5. Cash flows, contingencies, commitments

Statement of cash flows

FRR section 13 – Statement of cash flows

This section of the FRR sets out requirements for the preparation of the cash flow statement.

Entities are required to prepare a statement of cash flows in accordance with AAS (Tier 1 reporting: AASB 107 Statement of Cash Flows (AASB 107), Tier 2 reporting: AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (AASB 1060)) and section 13 of the FRR, including:

cash flows in a foreign currency recorded in Australian dollars, by applying the exchange rate between the functional currency and the foreign currency at the date of the cash flow (Tier 1 reporting: paragraphs 25-28 of AASB 107, Tier 2 reporting: paragraphs 79-81 of AASB 1060).
restrictions on use of cash balances the amount of significant cash and cash equivalent balances held by the entity and not available for use by the entity/group (that is, parent entity and other subsidiaries) is to be disclosed with an explanation on the restrictions of use.
other CRF money considered in the context of paragraph 48 of AASB 107 (Tier 1 reporting) or paragraph 89 of AASB 1060 (Tier 2 reporting).
appropriation designated as contributions by owners cash flow activities being disclosed under financing activities.
administered cash flows to/from the OPA disclosed as adjustments to administered cash held.

Entities should refer to paragraph 11 of AASB Interpretation 1031 Accounting for the Goods and Services Tax (GST) and AASB 107 (Tier 1 reporting)/ AASB 1060 (Tier 2 reporting), when determining whether cash flows should be disclosed on a gross basis under section 13 of the FRR. Entities should also refer to relevant legislation governing their receipts and payments to assess whether this may impact on cash flow disclosures.

OPA transfers

Transfers of the PGPA Act section 74 (s74) receipts to the OPA are reported as operating cash flows.

When s74 receipts are transferred to the OPA, and subsequently redrawn the transfers are reported separately as operating cash outflows and inflows (not netted off). This is the same treatment required for amounts credited and debited to a special account.

Notional transfers within the OPA recorded in CBMS do not impact the cash flow as there is no actual cash transferred. There will be an impact on the cash flow when there is an actual transfer of cash.

Cash flow reconciliation – disclosure

Details of transactions that do not result in cash flows but affect assets and liabilities, must be disclosed, such as:

  • conversions of liabilities to equity
  • acquisitions of entities by an equity issue
  • acquisitions of assets by assuming directly related liabilities (such as the purchase of a building by incurring a mortgage to the seller)
  • acquisitions of assets by entering into finance leases
  • exchanges of non-cash assets or liabilities for other non-cash assets or liabilities
  • asset transfers because of restructuring.

Where the related item in the statement of financial position is cash, and its amount equals the amount in the statement of cash flows in both the current and immediately preceding reporting periods, no reconciliation is required.

Disclosure of additional information to aid users’ understanding of an entity’s financial position and liquidity, with a management commentary, is encouraged and may include:

  • the amount of undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments, indicating any restrictions on the use of these facilities.
  • the aggregate amount of cash flows that represent increases in operating capacity separate to those cash flows required to maintain operating capacity.

Contingencies

FRR section 29 – Contingencies

This section of the FRR sets out additional reporting requirements for contingent assets and liabilities, unquantifiable contingent assets and liabilities, and financial guarantees.

Entities need to:

  • review the Statement of Risks (SoR), published in Budget Paper No. 1: Budget Strategy and Outlook, to ensure that all relevant contingencies are considered for disclosure in the statements. Entities may need to consider when the SoR was prepared (for example, at Budget or at Mid-Year Economic and Fiscal Outlook) to determine details of relevant contingencies
  • ensure contingencies disclosed in the SoR are consistent with their annual financial statements (including whether the contingency is quantifiable or unquantifiable).

SoR disclosure requirements may differ (for example, the threshold applied for the SoR differs to the materiality level applied for entity financial statements). Entities should include an explanation of any differences in the SoR and their financial statements in relevant work papers. Where appropriate, entities should discuss this matter with their auditors.

Paragraph 2.1(e) of AASB 9 Financial Instruments (AASB 9) includes financial guarantee contracts in its scope (as defined in AASB 9 Appendix A). Paragraph 2 of AASB 137 Provisions, Contingent Liabilities and Contingent Assets (AASB 137) excludes from its scope financial instruments covered by AASB 9.

In extremely rare cases where an entity is in a dispute with other parties; and where full disclosure is likely to seriously prejudice the entity, reduced disclosures are allowed under AAS (Tier 1 reporting: paragraph 92 of AASB 137, Tier 2 reporting: paragraph 156 of AASB 1060). In such cases, ‘entity’ must be read to mean ‘entity, another Commonwealth entity or the Australian Government as a whole’.

Commitments

With a commitment, there is either no present obligation to make a payment for a past transaction or event, or a payment obligation is subject to the future performance by another party.

Generally, a commitment arises when an entity has entered into an agreement with an external party (such as through a purchase order or other contractual document) and this creates a future obligation for the outflow of resources. Without an agreement, there is no commitment (see AASB 137, paragraphs Aus26.1 and Aus26.2).

A commitment becomes a liability when a present obligation arises (for example, the entity has little or no discretion to avoid payment for work or services completed by another party).

Example 3: Agreement, commitment and liability

If an entity decides to acquire equipment in the future and receives ministerial approval for the spending:

  • an agreement would not exist until contracts are entered into

  • a commitment would not be recognised until the agreement is in place

  • no liability or asset would be recognised until performance by the entity or the other party has taken place.

An intention to make payments to other parties because of a government policy statement, an election promise or other public pronouncement does not, of itself, create a present obligation.

The following items are not commitments:

  • provisions – these occur when an entity is already under an obligation to sacrifice future economic benefits but there is uncertainty about the timing or amount of the future expenditure required in settlement (see Example 4).
  • social benefit payments – see Liabilities – general Information.
  • future payment of GST revenue to the states and territories.
  • undertakings where further approval is required or legislation needs to be enacted – unilateral promises, intended to result in payments in future periods are not reported as undertakings, and, therefore, are not disclosed as commitments.

Example 4: Provisions

If a legal or constructive obligation requires an entity to restore a site or decommission an asset in the future but the timing of that event, or the amount of the obligation, is uncertain, the entity would record a provision.

Where there are no commitments in either the current or the immediately preceding reporting periods, this fact can be disclosed in the notes to the financial statements.


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