In the absence of these
factors, or where they are not significant, it is unlikely that users of
GPFRs of these entities will exist.
4.8 The preparation of GPFRs is not a cost-free process. Therefore, if the
imposition of financial reporting requirements is to be efficient and
effective, it is important that only those entities for which such users
exist are required to prepare GPFRs.
4.9 In many cases, it will be clear whether or not there exist service
recipients or resource providers that are dependent on GPFRs of an
entity for information for accountability and decision-making purposes.
For example, such users are likely to exist for GPFRs of local bodies,
i.e., municipal corporation, municipal councils, etc. This is because
these entities generally have the capacity to raise substantial
resources from and/or deploy substantial resources on behalf of their
constituents, to incur liabilities, and to impact the economic and/or
social well-being of the communities that depend on them for the
provision of services.
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Compendium of Accounting Standards for Local Bodies (ASLBs)
4.10 However, it may not always be clear whether there are service
recipients or resource providers that are dependent on GPFRs of, for
example, particular programme or identifiable areas of activity/ scheme
of local bodies, its departments and agencies for information for
accountability and decision-making purposes. Determining whether
these programmes or activities should be identified as reporting
entities and, consequently, be required to prepare GPFRs will involve
the exercise of professional judgment.
4.11 The local bodies have a separate identity or standing in law (a legal
identity). However, programmes and activities without a separate legal
identity may also raise or deploy resources, acquire or manage public
assets, incur liabilities, undertake activities to achieve service delivery
objectives or otherwise implement government policy. Service
recipients and resource providers may depend on GPFRs of these
programmes and activities for information for accountability and
decision-making purposes. Consequently, a reporting entity may have
a separate legal identity or be, for example, programme or activity
without a separate legal identity.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
Chapter 5
Elements in Financial Statements
Contents
Paragraphs
Introduction 5.1 – 5.5
Purpose of this Chapter 5.1
Elements and their Importance 5.2 – 5.4
Elements Defined 5.5
Assets 5.6 - 5.13
Definition 5.6
A Resource 5.7 – 5.10
Presently Controlled by the Entity 5.11 – 5.12
Past Event 5.13
Liabilities 5.14 - 5.26
Definition 5.14
A Present Obligation 5.15
An Outflow of Resources from the Entity 5.16
Past Event 5.17
Legal and Non-Legally Binding Obligations 5.18 – 5.26
Net Financial Position, Other Resources, and Other
Obligations 5.27 – 5.28
Revenue and Expense 5.29 – 5.32
Definitions 5.29 – 5.31
Surplus or deficit for the Period 5.32
Ownership Contributions and Ownership Distributions 5.33 – 5.37
Definitions 5.33 – 5.37
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Compendium of Accounting Standards for Local Bodies (ASLBs)
Chapter 5
Elements in Financial Statements
Introduction
Purpose of this Chapter
5.1 This Chapter defines the elements used in financial statements and
provides further explanation about those definitions.
Elements and their Importance
5.2 Financial statements portray the financial effects of transactions and
other events by grouping them into broad classes which share
common economic characteristics. These broad classes are termed
the elements of financial statements. Elements are the building blocks
from which financial statements are constructed. These building blocks
provide an initial point for recording, classifying and aggregating
economic data and activity in a way that provides users with
information that meets the objectives of financial reporting and
achieves the qualitative characteristics of financial reporting while
taking into account the constraints on information included in GPFRs.
5.3 The elements defined in this Chapter do not refer to the individual
items that are recognised as a result of transactions and events. Sub-
classifications of individual items within an element and aggregations
of items are used to enhance the understandability of the financial
statements. Presentation is addressed in Chapter 8, Presentation in
General Purpose Financial Reports.
5.4 For a meaningful assessment of the financial performance and
financial position of an entity, recognition of economic phenomena and
events that are not captured by the elements as defined in this
Chapter may be necessary. Consequently, the identification of the
elements in this Chapter does not preclude ASLBs from requiring or
allowing the recognition of resources or obligations that do not satisfy
the definition of an element identified in this Chapter.
Elements Defined
5.5 The elements that are defined in this Chapter are:
Assets;
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The Conceptual Framework for General Purpose Financial Reporting by LBs
Liabilities;
Revenue;
Expense;
Ownership contributions 3; and
Ownership distributions.
Assets
Definition
5.6 An asset is:
A resource presently controlled by the entity as a result of a past
event.
A Resource
5.7 A resource is an item for its own use with service potential or the
ability to generate economic benefits. Physical form is not a necessary
condition of a resource. The service potential or ability to generate
economic benefits can arise directly from the resource itself or from
the rights to use the resource. Some resources embody an entity‘s
rights to a variety of benefits including, for example, the right to:
Use the resource to provide services 4;
Use an external party‘s resources to provide services, for
example, leases;
Convert the resource into cash through its disposal;
Benefit from the resource‘s appreciation in value; or
Receive a stream of cash flows.
5.8 Service potential is the capacity of the asset to provide services that
contribute to achieving the entity‘s objectives. Service potential
enables an entity to achieve its objectives without necessarily
generating net cash inflows.
3 Ownership contribution in case of local bodies denotes the contribution from the
Central Government/respective State Government.
4 References to ―services‖ in the Conceptual Framework encompass ―goods‖.
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Compendium of Accounting Standards for Local Bodies (ASLBs)
5.9 Local Body‘s assets that embody service potential may include
recreational, heritage, community, and other assets which are held by
local bodies, and which are used to provide services to third parties.
Such services may be for collective or individual consumption. Many
services may be provided in areas where there is no market
competition or limited market competition. The use and disposal of
such assets may be restricted as many assets that embody service
potential are specialised in nature.
5.10 The future economic benefit embodied in an asset is the potential to
contribute, directly or indirectly, to the flow of cash and cash
equivalents to the entity. The potential may be a productive one that is
part of the operating activities of the entity and it may also take the
form of convertibility into cash or cash equivalents or a capability to
reduce cash outflows. In other words, economic benefits are cash
inflows or a reduction in cash outflows. Cash inflows (or reduced cash
outflows) may be derived from, for example:
An asset‘s use in the production and sale of services;
The direct exchange of an asset for cash or other resources;
An asset‘s use in settlement of a liability; or
Distribution of asset to the government/owners of the entity.
Presently Controlled by the Entity
5.11 An entity must have control of the resource. Control of the resource
entails the ability of the entity to use the resource (or direct other
parties on its use) so as to derive the benefit of the service potential or
economic benefits embodied in the resource in the achievement of its
service delivery or other objectives.
5.12 In assessing whether it presently controls a resource, an entity
assesses whether the following indicators of control exist:
Legal ownership;
Access to the resource, or the ability to deny or restrict access
to the resource;
The means to ensure that the resource is used to achieve its
objectives; and
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The Conceptual Framework for General Purpose Financial Reporting by LBs
The existence of an enforceable right to service potential and or
the ability to generate economic benefits arising from a
resource.
While these indicators are not conclusive determinants of whether
control exists, identification and analysis of them can inform that
decision.
Past Event
5.13 The definition of an asset requires that a resource that an entity
presently controls must have arisen from a past transaction or other
past event. Entities can obtain assets by purchasing them in an
exchange transaction or developing them. Assets may also arise
through non-exchange transactions, including through the exercising
of sovereign powers. The power to tax or to issue licenses and to
access or restrict or deny access to the benefits embodied in
intangible resources may give rise to assets. In assessing when an
entity‘s control of rights to resources arise the following events may be
considered: (a) a general ability to establish a power, (b)
establishment of a power through a statute, (c) exercising the power to
create a right, and (d) the event which gives rise to the right to receive
resources from an external party. An asset arises when the power is
exercised and the rights exist to receive resources.
Liabilities
Definition
5.14 A liability is:
A present obligation of the entity for an outflow of resources that
results from a past event.
A Present Obligation
5.15 Local bodies can have a number of obligations. A present obligation is
a legally binding obligation (legal obligation) or non-legally binding
obligation, which an entity has little or no realistic alternative to avoid.
Obligations are not present obligations unless they are binding and
there is little or no realistic alternative to avoid an outflow of resources.
An Outflow of Resources from the Entity
5.16 A liability must involve an outflow of resources from the entity for it to
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be settled. An obligation that can be settled without an outflow of
resources from the entity is not a liability.
Past Event
5.17 To satisfy the definition of a liability, it is necessary that a present
obligation arises as a result of a past transaction or other event and
requires an outflow of resources from the entity. The complexity of
local body programmes and activities means that a number of events
in the development, implementation and operation of a particular
programme may give rise to obligations. For financial reporting
purposes it is necessary to determine whether such commitments and
obligations, including binding obligations that the entity has little or no
realistic alternative to avoid but are not legally enforceable (non-legally
binding obligations) are present obligations and satisfy the definition of
a liability. Where an arrangement has a legal form and is binding, such
as a contract, the past event may be straightforward to identify. In
other cases, it may be more difficult to identify the past event and
identification involves an assessment of when an entity has little or no
realistic alternative to avoid an outflow of resources from the entity.
Legal and Non-Legally Binding Obligations
5.18 Binding obligations can be legal obligations or non-legally binding
obligations. Binding obligations can arise from both exchange and
non-exchange transactions. An obligation must be to an external party
in order to give rise to a liability. An entity cannot be obligated to itself,
even where it has publicly communicated an intention to behave in a
particular way. Identification of an external party is an indication of the
existence of an obligation giving rise to a liability. However, it is not
essential to know the identity of the external party before the time of
settlement in order for a present obligation and a liability to exist.
5.19 Many arrangements that give rise to an obligation include settlement
dates. The inclusion of a settlement date may provide an indication
that an obligation involves an outflow of resources and gives rise to a
liability. However, there are many agreements that do not contain
settlement dates. The absence of a settlement date does not preclude
an obligation giving rise to a liability.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
Legal Obligations
5.20 A legal obligation is enforceable in law. Such enforceable obligations
may arise from a contract, legislation or other operation of law.
Exchange transactions are usually contractual in nature and therefore
enforceable through the laws of contract or equivalent authority or
arrangements. Obligations that are binding through alternative
processes are considered legal obligations in the Conceptual
Framework. For some types of non-exchange transactions, judgment
will be necessary to determine whether an obligation is enforceable in
law. Where it is determined that an obligation is enforceable in law
there can be no doubt that an entity has no realistic alternative to
avoid the obligation and that a liability exists.
5.21 Some obligations related to exchange transactions are not strictly
enforceable by an external party at the reporting date, but will be
enforceable with the passage of time without the external party having
to meet further conditions— or having to take any further action—prior
to settlement. Claims that are unconditionally enforceable subject to
the passage of time are enforceable obligations in the context of the
definition of a liability.
5.22 The legal position should be assessed at each reporting date to
consider if an obligation is no longer binding and does not meet the
definition of a liability.
Non-Legally Binding Obligations
5.23 Liabilities can arise from non-legally binding obligations. Non-legally
binding obligations differ from legal obligations in that the party to
whom the obligation exists cannot take legal (or equivalent) action to
enforce settlement. Non-legally binding obligations that give rise to
liabilities have the following attributes:
The entity has indicated to other parties by an established
pattern of past practice, published policies, or a sufficiently
specific current statement that it will accept certain
responsibilities;
As a result of such an indication, the entity has created a valid
expectation on the part of those other parties that it will
discharge those responsibilities; and
The entity has little or no realistic alternative to avoid settling the
obligation arising from those responsibilities.
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5.24 In the local body, obligations may arise at a number of points. For
example, in implementing a programme or service:
Making a political promise such as an electoral pledge;
Announcement of a policy;
Introduction (and approval) of the budget (which may be two
distinct points);
The budget becoming effective (in some cases, the budget will
not be effective until an appropriation has been effected); and
The early stages of implementation are unlikely to give rise to
present obligations that meet the definition of a liability. Later
stages, such as claimants meeting the eligibility criteria for the
service to be provided, may give rise to obligations that meet
the definition of a liability.
5.25 The point at which an obligation gives rise to a liability depends on the
nature of the obligation. Factors that are likely to impact on judgments
whether other parties can validly conclude that the obligation is such
that that the entity has little or no realistic alternative to avoid an
outflow of resources include:
The nature of the past event or events that give rise to the
obligation. For example, a promise made in an election is
unlikely to give rise to a present obligation because an electoral
pledge very rarely creates a valid expectation on the part of
external parties that the entity has an obligation that it has little
or no realistic alternative to avoid settling. However, an
announcement in relation to an event or circumstance that has
occurred may have such political support that a local body has
little option to withdraw. Where a local body has committed to
introduce and secure passage of the necessary budgetary
provision such an announcement may give rise to a non-legally
binding obligation;
The ability of the entity to modify or change the obligation before
it crystallises. For example, the announcement of policy will
generally not give rise to a non-legally binding obligation; and
There may be a correlation between the availability of funding to
settle a particular obligation and the creation of a present
obligation. For example, where both a budget line item has been
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The Conceptual Framework for General Purpose Financial Reporting by LBs
approved and linked funding is assured through an
appropriation, or through the availability of contingency funding
or a transfer from a different level of government, a non-legally
binding obligation may exist. However, the absence of a
budgetary provision does not itself mean that a present
obligation has not arisen.
5.26 ―Economic coercion‖, ―political necessity‖ or other circumstances may
give rise to situations where, although the local body is not legally
obliged to incur an outflow of resources, the economic or political
consequences of refusing to do so are such that the entity may have
little or no realistic alternative to avoid an outflow of resources.
Economic coercion, political necessity or other circumstances may
lead to a liability arising from a non-legally binding obligation.
Net Financial Position, Other Resources, and Other
Obligations
5.27 As explained in paragraph 5.4, in some cases, in developing or
revising an ASLB, the CASLB may determine that to achieve the
objectives of financial reporting a resource or obligation that does not
satisfy the definition of an element defined in the Conceptual
Framework needs to be recognised in the financial statements. In
these cases, the ASLB may require or allow these resources or
obligations to be recognised as other resources or other obligations,
which are items additional to the six elements defined in this
Framework.
5.28 Net financial position is the difference between assets and liabilities
after adding other resources and deducting other obligations
recognised in the balance sheet. Net financial position can be a
positive or negative residual amount.
Revenue and Expense
Definitions
5.29 Revenue is:
Revenue is the gross inflow of economic benefits or service potential
during the reporting period when those inflows results in an increase in
the net financial position of the entity, other than increases arising
from ownership contributions.
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5.30 Expense is:
Expenses are decreases in economic benefits or service potential
during the reporting period in the form of outflows or consumption of
assets or incurrence of liabilities that result in decreases in the net
financial position of the entity, other than decreases arising from
ownership distributions.
5.31 Revenue and expense arise from exchange and non-exchange
transactions, other events such as unrealised increases and
decreases in the value of assets and liabilities, and the consumption of
assets through depreciation and erosion of service potential and
impairments. Revenue and expense may arise from individual
transactions or groups of transactions.
Surplus or deficit for the Period
5.32 The entity‘s surplus or deficit for the period is the difference between
revenue and expense reported on the income and expenditure
statement.
Ownership Contributions and Ownership Distributions
Definitions
5.33 Ownership contributions 5 are:
Inflows of resources to an entity, contributed by external parties in
their capacity as owners, towards the corpus of Local Bodies which
establish or increase an interest in the net financial position of the
entity.
5.34 Ownership distributions6 are:
Outflows of resources from the entity, distributed to external parties in
5 In case of Local Bodies, normally the contribution towards corpus will come from the
Central/respective State Government. However, where local bodies enter into joint
ventures/Special Purpose Vehicles (SPVs) with other entities, the controlling local
body itself may contribute in capacity as owner towards corpus of controlled entity.
6 The concept of ownership distribution may not be relevant for local bodies in normal
course where ownership contribution comes from the Central/ respective State
Government as surplus of Local Bodies is generally not meant for distribution.
However, in certain instances local bodies enter into joint ventures/SPVs with other
entities. In such cases, this concept may apply.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
their capacity as owners, which return or reduce an interest in the net
financial position of the entity.
5.35 It is important to distinguish inflows of resources from owners,
including those inflows that initially establish the ownership interest,
and outflows of resources to owners in their capacity as owners from
revenue and expense. In addition to the injections of resources and
the payment of dividends that may occur, in some jurisdictions it is
relatively common for assets and liabilities to be transferred between
entities. Where such transfers satisfy the definitions of ownership
contributions or ownership distributions they will be accounted for as
such.
5.36 Ownership interests may arise on the creation of an entity when
another entity contributes resources to provide the new entity with the
capacity to commence operational activities. In the local body,
contributions to, and distributions from, entities are sometimes linked
to the restructuring of government and will take the form of transfers of
assets and liabilities rather than cash transactions. Ownership
interests may take different forms, which may not be evidenced by an
equity instrument.
5.37 Ownership contributions may take the form of an initial injection of
resources at the creation of an entity or a subsequent injection of
resources, including those where an entity is restructured. Ownership
distributions may be: (a) a return on investment; (b) a full or partial
return of investment; or (c) in the event of the entity being wound up or
restructured, a return of any residual resources.
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Compendium of Accounting Standards for Local Bodies (ASLBs)
Chapter 6
Recognition in Financial Statements
Contents
Paragraphs
Recognition Criteria and their Relationship to Disclosure 6.1 – 6.4
Definition of an Element 6.5 – 6.6
Measurement Uncertainty 6.7 – 6.8
Disclosure and Recognition 6.9
Derecognition 6.10
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The Conceptual Framework for General Purpose Financial Reporting by LBs
Chapter 6
Recognition in Financial Statements
Recognition Criteria and their Relationship to Disclosure
6.1 This chapter identifies the criteria that must be satisfied in order for an
element to be recognised in the financial statements. Recognition is
the process of incorporating and including in amounts displayed on the
face of the appropriate financial statement an item that meets the
definition of an element and can be measured in a way that achieves
the qualitative characteristics and takes account of the constraints on
information included in GPFRs.
6.2 The recognition criteria are that:
An item satisfies the definition of an element; and
Can be measured in a way that achieves the qualitative
characteristics and takes account of constraints on information
in GPFRs.
6.3 All items that satisfy the recognition criteria are recognised in the
financial statements. In some circumstances, an ASLB may also
specify that, to achieve the objectives of financial reporting, a resource
or obligation that does not meet the definition of an element is to be
recognised in the financial statements provided it can be measured in
a way that meets the qualitative characteristics and constraints. Other
resources and other obligations are discussed in Chapter 5, Elements
in Financial Statements.
6.4 Recognition involves an assessment of uncertainty related to the
existence and measurement of the element. The conditions that give
rise to uncertainty, if any, can change. Therefore, it is important that
uncertainty is assessed at each reporting date.
Definition of an Element
6.5 In order to be recognised as an element, an item must meet the
definition of one of the elements in Chapter 5. Uncertainty about the
existence of an element is addressed by considering the available
evidence in order to decide whether an item satisfies all essential
characteristics of the definition of that element, taking into account all
available facts and circumstances at the reporting date.
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Compendium of Accounting Standards for Local Bodies (ASLBs)
6.6 If it is determined that an element exists, uncertainty about the amount
of service potential or ability to generate economic benefits
represented by that element is taken into account in the measurement
of that element (see paragraphs 6.7 and 6.8). Preparers review and
assess all available evidence in determining whether an element exists
and is recognised, whether that element continues to qualify for
recognition (see paragraph 6.9), or whether there has been a change
to an existing element.
Measurement Uncertainty
6.7 In order to recognise an item in the financial statements, it is
necessary to attach a monetary value to the item. This entails
choosing an appropriate measurement basis and determining whether
the measurement of the item achieves the qualitative characteristics,
taking into account the constraints on information in GPFRs, including
that the measurement is sufficiently relevant and faithfully
representative for the item to be recognised in the financial
statements. The selection of an appropriate measurement basis is
considered in Chapter 7, Measurement of Assets and Liabilities in
Financial Statements.
6.8 There may be uncertainty associated with the measurement of many
amounts presented in the financial statements. The use of estimates is
an essential part of the accrual basis of accounting. A decision about
the relevance and faithful representativeness of measurement involves
the consideration of techniques, such as using ranges of outcomes
and point estimates, and whether additional evidence is available
about economic circumstances that existed at the reporting date.
Disclosures can provide useful information on estimation techniques
employed. There may be rare instances in which the level of
uncertainty in a single point estimate is so large that the relevance and
faithful representativeness of the measure is questionable even if
disclosures are provided to explain estimation techniques. Under these
circumstances the item is not recognised.
Disclosure and Recognition
6.9 The failure to recognise items that meet the definition of an element
and the recognition criteria is not rectified by the disclosure of
accounting policies, notes or other explanatory detail. However,
disclosure can provide information about items that meet many, but
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The Conceptual Framework for General Purpose Financial Reporting by LBs
not all the characteristics of the definition of an element. Disclosure
can also provide information on items that meet the definition of an
element but cannot be measured in a manner that achieves the
qualitative characteristics sufficiently to meet the objectives of financial
reporting. Disclosure is appropriate when knowledge of the item is
considered to be relevant to the evaluation of the net financial position
of the entity and therefore meets the objectives of financial reporting.
Derecognition
6.10 Derecognition is the process of evaluating whether changes have
occurred since the previous reporting date that warrant removing an
element that has been previously recognised from the financial
statements, and removing the item if such changes have occurred. In
evaluating existence uncertainty the same criteria are used for
derecognition as at initial recognition.
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Compendium of Accounting Standards for Local Bodies (ASLBs)
Chapter 7
Measurement of Assets and Liabilities in
Financial Statements
Contents
Paragraphs
Introduction 7.1
The Objective of Measurement 7.2 – 7.1
Measurement Bases and their Selection 7.5 – 7.7
Entry and Exit Values 7.8 – 7.9
Entity-Specific and Non-Entity Specific Measures 7.11
Level of Aggregation or Disaggregation for Measurement 7.12
Measurement Bases for Assets 7.13 – 7.68
Historical Cost 7.13 – 7.21
Current Value Measurements 7.22 – 7.68
Market Value 7.24 – 7.36
Replacement Cost 7.37 – 7.48
Net Selling Price 7.49 – 7.57
Value in Use 7.58 – 7.68
Measurement Bases for Liabilities 7.69 – 7.91
Historical Cost 7.70 – 7.73
Cost of Fulfillment 7.74 – 7.79
Market Value 7.80 – 7.81
Cost of Release 7.82 – 7.86
Assumption Price 7.87 – 7.91
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The Conceptual Framework for General Purpose Financial Reporting by LBs
Chapter 7
Measurement of Assets and Liabilities in
Financial Statements
Introduction
7.1 This Chapter identifies the measurement concepts that guide the
CASLB in the selection of measurement bases for ASLBs and by
preparers of financial statements in selecting measurement bases for
assets and liabilities where there are no requirements in ASLBs.
The Objective of Measurement
7.2 The objective of measurement is:
To select those measurement bases that most fairly reflect the cost of
services, operational capacity and financial capacity of the entity in a
manner that is useful in holding the entity accountable, and for
decision-making purposes.
7.3 The selection of a measurement basis for assets and liabilities
contributes to meeting the objectives of financial reporting in the local
body by providing information that enables users to assess:
The cost of services provided in the period in historical or
current terms;
Operational capacity—the capacity of the entity to support the
provision of services in future periods through physical and
other resources; and
Financial capacity—the capacity of the entity to fund its
activities.
7.4 The selection of a measurement basis also includes an evaluation of
the extent to which the information provided achieves the qualitative
characteristics while taking into account the constraints on information
in financial reports.
Measurement Bases and their Selection
7.5 It is not possible to identify a single measurement basis that best
meets the measurement objective at a Conceptual Framework level.
Therefore, the Conceptual Framework does not propose a single
measurement basis (or combination of bases) for all transactions,
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Compendium of Accounting Standards for Local Bodies (ASLBs)
events and conditions. It provides guidance on the selection of a
measurement basis for assets and liabilities in order to meet the
measurement objective.
7.6 The following measurement bases for assets are identified and
discussed in terms of the information they provide about the cost of
services delivered by an entity, the operating capacity of an entity and
the financial capacity of an entity, and the extent to which they provide
information that meets the qualitative characteristics:
Historical cost;
Market value;
Replacement cost;
Net selling price; and
Value in use.
Table 1 summarises these measurement bases in terms of whether
they (a) provide entry or exit values; (b) are observable in a market;
and (c) whether or not they are entity-specific7.
Table 1: Summary of Measurement Bases for Assets
Measurement Basis Entry / Observable / Entity / Non-
Exit Unobservable entity
Value in a Market Specific
Historical cost Entry Generally Entity-specific
observable
Market value in open, Entry and Observable Non-entity-
active and orderly exit specific
market
Market value in Exit Dependent on Dependent on
inactive market valuation valuation
technique technique
Replacement cost Entry Observable Entity-specific
7 In some cases a judgment has been made in classifying a particular measurement
basis as observable or unobservable in a market and/or as entity or non-entity
specific.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
Net selling price Exit Observable Entity-specific
Value in use Exit8 Unobservable Entity-specific
7.7 The following measurement bases for liabilities are identified and
discussed in terms of (a) the information they provide about the cost of
services delivered by an entity, the operating capacity of an entity and
the financial capacity of an entity; and (b) the extent to which they
provide information that meets the qualitative characteristics:
Historical cost;
Cost of fulfillment;
Market value;
Cost of release; and
Assumption price.
Table 2 summarises these measurement bases in terms of whether
they (a) provide entry or exit values; (b) are observable in a market;
and (c) whether or not they are entity-specific.
Table 2: Summary of Measurement Bases for Liabilities
Measurement Entry / Observable / Entity / Non-
Basis Exit ValueUnobservable in entity Specific
a Market
Historical cost Entry Generally Entity-specific
observable
Cost of fulfillment Exit Unobservable Entity-specific
Market value in Entry and Observable Non-entity-
open, active and exit specific
orderly market
Market value in Exit Dependent on Dependent on
inactive market valuation valuation
technique technique
Cost of release Exit Observable Entity-specific
Assumption price Entry Observable Entity-specific
8 As pointed out in paragraph 7.66, for non-cash-generating assets the calculation of
value in use may require the use of replacement cost as surrogate.
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Entry and Exit Values
7.8 Measurement bases may provide either entry or exit values. For
assets, entry values reflect the cost of purchase. Historical cost and
replacement cost are entry values. Exit values reflect the economic
benefits from sale. An exit value also reflects the amount that will be
derived from use of the asset. In a diversified economy entry and exit
prices differ as entities typically:
Acquire assets tailored to the entity‘s particular operating
requirements for which other market participants would be
unwilling to pay a similar price; and
Incur transaction costs on acquisition.
7.9 Measurement bases for liabilities may also be classified in terms of
whether they are entry or exit values. Entry values relate to the
transaction under which an obligation is received or the amount that
an entity would accept to assume a liability. Exit values reflect the
amount required to fulfill an obligation or the amount required to
release the entity from an obligation.
Observable and Unobservable Measures
7.10 Certain measures may be classified according to whether they are
observable in an open, active and orderly market. Measures that are
observable in a market are likely to be more understandable and
verifiable than measures that are not observable. They may also be
more faithfully representative of the phenomena they are measuring.
Entity-Specific and Non-Entity Specific Measures
7.11 Measures may also be classified according to whether they are ―entity -
specific‖ or ―non-entity-specific‖. Measurement bases that are entity-
specific reflect the economic and current policy constraints that affect
the possible uses of an asset and the settlement of a liability by an
entity. Entity-specific measures may reflect economic opportunities
that are not available to other entities and risks that are not
experienced by other entities. Non-entity-specific measures reflect
general market opportunities and risks. The decision on whether to
use an entity-specific or non-entity-specific measure is taken by
reference to the measurement objective and the qualitative
characteristics.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
Level of Aggregation or Disaggregation for Measurement
7.12 In order to present assets and liabilities in the financial statements in a
way that provides information that best meets the measurement
objective and achieves the qualitative characteristics it may be
necessary to aggregate or disaggregate them for measurement
purposes. In assessing whether such an aggregation or disaggregation
is appropriate the costs are compared with the benefits.
Measurement Bases for Assets
(I) Historical Cost
7.13 Historical cost for an asset is:
The consideration given to acquire or develop an asset, which is the
cash or cash equivalents or the value of the other consideration given,
at the time of its acquisition or development.
7.14 Historical cost is an entry, entity-specific value9. Under the historical
cost model assets are initially reported at the cost incurred on their
acquisition. Subsequent to initial recognition, this cost may be
allocated as an expense to reporting periods in the form of
depreciation or amortisation for certain assets, as the service potential
or ability to generate economic benefits provided by such assets are
consumed over their useful lives. Following initial recognition, the
measurement of an asset is not changed to reflect changes in prices
or increases in the value of the asset.
7.15 Under the historical cost model the amount of an asset may be
reduced by recognising impairments. Impairment is the extent to which
the service potential or ability to generate economic benefits provided
by an asset have diminished due to changes in economic or other
conditions, as distinct to their consumption. This involves assessments
of recoverability. Conversely, the amount of an asset may be
increased to reflect the cost of additions and enhancements (excluding
price increases for unimproved assets) or other events, such as the
accrual of interest on a financial asset.
9 The term ―historical cost‖ may also be referred to as the ―cost model‖ or generically
as ―cost-based measures‖.
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Costs of Services
7.16 Where historical cost is used, the cost of services reflects the amount
of the resources expended to acquire or develop assets consumed in
the provision of services. Historical cost generally provides a direct link
to the transactions actually undertaken by the entity. Because the
costs used are those carried forward from an earlier period without
adjustment for price changes, they do not reflect the cost of assets
when the assets are consumed. As the cost of services is reported
using past prices, historical cost information will not facilitate the
assessment of the future cost of providing services if cumulative price
changes since acquisition are significant.
Operational Capacity
7.17 If an asset has been acquired in an exchange transaction, historical
cost provides information on the resources available to provide
services in future periods, based on their acquisition cost. At the time
an asset is purchased or developed, it can be assumed that the value
to the entity of its service potential is at least as great as the cost of
purchase10. When depreciation or amortisation is recognised it reflects
the extent to which the service potential of an asset has been
consumed. Historical cost information shows that the resources
available for future services are at least as great as the amount at
which they are stated. Increases in the value of an asset are not
reflected under the historical cost model. If an asset has been
acquired in a non-exchange transaction the transaction price will not
provide information on operating capacity.
Financial Capacity
7.18 The amount at which assets are stated in financial statements assists
in an assessment of financial capacity. Historical cost can provide
information on the amount of assets that may be used as effective
security for borrowings. An assessment of financial capacity also
requires information on the amount that could be received on sale of
an asset, and reinvested in assets to provide different services.
Historical cost does not provide this information when significantly
different from current exit values.
10 Where this is not the case the initial historical cost measurement will be reduced by
the amount of the impairment.
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The Conceptual Framework for General Purpose Financial Reporting by LBs
Application of the Qualitative Characteristics
7.19 Paragraphs 7.16–7.18 explain the areas where historical cost provides
relevant information in terms of its confirmatory or predictive value.
Application of historical cost is often straightforward, because
transaction information is usually readily available. As a result
amounts derived from the historical cost model are generally
representationally faithful in that they represent what they purport to
represent—that is, the cost to acquire or develop an asset based on
actual transactions. Estimates of depreciation and impairment used in
the historical cost model, particularly for non-cash-generating assets,
can affect representational faithfulness. Because application of
historical cost generally reflects resources consumed by reference to
actual transactions, historical cost measures are verifiable,
understandable and can be prepared on a timely basis.
7.20 Historical cost information is comparable to the extent that assets have
the same or similar acquisition dates. Because historical cost does not
reflect the impact of price changes, it is not possible to compare the
amounts of assets that were acquired at different times when prices
differed in a meaningful way.
7.21 In certain circumstances the application of historical cost necessitates
the use of allocations—for example where:
Several assets are acquired in a single transaction;
Assets are constructed by the entity itself and overheads and
other costs have to be attributed; and
The use of a flow assumption, such as first-in-first-out, is
necessary when many similar assets are held. To the extent
such allocations are arbitrary they reduce the extent to which
the resulting measurement achieves the qualitative
characteristics.
(II) Current Value Measurements
7.22 Current value measurements reflect the economic environment
prevailing at the reporting date.
7.23 There are four current value measurement bases for assets:
Market value;
Replacement cost;
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Net selling price; and
Value in use.
(i) Market Value
7.24 Market value for assets is:
The amount for which an asset could be exchanged between
knowledgeable, willing parties in an arm’s length transaction.
7.25 At acquisition market value and historical cost will be the same, if
transaction costs are ignored and the transaction is an exchange
transaction. The extent to which market value meets the objectives of
financial reporting and the information needs of users partially
depends on the quality of the market evidence. Market evidence, in
turn, depends upon the characteristics of the market in which the asset
is traded. Market value is particularly appropriate where it is judged
that the difference between entry and exit values is unlikely to be
significant or the asset is being held with a view to sale.
7.26 In principle, market values provide useful information because they
fairly reflect the value of the asset to the entity. In an open, active and
orderly market (see paragraph 7.28), the asset cannot be worth less
than market value as the entity can obtain that amount by selling the
asset, and cannot be worth more than market value, as the entity can
obtain equivalent service potential or the ability to generate economic
benefits by purchasing the same asset.
7.27 The usefulness of market values is more questionable when the
assumption that markets are open, active and orderly does not hold. In
such circumstances it cannot be assumed that the asset may be sold
for the same price as that at which it can be acquired and it is
necessary to determine whether an exit price or an entry price is the
more useful measure. Exit-based market values are useful for assets
that are held for trading, such as certain financial instruments, but may
not be useful for specialised operational assets. Furthermore, while
the purchase of an asset provides evidence that the value of the asset
to the entity is at least as great as its purchase price, operational
factors may mean that the value to the entity may be greater. Hence
market values may not reflect the value to the entity of the asset,
represented by its operational capacity.
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Market Values in Open, Active and Orderly Markets
7.28 Open, active and orderly markets have the following characteristics:
There are no barriers that prevent the entity from transacting in
the market;
They are active so there is sufficient frequency and volume of
transactions to provide price information; and
They are orderly, with many well-informed buyers and sellers
acting without compulsion, so there is assurance of ―fairness‖ in
determining current prices—including that prices do not
represent distress sales.
An orderly market is one that is run in a reliable, secure, accurate and
efficient manner. Such markets deal in assets that are identical and
therefore mutually interchangeable, such as commodities, currencies
and securities where prices are publicly available. In practice few, if
any, markets fully exhibit all of these characteristics, but some may
approach an orderly market as described.
Market Values where it cannot be Assumed that Markets are Open, Active
and Orderly
7.29 Markets for assets that are unique and rarely traded are not open,
active and orderly: any purchases and sales are individually
negotiated, and there may be a large range of prices at which a
transaction might be agreed. Therefore, participants will incur
significant costs to purchase or to sell an asset. In such circumstances
it is necessary to use an estimation technique to estimate the price at
which an orderly transaction to sell the asset would take place
between market participants at the measurement date under current
market conditions.
Costs of Services
7.30 Revenue from services reported in financial statements is measured
on the basis of prices current in the reporting period. If assets used to
provide services are measured at market value, the allocation of the
cost of assets to reflect their consumption in the current reporting
period is based on the current market value of the asset.
7.31 The use of market values permits a return on assets to be determined.
However, Local Bodies do not generally carry out activities with the
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primary objective of generating profits, and services are often provided
in non-exchange transactions or on subsidized terms. Consequently,
there may be limited relevance in a reported return derived from exit-
based market prices.
7.32 As noted above, revenue from providing services reported in financial
statements is measured on the basis of prices current in the reporting
period. Thus, the surplus or deficit for a period includes price
movements that take place over the period during which assets and
liabilities are held, and no profit or loss is reported on the sale of an
asset. Where the asset is traded on an open, active and orderly
market, the existence of the market provides assurance that the entity
would be able to realise the market value (and no more) at the
reporting date: it is therefore, unnecessary to postpone recognition of
changes in value until a surplus is realised on sale. However, where
assets used to provide services are not traded on open, active and
orderly markets, or a close approximation to such markets, the
relevance of revenue and expense related to changes in market value
is more questionable.
Operational Capacity
7.33 Information on the market value of assets held to provide services in
future periods is useful if it reflects the value that the entity is capable
of deriving from assets by using them in providing or delivering
services. However, if an exit-based market value is significantly lower
than historical cost, market value is likely to be less relevant than the
historical cost of such assets in providing information on operational
capacity—such a market value is also likely to be less relevant than
entry value-based current measures.
Financial Capacity
7.34 An assessment of financial capacity requires information on the
amount that would be received on sale of an asset. This information is
provided by market value.
Application of the Qualitative Characteristics
7.35 Values determined in open, active and orderly markets can be readily
used for financial reporting purposes. The information will meet the
qualitative characteristics—that is it will be relevant, representationally
faithful, understandable, comparable, and verifiable. Under such
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market conditions entry and exit values can be assumed to be the
same or very similar. Because it can be prepared quickly, such
information is also likely to be timely.
7.36 The extent to which market values meet the qualitative characteristics
will decrease as the quality of market evidence diminishes and the
determination of such values relies on estimation techniques. As
indicated above, exit-based market values are only likely to be
relevant to assessments of financial capacity.
(ii) Replacement Cost
7.37 Replacement cost11 is:
The most economic cost required for the entity to replace the service
potential of an asset (including the amount that the entity will receive
from its disposal at the end of its useful life) at the reporting date .
7.38 Replacement cost differs from market value because:
In a Local Body context it is explicitly an entry value that reflects
the cost of replacing the service potential of an asset;
It includes all the costs that would necessarily be incurred in the
replacement of the service potential of an asset; and
It is entity specific and therefore reflects the economic position
of the entity, rather than the position prevailing in a hypothetical
market. For example, the replacement cost of a vehicle is less
for an entity that usually acquires a large number of vehicles in
a single transaction and is regularly able to negotiate discounts
than for an entity that purchases vehicles individually.
7.39 Because entities usually acquire their assets by the most economic
means available, replacement cost reflects the procurement or
construction process that an entity generally follows. Replacement
cost reflects the replacement of service potential in the normal course
of operations, and not the costs that might be incurred if an urgent
necessity arose as a result of some unforeseeable event, such as a
fire.
11 The full term is ―optimised depreciated replacement cost‖ to denote that it refers to
the replacement of the service potential embodied in an asset and not the asset itself.
(see paragraph 7.41) The term ―replacement cost‖ is used for economy of expression
in the Framework.
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7.40 Replacement cost is the cost of replacing an asset‘s service potential.
Replacement cost adopts an optimized approach and differs from
reproduction cost, which is the cost of acquiring an identical asset12.
Although in many cases the most economic replacement of the service
potential will be by purchasing an asset that is similar to that which is
controlled, replacement cost is based on an alternative asset if that
alternative would provide the same service potential more cheaply. For
financial reporting purposes, it is therefore necessary to reflect the
difference in service potential between the existing and replacement
asset.
7.41 The appropriate service potential is that which the entity is capable of
using or expects to use, having regard to the need to hold sufficient
service capacity to deal with contingencies. Therefore, the
replacement cost of an asset reflects reductions in required service
capacity. For example, if an entity owns a school that accommodates
500 pupils but, because of demographic changes since its
construction, a school for 100 pupils would be adequate for current
and reasonably foreseeable requirements, the replacement cost of the
asset is that of a school for 100 pupils.
7.42 In some cases the value that will be derived from an asset will be
greater than its replacement cost. However, it would not be
appropriate to measure the asset at that value, as it includes benefits
from future activities, rather than service potential at the reporting
date. Replacement cost represents the highest potential value of an
asset, as, by definition, the entity is able to secure equivalent service
potential by incurring replacement cost.
Costs of Services
7.43 Replacement cost provides a relevant measure of the cost of the
provision of services. The cost of consuming an asset is equivalent to
the amount of the sacrifice of service potential incurred by that use.
That amount is its replacement cost—the entity is able to restore its
position to that prevailing immediately before the consumption of the
asset by an outlay equal to replacement cost.
7.44 The costs of services are reported in current terms when based on
12 There may be cases where replacement cost equates to reproduction cost. This is
where the most economic way of replacing service potential is to reproduce the
asset.
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replacement cost. Thus, the amount of assets consumed is stated at
the value of the assets at the time they are consumed—and not, as
with historical cost, at the time they were acquired. This provides a
valid basis for a comparison between the cost of services and the
amount of taxes and other revenue received in the period—which are
generally transactions of the current period and measured in current
prices—and for assessing whether resources have been used
economically and efficiently. It also provides a useful basis for
comparison with other entities that report on the same basis, as asset
values will not be affected by different acquisition dates, and for
assessing the cost of providing services in the future and future
resource needs, as future costs are more likely to resemble current
costs than those incurred in the past, when prices were different (see
also paragraph 7.48).
Operational Capacity
7.45 In principle, replacement cost provides a useful measure of the
resources available to provide services in future periods, as it is
focused on the current value of assets and their service potential to
the entity.
Financial Capacity
7.46 Replacement cost does not provide information on the amounts that
would be received on the sale of assets. It, therefore, does not
facilitate an assessment of financial capacity.
Application of the Qualitative Characteristics
7.47 As noted above, replacement cost is relevant to assessments of the
cost of services and operational capacity. It is not relevant to
assessments of financial capacity. In some circumstances, calculation
of replacement cost is complex, and subjective judgments are
required. These factors may reduce the representational faithfulness
of replacement cost. In these circumstances, the timeliness,
comparability and verifiability of information prepared on a
replacement cost basis may be affected, and replacement cost may be
more costly than some alternatives. Replacement cost information may
also not be straightforward to understand, particularly when that
information reflects a reduction in required service capacity (see
paragraph 7.41).
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7.48 Replacement cost information is comparable within an entity as assets
that provide equivalent service potential are stated at similar amounts,
regardless of when those assets were acquired. In principle different
entities may report similar assets at different amounts, because
replacement cost is an entity-specific measure that reflects the
opportunities for replacement that are available to the entity. The
opportunities for replacement may be the same or similar for different
entities. Where they are different, the economic advantage of an entity
that is able to acquire assets more cheaply is reported in financial
statements through lower asset values and a lower cost of services in
order to be representationally faithful.
(iii) Net Selling Price
7.49 Net selling price is:
The amount that the entity can obtain from sale of the asset, after
deducting the costs of sale.
7.50 Net selling price differs from market value in that it does not require an
open, active and orderly market or the estimation of a price in such a
market and that it includes the entity‘s costs of sale. Net selling price
therefore reflects constraints on sale. It is entity-specific.
7.51 The potential usefulness of measuring assets at net selling price is
that an asset cannot be worth less to the entity than the amount it
could obtain on sale of the asset. However, it is not appropriate as a
measurement basis if the entity is able to use its resources more
efficiently by employing the asset in another way, for example by using
it in the delivery of services.
7.52 Net selling price is therefore useful where the most resource-efficient
course available to the entity is to sell the asset. This is the case
where the asset cannot provide service potential or the ability to
generate economic benefits at least as valuable as net selling price.
Net selling price may provide useful information where an entity is
contractually obligated to sell an asset at below market value. There
may be cases where net selling price can indicate a development
opportunity.
Costs of Services
7.53 It is not appropriate to quantify the cost of the provision of services at
net selling prices. Such an approach would involve the use of an exit
value as the basis of the expense reported.
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Operational Capacity
7.54 Stating assets held for use in the provision of services at net selling
price does not provide information useful to an assessment of
operating capacity. Net selling price shows the amount that could be
derived from an asset‘s sale, rather than the value of the service
potential that could be derived from that asset.
Financial Capacity
7.55 As noted above, an assessment of financial capacity requires
information on the amount that would be received on sale of an asset.
Such information is provided by the use of net selling price. However,
such a measure is not relevant for assets that may yield more valuable
service potential by continuing to use them to deliver services.
Application of the Qualitative Characteristics
7.56 As indicated in paragraph 7.52, net selling price provides relevant
information only where the most resource-efficient course available to
the entity is to sell the asset. Assessments of net selling price may be
made by reference to active markets where they exist. For major
assets it may be possible and cost-effective to obtain professional
appraisals. Net selling price will generally provide understandable
information.
7.57 In most cases where net selling price is relevant, it will achieve the
qualitative characteristics of faithful representation, verifiability, and
timeliness.
(iv) Value in Use
7.58 Value in use is:
The present value to the entity of the asset’s remaining service
potential or ability to generate economic benefits if it continues to be
used, and of the net amount that the entity will receive from its
disposal at the end of its useful life.
Suitability of Value in Use
7.59 Value in use is an entity-specific value that reflects the amount that
can be derived from an asset through its operation and its disposal at
the end of its useful life. As noted in paragraph 7.42 above, the value
that will be derived from an asset is often greater than its replacement
cost—it is also usually greater than its historical cost. Where this is the
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case, reporting an asset at its value in use is of limited usefulness, as
by definition, the entity is able to secure equivalent service potential at
replacement cost.
7.60 Value in use is also not an appropriate measurement basis when net
selling price is greater than value in use, as in this case the most
resource-efficient use of the asset is to sell it, rather than continue to
use it.
7.61 Therefore, value in use is appropriate where it is less than
replacement cost and greater than net selling price. This occurs where
an asset is not worth replacing, but the value of its service potential or
ability to generate economic benefits is greater than its net selling
price. In such circumstances value in use represents the value of the
asset to the entity.
7.62 Value in use is an appropriate measurement basis for the assessment
of certain impairments, because it is used in the determination of the
recoverable amount for an asset or group of assets.
Costs of Services, Operational Capacity, Financial Capacity
7.63 Because of its potential complexity 13, its limited applicability and the
fact that its operationalisation in a local body context for non-cash-
generating assets involves the use of replacement cost as a surrogate,
value in use is generally inappropriate for determining the cost of
services. Its usefulness to assessments of operational capacity is
limited, and is only likely to be significant in the atypical circumstances
where entities have a large number of assets that are not worth
replacing, but their value in use is greater than their net selling p rice.
This may be the case if, for example, an entity will discontinue
provision of a service in the future, but the proceeds of immediate sale
are less than the service potential embodied in the assets. Value in
use does involve an estimate of the net amount that an entity will
receive from disposal of the asset. However, its limited applicability
reduces its relevance for assessments of financial capacity.
Application of the Qualitative Characteristics
7.64 While value in use may be used in assessments of certain impairments
its relevance for financial reporting purposes is limited to the
circumstances outlined in paragraph 7.61.
13 See below paragraph 7.66
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7.65 The extent to which value in use meets the other qualitative
characteristics depends on how it is determined. In some cases, an
asset‘s value in use can be quantified by calculating the value that the
entity will derive from the asset assuming its continued use. This may
be based on the future cash inflows related to the asset, or on cost
savings that will accrue to the entity through its control of the asset.
The calculation of value in use takes into account the time value of
money and, in principle, the risk of variations in the amount and timing
of cash flows.
7.66 The calculation of value in use can be complex. Assets that are
employed in cash-generating activities often provide cash flows jointly
with other assets. In such cases, value in use can be estimated only
by calculating the present value of the cash flows of a group of assets
and then making an allocation to individual assets.
7.67 In the Local Body, most assets are held with the primary objective of
contributing to the provision of services, rather than to the generation
of a commercial return: such assets are referred to as ―non-cash-
generating assets‖. Because value in use is usually derived from
expected cash flows, its operationalisation in such a context can be
difficult. It may be inappropriate to calculate value in use on the basis
of expected cash flows, because such a measure would not be
faithfully representative of the value in use of such an asset to the
entity. Therefore, it would be necessary to use replacement cost as a
surrogate for financial reporting purposes.
7.68 The method of determining value in use reduces its representational
faithfulness in many cases. It also affects the timeliness,
comparability, understandability and verifiability of information
prepared on a value in use basis.
Measurement Bases for Liabilities
7.69 This section discusses the measurement bases for liabilities. This
section does not repeat all the discussion the section on assets. It
considers the following measurement bases:
Historical Cost;
Cost of Fulfillment;
Market Value;
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Cost of Release; and
Assumption Price.
(I) Historical Cost
7.70 Historical cost for a liability is:
The consideration received to assume an obligation, which is the cash
or cash equivalents, or the value of the other consideration received at
the time the liability is incurred.
7.71 Under the historical cost model, initial measures may be adjusted to
reflect factors such as the accrual of interest, the accretion of discount
or amortisation of a premium.
7.72 Where the time value of a liability is material—for example, where the
length of time before settlement falls due is significant— the amount of
the future payment is discounted so that, at the time a liability is first
recognised, it represents the value of the amount received. The
difference between the amount of the future payment and the present
value of the liability is amortised over the life of the liability, so that the
liability is stated at the amount of the required payment when it falls
due.
7.73 The advantages and drawbacks of using the historical cost basis for
liabilities are similar to those that apply in relation to assets. Historical
cost is appropriate where liabilities are likely to be settled at stated
terms. However, historical cost cannot be applied for liabilities that do
not arise from a transaction, such as a liability to pay damages for a
tort or civil damages. It is also unlikely to provide relevant information
where the liability has been incurred in a non-exchange transaction,
because it does not provide a faithful representation of the claims
against the resources of the entity. It is also difficult to apply historical
cost to liabilities that may vary in amount, such as those related to
defined benefit pension liabilities.
(II) Cost of Fulfillment
7.74 Cost of fulfillment is:
The costs that the entity will incur in fulfilling the obligations
represented by the liability, assuming that it does so in the least costly
manner.
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7.75 Where the cost of fulfillment depends on uncertain future events, all
possible outcomes are taken into account in the estimated cost of
fulfillment, which aims to reflect all those possible outcomes in an
unbiased manner.
7.76 Where fulfillment requires work to be done—for example, where the
liability is to rectify environmental damage—the relevant costs are
those that the entity will incur. This may be the cost to the entity of
doing the remedial work itself, or of contracting with an external party
to carry out the work. However, the costs of contracting with an
external party are only relevant where employing a contractor is the
least costly means of fulfilling the obligation.
7.77 Where fulfillment will be made by the entity itself, the fulfillment cost
does not include any surplus, because any such surplus does not
represent a use of the entity‘s resources. Where fulfillment amount is
based on the cost of employing a contractor, the amount will implicitly
include the profit required by the contractor, as the total amount
charged by the contractor will be a claim on the entity‘s resources—
this is consistent with the approach for assets, where replacement cost
would include the profit required by a supplier, but no profit would be
included in the replacement cost for assets that the entity would
replace through self-construction.
7.78 Where fulfillment will not take place for an extended period, the cash
flows need to be discounted to reflect the value of the liability at the
reporting date.
7.79 Cost of fulfillment is generally relevant for measuring liabilities except
in the following circumstances:
Where the entity can obtain release from an obligation at a lower
amount than cost of fulfillment, then cost of release is a more relevant
measure of the current burden of a liability, just as, for an asset, net
selling price is more relevant when it is higher than value in use.
In the case of liabilities assumed for a consideration, assumption price
(see paragraphs 7.87-7.91) is more relevant when assumption price is
higher than both cost of fulfillment and cost of release.
(III) Market Value
7.80 Market value for liabilities is:
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The amount for which a liability could be settled between
knowledgeable, willing parties in an arm’s length transaction.
7.81 The advantages and disadvantages of market value for liabilities are
the same as those for assets. Such a measurement basis may be
appropriate, for example, where the liability is attributable to changes
in a specified rate, price or index quoted in an open, active and orderly
market. However, in cases where the ability to transfer a liability is
restricted and the terms on which such a transfer might be made are
unclear the case for market values, even if they exist, is significantly
weaker. This is particularly the case for liabilities arising from
obligations in non-exchange transactions, because it is unlikely that
there will be an open, active and orderly market for such liabilities.
(IV) Cost of Release
7.82 ―Cost of release‖ is the term used in the context of liabilities to refer to
the same concept as ―net selling price‖ in the context of assets. Cost
of release refers to the amount of an immediate exit from the
obligation. Cost of release is the amount that either the creditor will
accept in settlement of its claim, or a third party would charge to
accept the transfer of the liability from the obligor. Where there is more
than one way of securing release from the liability, the cost of release
is that of the lowest amount—this is consistent with the approach for
assets, where net selling price would not reflect the amount that would
be received on sale to a scrap dealer, if a higher price could be
obtained from sale to a purchaser who would use the asset.
7.83 For some liabilities, particularly in the Local Body, transfer of a liability
is not practically possible and cost of release will therefore be the
amount that the creditor will accept in settlement of its claim. This
amount will be known if it is specified in the agreement with the
creditor—for example, where a contract includes a specific
cancellation clause.
7.84 In some cases, there may be evidence of the price at which a liability
may be transferred—for example, in the case of some pension
liabilities. Transferring a liability may be distinguished from entering
into an agreement with another party that will fulfill the entity‘s
obligation or bear all the costs stemming from a liability. For a liability
to be transferred it is necessary that all of the creditor‘s rights against
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the entity are extinguished. If this is not the effect of an arrangement,
the liability remains a liability of the entity.
7.85 In assessing whether cost of release is appropriate for measuring
liabilities it is necessary to consider whether release in the envisaged
manner is an option that is open to the entity in practice, having regard
to any consequences of obtaining release, such as damage to the
entity‘s reputation.
7.86 Just as net selling price is relevant only when the most resource-
efficient course available to the entity is to sell the asset, so cost of
release is relevant only when the most resource-efficient course is to
seek immediate release from an obligation. In particular, where cost of
fulfillment is lower than cost of release, cost of fulfillment provides
more relevant information than cost of release, even if it is feasible to
negotiate a release from the obligation in accordance with the methods
for transferring a liability in paragraph 7.84.
(V) Assumption Price
7.87 ―Assumption price‖ is the term used in the context of liabilities to refer
to the same concept as replacement cost for assets. Just as
replacement cost represents the amount that an entity would rationally
pay to acquire an asset, so assumption price is the amount which the
entity would rationally be willing to accept in exchange for assuming
an existing liability. Exchange transactions carried out on arms-length
terms will provide evidence of assumption price—this is not the case
for non-exchange transactions.
7.88 In the context of an activity that is carried out with a view to profit, an
entity will assume a liability only if the amount it is paid to assume the
liability is greater than the cost of fulfillment or release—i.e., the
settlement amount. Once that assumption price has been received by
the entity, the entity has an obligation to its creditor.
7.89 At the time a liability is first incurred in an exchange transaction,
assumption price represents the amount that was accepted by the
entity for assuming the liability—it is therefore usually reasonable to
assume that assumption price is the price that the entity would
rationally accept for assuming a similar liability. It would charge a
higher amount, if competitive pressures allowed it to do so, but it might
be unwilling to accept a lower price. Just as replacement cost is a
current value so, conceptually, is assumption price. There are,
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however, practical problems in reflecting changes in prices in
obligations that are stated at assumption price.
7.90 A consequence of stating performance obligations at the assumption
price is that no surplus is reported at the time the obligation is taken
on. A surplus or deficit is reported in the financial statements in the
period when fulfillment (or release) takes place, as it is the difference
between the revenue arising from satisfaction of the liability and the
cost of settlement.
7.91 An entity may have a potential obligation that is larger than
assumption price. If the entity has to seek release from a contract, the
other party to the contract may be able to claim recompense for losses
that it will sustain, as well as the return of any amounts paid. However,
provided that the entity can settle the obligation by fulfillment, it can
avoid such additional obligations and it is representationally faithful to
report the obligation at no more than assumption price—this is
analogous to the position where an asset will yield greater benefits
than replacement cost. Under such circumstances, as explained in
paragraph 7.42, replacement cost rather than value in use is the most
relevant measurement basis.
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Chapter 8
Presentation in General Purpose Financial
Reports
Contents
Paragraphs
Introduction 8.1 – 8.8
Presentation 8.4 – 8.8
Information Selection 8.9 – 8.35
Nature of Information 8.11– 8.14
Information Selected for Display or Disclosure 8.15 – 8.24
Principles Applicable to Information Selection 8.25 - 8.35
Information Location 8.36 – 8.44
Principle for Allocation of Information between
Different Reports 8.38 -8.40
Principles for Location of Information within a Report 8.41 - 8.44
Information Organisation 8.45 – 8.64
Nature of Information Relevant to Organisations 8.47 – 8.53
Principles Applicable to Information Organisations 8.54 - 8.64
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Chapter 8
Presentation in General Purpose Financial
Reports
Introduction
8.1 This Chapter sets out the concepts applicable to the presentation of
information in GPFRs, including financial statements of entities.
8.2 Presentation is linked to Chapters 1 to 4—the objectives of financial
reporting, users‘ needs, the qualitative characteristics, constraints on
information included in GPFRs and the reporting entity all influence
presentation decisions. For information reported in the financial
statements, presentation is also linked to the definitions of the
elements, recognition criteria and measurement bases identified in
Chapters 5 to 7-—for example:
The definition of the elements affects the items that can be
presented in the financial statements;
Application of the recognition criteria affects the location of
information; and,
The selection of measurement bases impacts the information
presented on measurement methodologies.
Language in which Financial Statement and Other GPFRs are Issued
8.3 The language (or languages) in which financial statements and other
GPFRs are issued supports achievement of the objectives of financial
reporting and the qualitative characteristics. All translated versions
need to be faithful to the original language version. The translated
version is made available to meet the needs of users with reference to:
Legal requirements in the entity‘s jurisdiction; and
Translation costs and benefits.
Presentation
8.4 Presentation is the selection, location and organisation of information
that is reported in the GPFRs.
8.5 Presentation aims to provide information that contributes towards the
objectives of financial reporting and achieves the qualitative
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characteristics while taking into account the constraints on information
included in GPFRs. Decisions on selection, location and organisation
of information are made in response to the needs of users for
information about economic or other phenomena.
8.6 Chapter 1 explains that GPFRs are likely to comprise multiple reports,
each responding more directly to certain aspects of the objectives of
financial reporting and matters included within the scope of financial
reporting. In addition to the financial statements, GPFRs provide
information relevant to, for example, assessments of an entity‘s
service performance and the sustainability of its finances. The
objectives of financial reporting, applied to the area covered by a
particular report, guide presentation decisions for that report.
8.7 Presentation decisions may:
Result in the development of a new GPFR, the movement of
information between reports, or the amalgamation of existing
reports; or,
Be detailed decisions on information selection, location and
organisation within a GPFR.
Presentation Decisions are Interlinked
8.8 Decisions on information selection, location and organisation are
interlinked and, in practice, are likely to be considered together. The
amount or type of information selected could have implications on
whether it is included in a separate report or organised into tables or
separate schedules. The following three sections separately focus on
each presentation decision.
Information Selection
8.9 Decisions on information selection address what information is
reported:
In the financial statements; and
In GPFRs outside the financial statements (other GPFRs).
8.10 As Chapter 2, Objectives and Users of General Purpose Financial
Reporting, explains, the objectives of financial reporting are to provide
information about the entity that is useful to users of GPFRs for
accountability and decision-making purposes. Chapter 2 describes the
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types of information that users need to meet the objectives of financial
reporting. That description guides decisions on whether particular
types of reports are needed. This Chapter focuses on the selection of
information to be presented in GPFRs, including financial statements
and other reports.
Information Selection—Nature of Information
Nature of Information in Financial Statements
8.11 Users‘ information needs identified in Chapter 2 underpin information
selection for the financial statements. Those needs include information
about the financial position, financial performance and cash flows of
an entity in order to:
Enable users to identify the resources of the entity and claims
on those resources at the reporting date;
Inform assessments of matters such as whether the entity has
acquired resources economically, and used them efficiently and
effectively to achieve its service delivery objectives; and,
Inform assessments of financial performance and the entity‘s
liquidity and solvency.
8.12 The financial statements may also provide information that assists
users in assessing the extent to which:
An entity has met its financial objectives;
Revenues, expenses, cash flows and financial results of the
entity comply with approved budgets; and
An entity has adhered to relevant legislation or other authority
governing the raising and use of public monies.
8.13 The financial statements do not report comprehensively on an entity‘s
service performance. However, information in the financial statements
may provide information relevant to the financial aspects of service
performance such as information about:
Revenue, expenses and cash flows related to services; and
The assets and liabilities that inform users‘ evaluations of, for
example, an entity‘s operational capacity or financial risks that
could impact on service provision.
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8.14 Other reports in GPFRs present information additional to the financial
statements. Such information could, for example, include:
Information on the sustainability of an entity‘s public finances;
Financial statement discussion and analysis; or
Service performance information.
Information Selected for Display or Disclosure
8.15 Information is selected for display or disclosure in GPFRs. Information
selected for display communicates key messages in a GPFR, while
information selected for disclosure makes displayed information more
useful by providing detail that will help users to understand the
displayed information. Disclosure is not a substitute for display.
8.16 Repetition of information in a GPFR needs to be generally be avoided.
However, the same information may be both displayed and disclosed.
For example, a total displayed on the face of the financial statements
may be repeated in the notes, where the notes provide a
disaggregation of the displayed total. Similarly, the same information
may be presented in different GPFRs in order to address their different
aims.
Information Selected for Display
8.17 Every GPFR contains key messages that are communicated, so every
GPFR contains displayed information. Displayed information is kept to
a concise, understandable level, so that users can focus on the key
messages presented and not be distracted by detail that could
otherwise obscure those messages. Displayed information is
presented prominently, using appropriate presentation techniques
such as clear labeling, borders, tables and graphs.
8.18 The items displayed on the face of the financial statements provide
information about such matters as the reporting entity‘s financial
position, financial performance and cash flows.
8.19 Assessment of whether an item satisfies the recognition criteria is one
of the key mechanisms in determining whether information is displayed
on the face of the balance sheet or income and expenditure statement
and/or disclosed either in the notes or elsewhere in the GPFRs. In
other cases, for example a statement of cash flows, displayed
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information will also support achievement of the objectives of financial
reporting.
8.20 Developing requirements for the display of line items and totals
involves balancing the standardisation of displayed information, which
facilitates understandability, with information that is tailored for entity -
specific factors. The aim of both standardised display requirements
and entity specific information is to ensure that information necessary
to meet the objectives of financial reporting is available for all entities,
while allowing information to be displayed in a manner that reflects the
nature and operations of specific entities.
Information Selected for Disclosure
8.21 Disclosed information is likely to include:
The basis for the displayed information, such as applicable policies or
methodologies;
Disaggregations of displayed information; and,
Items that share some but not all of the aspects of displayed
information—for example, disclosures on items that meet some, but
not all, of the characteristics of the definition of an element 14 or
disclosures on items that meet the definition of an element, but not the
recognition criterion.
8.22 The level of detail provided by disclosed information contributes to
achievement of the objectives of financial reporting, without being
excessive. Disclosed information, like displayed information, is
necessary for achievement of the objectives of financial reporting.
8.23 Information disclosed in the notes to the financial statements:
Is necessary to a user‘s understanding of the financial statements;
Provides information that presents the financial statements in the
context of the entity and its operating environment; and
Generally, will have a clear and demonstrable relationship to
14 Chapter 5, Elements in Financial Statements, explains that other resources and other
obligations that do not meet the definition of elements may be recognised in order to
contribute to the objectives of financial reporting.
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information displayed on the face of the financial statement(s) to which
it pertains.
8.24 Information disclosed in the notes may also include:
Entity-related factors that could influence judgments about reported
information (for example, information about related parties and
controlled entities or interests in other entities);
The basis for what is displayed (for example, information on
accounting policies and measurement, including measurement
methods and measurement uncertainties where applicable);
Disaggregations of amounts displayed on the face of the statements
(for example, a breakdown of property, plant and equipment into
different classes);
Items that do not meet the definition of an element or the recognition
criteria, but are important to an understanding of the entity‘s finances
and ability to deliver services— for example, information about events
and conditions, that might affect future cash flows or service potential,
including their natures, possible effects on cash flows or service
potential, probabilities of occurrence, and sensitivities to changes in
conditions; and
Information that may explain underlying trends affecting displayed
totals.
Principles Applicable to Information Selection
8.25 Decisions about what information needs to be displayed and disclosed
involve consideration of:
The objectives of financial reporting;
The qualitative characteristics and constraints on information
included in GPFRs; and
The relevant economic or other phenomena about which
information may be necessary.
8.26 Information selection results in information that contributes to meeting
the objectives of financial reporting, as applied to the area covered by
a particular report, and provides the appropriate level of detail.
Decisions on information selection involve information prioritisation
and summarisation. Information selection avoids information overload
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that reduces understandability. Too much information may make it
difficult for users to understand the key messages, and, consequently
undermines achievement of the objectives of financial reporting.
8.27 Preparers, applying pronouncements and their professional judgment,
are responsible for ensuring that information that meets the objectives
of financial reporting and achieves the qualitative characteristics is
provided in the GPFRs that they prepare.
8.28 Decisions on information selection require continuing and critical
review. Information identified for possible selection is reviewed as it is
developed and considered for presentation, with particular reference to
its relevance, materiality and cost-benefit, although all the qualitative
characteristics and constraints are applied to decisions on information
selection. Past decisions may require reconsideration because new
information may make existing information requirements redundant
with the result that those items no longer achieve the qualitative
characteristics and/or the constraints.
8.29 All material transactions, events, and other items reported are
presented in a manner that conveys their substance rather than their
legal or other form so that the qualitative characteristics of relevance
and representational faithfulness are achieved.
8.30 The benefits to users of receiving information need to justify the costs
to entities of collecting and presenting that information. In making this
assessment it is important to consider how individual items impact on
the overall view presented and the nature of the information
presented. Items that may appear to have little benefit when viewed in
isolation could have much greater benefit in contributing to the
complete set of information presented.
8.31 Information needs to be presented on a sufficiently timely basis to
enable users to hold a management accountable and to inform users'
decisions.
8.32 GPFRs may include additional information derived from sources
other than the financial information system. The qualitative
characteristics apply to such information. The date of delivery of any
such additional information needs to be as close as possible to the
financial statements‘ reporting date, so that reported information will
be timely.
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Principles for Selection of Information for Display and Disclosure
8.33 Decisions about display or disclosure apply to both the financial
statements and other GPFRs. The objectives of financial reporting are
applied to the area covered by a particular report to guide the
identification of information for display or disclosure. The identification
of information for display and disclosure in a particular GPFR may
involve the development of:
Classification principles;
A list of broad types of information that are displayed and a
similar list of broad types of information that are disclosed;
and/or,
Lists of specific information that preparers must display or
disclose.
8.34 Decisions about selection of information to be displayed and disclosed
are made:
With reference to each other rather than in isolation; and
To effectively communicate an integrated set of information.
8.35 Selection decisions with respect to information in other GPFRs are
made after carefully considering the relationship of the other GPFRs to
the financial statements.
Information Location
8.36 Decisions on information location are made about which:
Report information is located within; and
Component of a report information is located.
8.37 The location of information has an impact on information‘s contribution
to achievement of the objectives of financial reporting and the
qualitative characteristics. Location may affect the way that users
interpret information and the comparability of information. Location
may be used to:
Convey the relative importance of information and its
connections with other items of information;
Convey the nature of information;
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Link different items of information that combine to meet a
particular user need; and
Distinguish between information selected for display and
information selected for disclosure.
Principles for Allocation of Information between Different
Reports
8.38 Factors relevant to decisions about allocating information between the
financial statements and another GPFR include:
Nature: Whether the nature of the information, for example,
historical versus prospective, supports including the information
either in the same or a different GPFR, because of
considerations related to, for example, comparability and/or
understandability;
Jurisdiction-Specific: Whether jurisdiction-specific factors, such
as legal provisions, specify requirements on information
location; and
Linkage: Whether or not the additional information envisaged
needs to link very closely to information already included in an
existing report. The linkages between all information need to be
assessed, not only linkages between new and existing
information.
8.39 The factors above, which are expressed from the perspective of
adding information to an existing set of information, also apply to
considerations of whether the grouping of existing information could be
improved, which is discussed in the section on information
organisation.
8.40 A separate GPFR may be necessary when:
Additional user information needs, not satisfied by an existing
report, are identified; and
A separate GPFR to meet those needs is more likely to achieve
the objectives of financial reporting and the qualitative
characteristics than including information in an existing report.
Principles for Location of Information within a Report
8.41 Paragraph 8.17 of this Chapter states that displayed information is
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presented prominently, using appropriate presentation techniques —
location is one way to achieve this. Information location within a report
ensures that displayed information is given appropriate prominence
and is not obscured by more detailed and extensive disclosed
information.
8.42 The location of information in the financial statements contributes to
communicating a comprehensive financial picture of an entity.
8.43 For the financial statements, displayed information is shown on the
face of the appropriate statement, while disclosures are in the notes.
Distinguishing displayed information and disclosed information through
location ensures that those items that directly relate to communicating
matters, such as an entity‘s financial position, financial performance
and cash flows, can be highlighted, with further more detailed
information provided through disclosure in the notes.
8.44 For other GPFRs, displayed information may either be located
separately from disclosed information or located in the same area, but
distinguished from disclosed information and given prominence
through the use of another presentation technique.
Information Organisation
8.45 Information organisation addresses the arrangement, grouping and
ordering of information, which includes decisions on:
How information is arranged within a GPFR; and
The overall structure of a GPFR.
8.46 Information organisation involves a range of decisions including
decisions on the use of cross referencing, tables, graphs, headings,
numbering, and the arrangement of items within a particular
component of a report, including decisions on item order. How
information is organised can affect its interpretation by users.
Nature of Information Relevant to Organisation
8.47 Decisions about the organisation of information take into account:
Important relationships between information; and
Whether information is for display or disclosure.
Types of Relationships
8.48 Important relationships include, but are not restricted to:
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Enhancement;
Similarity; and
Shared purpose.
8.49 Enhancement: Information in one place in a GPFR may be enhanced
through information provided elsewhere. For example, budget,
prospective and service performance information enhances
information in the financial statements. Tables and graphs may be
used to enhance the understanding of narrative information. Links to
information reported outside the GPFRs may enhance the
understandability of information reported in GPFRs.
8.50 Similarity: A relationship of similarity exists where information reported
in one place is based on information reported elsewhere in the
GPFRs, and the information either has not been adjusted or has had
relatively minor adjustments. For example, if service performance
information includes the cost of services, or the value of assets used in
different services, then it may be helpful to show how those totals
relate to expense and assets reported in the financial statements.
Another example is the relationship between the total expense
reported against budget and total expense reported in the income and
expenditure statement. A reconciliation between the two different
amounts can enhance users‘ understanding of an entity‘s finances.
8.51 Shared purpose: A relationship of shared purpose exists where
information reported in different places contributes to the same
purpose. An example is where different statements and disclosures
provide information needed for assessments of accountability for
services delivered. Information about (a) the actual and budgeted cost
of different services, (b) financial and non-financial resources used in
the provision of different services, and (c) future provision of different
services may be included in different places. To make the relationship
between the information in different places clear, it may be appropriate
to organise the information by using techniques such as common
headings and referencing.
8.52 Relationships may exist between information in different:
GPFRs;
Components within a GPFR; and
Parts of a single component.
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Grouping of Information
8.53 The three factors noted the section on information selection as being
applicable to decisions on information location—linkage, nature of
information and jurisdiction-specific considerations—also apply to
considerations of whether the grouping of existing information could be
improved. Decisions on effective grouping of information consider
linkages between information sets, the nature of the different
information sets, and, to the extent appropriate, jurisdiction-specific
factors.
Principles Applicable to Information Organisation
8.54 Information organisation:
Supports achievement of the objectives of financial reporting;
and
Helps reported information meet the qualitative characteristics.
8.55 Information organisation:
Helps to ensure that key messages are understandable;
Clearly identifies important relationships;
Gives appropriate prominence to information that conveys key
messages; and
Facilitates comparisons.
8.56 Related information is linked through the use of consistent headings,
presentation order, and/or other methods appropriate to the
relationship and type of information. Where links are to information
reported outside the GPFRs it is important that:
Links to information from other sources do not undermine a
GPFR‘s achievement of the qualitative characteristics; and
The issuance date of any such linked information is as close as
possible to the financial statements‘ reporting date so that
reported information will be timely.
Comparability
8.57 Information organisation takes into account the benefits of consistent
presentation over time. Consistent presentation supports users‘ ability
to understand information and facilitates their access to information. It
helps to achieve the qualitative characteristic of comparability.
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Principles for Information Organisation within the Financial Statements
8.58 Information displayed on the face of the financial statements is usually
organised into numeric totals and sub-totals. Its organisation provides
a structured overview of such matters as the reporting entity‘s financial
position, financial performance and cash flows.
8.59 For the financial statements, relationships may exist between:
Subsets of displayed amounts or changes in displayed amounts
and their impact on an entity‘s financial position, financial
performance and/or cash flows;
Different displayed amounts in different financial statements,
which all reflect the impact of a common external event, or
contribute together towards an understanding of an aspect of
the entity‘s financial position or financial performance; and
Displayed amounts and related note disclosures that provide
information that explains or could otherwise support users‘
understanding of displayed items.
8.60 The organisation of information in financial statements includes
decisions on:
The type and number of statements;
Disaggregation of totals into meaningful sub-categories;
Ordering and grouping of items displayed within each statement;
Identification of aggregates (additive and subtractive); and
Identification of other information for inclusion on the face of the
statement.
8.61 Information disclosed in the notes to the financial statements is
organised so that relationships to items reported on the face of the
financial statements are clear. The notes are an integral part of the
financial statements.
Principles for Organisation of Information within Other GPFRs
8.62 As is the case for the financial statements, information organisation in
other GPFRs helps to ensure that key messages conveyed by
displayed information are understandable. Presentation that clearly
identifies important relationships is likely to enhance the extent to
which a report:
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Meets the objectives of financial reporting; and
Achieves the qualitative characteristics.
8.63 Linking related information helps users to find important information.
Some information is more understandable when organised into graphs,
charts, tables, ratios or key performance indicators. Other information
may be presented more effectively in narrative form. Information
organisation supports users‘ understanding of linkages between
information within the same GPFR.
8.64 Information organisation facilitates comparisons such as making clear
when items are similar or dissimilar. Inter-period comparability is
facilitated by avoiding changes to the way that information is organised
for the same entity from year to year unless such changes enhance
relevance and understandability. Inter-entity comparisons are
facilitated when different reporting entities organise the information
they present in similar ways.
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Appendix 1
Note: This Appendix is not a part of The Conceptual Framework for General
Purpose Financial Reporting by Local Bodies. The purpose of this appendix
is only to bring out the major differences between this Conceptual
Framework and the corresponding Conceptual Framework of the
International Public Sector Accounting Standard Board (IPSASB).
Comparison with IPSAS’s Conceptual Framework
Some additional information regarding 73 rd and 74th Constitutional
Amendment Act envisaging a key role for the Panchayati Raj
Institutions (PRIs) and the Urban Local Bodies (ULBs) has been
incorporated in the CP&GFM‘s Conceptual Framework.
Paragraphs 20 – 24 of the Preface to the Conceptual Framework
pertaining to ‗Relationship to Statistical Reporting‘ and paragraphs
3.40 of the Chapter 3 Qualitative Characteristics contained in the
IPSASB‘s Conceptual Framework have not been retained in the
CP&GFM‘s Conceptual Framework since these are not relevant in the
context of Local Bodies in India.
The paragraph 5.33 containing definition of ‗Ownership Contribution‘
has been modified in the CP&GFM‘s Conceptual Framework in the
context of Local Bodies of India. Some more clarification with regard to
the relevance of concept of ‗Ownership Distribution‘ for Local Bodies
has also been provided in the CP&GFM‘s Conceptual Framework by
way of foot note.
CP&GFM‘s Conceptual Framework uses different terminology, in
certain instances, from IPSASB‘s Conceptual Framework. For
example, ‗Balance Sheet‘ and ‗Income and Expenditure Statement‘ in
CP&GFM‘s Conceptual Framework. The equivalent term in IPSASB‘s
Conceptual Framework is ‗Statement of Financial Position‘ and
‗Statement of Financial Performance‘.
CP&GFM‘s Conceptual Framework contains additional commentary in
certain paragraphs of its Preface and Chapters that reflects the
circumstances of the Local Bodies in India.
Some examples in the CP&GFM‘s Conceptual Framework have been
deleted and modified to better address the circumstances of the Local
Bodies.
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Consequential changes resulting from above departures have been
made in CP&GFM‘s Conceptual Framework. However, paragraph
numbers have been retained to maintain consistency with IPSASB‘s
Conceptual Framework.
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