Dada Adefolami

This latter situation could arise from existing economic restrictions where, for example, the cash and debt are in different jurisdictions and using the cash to settle debt would trigger a tax payment or from legal restrictions on the ability of the entity to freely use the cash. 

IAS 7 already requires the disclosure of significant cash and cash equivalent balances that are not available for use. However, this requirement does not address the situation where cash and cash equivalents are available but, because of restrictions, the entity would find it more economical to use other sources of finance. 

The ED results from the IASB’s Disclosure Initiative, which comprises smaller projects to improve presentation and disclosure requirements in existing IFRSs. As part of the initiative, the IASB has already issued proposed amendments to IAS 1, Presentation of Financial Statements. The initiative also complements the current review of the Conceptual Framework. The proposed amendments require an entity to provide a reconciliation of the opening and closing amounts in the statement of financial position for each liability for which cash flows are classified as financing activities.

The ED would not prohibit disclosures on a net basis – that is, liabilities relating to finance activities less cash and cash equivalents. The reason behind this view is that some entities manage debt on a net basis and there was no intention on the part of the IASB to limit management’s ability to explain its financial and risk management strategies. IFRS 12, Disclosure of Interests in Other Entities, already requires disclosure of significant restrictions on the access and use of assets and settlement of liabilities. However, the IASB felt that current disclosure does not address economic restrictions.

For many of years, users have been requesting the IASB to require companies to provide net debt reconciliation. Although the proposed amendment to IAS 7 does not include net debt reconciliation, it will help users by providing them with sufficient information to prepare net debt reconciliation themselves. The problem facing the IASB is that there is no definition of net debt in IFRS. The proposed changes will require companies to reconcile the movement in debt from one period to another and, together with the existing information from the statement of cash flows; this will facilitate net debt reconciliation.

Because many entities already voluntarily provide net debt reconciliation, the proposed changes should theoretically not impose any additional burden on issuers. The proposals also require issuers to provide information to help users better understand any liquidity issues. The understanding of limitations on the use of liquid resource is important, and some users would like additional disclosures to better understand the different types of debt financing by the entity. The changes should help users in making investment decisions.

Assetliabilitymanagement (ALM) is the administration of policies and procedures that address financial risks associated with changing interest rates, foreign exchange rates and other factors that can affect a company’s liquidity.

Initially pioneered by financial institutions during the 1970s as interest rates became increasingly volatile, asset and liability management (often abbreviated ALM) is the practice of managing risks that arise due to mismatches between the assets and liabilities.

Finally
However, there is currently no general agreement about the need for the ED. Although a reconciliation of ‘debt’ or ‘net debt’ is a common feature of reporting, some feel it is not appropriate to make such disclosure compulsory prior to establishing a conceptual basis for requiring reconciliations in general. Also, there has been comment that the practicality of implementing such a requirement has not been sufficiently analyzed to merit an amendment to IAS 7. 

It is thought by some that additional disclosure requirements of this type should not be added in advance of the IASB’s conclusions on relevant elements of its Principles of Disclosure project

Cash management refers to a broad area of finance involving the collection, handling, and usage of cash. It involves assessing market liquidity, cash flow, and investments. In banking, cash management, or treasury management, is a marketing term for certain services related to cash flow offered primarily to larger business customers

Cash concentration is the transfer of funds from diverse accounts into a central account to improve the efficiency of cash management. The consolidation of cash into a single account allows a company to maintain smaller cash balances overall, and to identify excess cash available for short term investments. The cash available in different bank accounts are pooled into a master account. The advantages of cash concentration are 1) Cash control and Cash visibility

Note that Retail banking also known as Consumer Banking is the provision of services by a bank to individual consumers, rather than to companies, corporations or other banks. Services offered include savings and transactional accounts, mortgages, personal loans, debit cards, and credit cards

Dada Suraju Adefolami, Professor of Finance, School of Business Administration, UNEM University Costa Rica, is a Finance / Management Consultant and Certified Forensic Accountant. You can reach him via: [email protected]; 08052043855