Restricted cash and encouraged disclosures

Learning objectives

• Assess whether significant cash balances are not available for use by the group and draft the disclosure together with management's commentary.L2, L3
• Distinguish required disclosures from encouraged disclosures (undrawn borrowing facilities, operating capacity, segments).L2, L3

Normative references

• IAS 7 §48An entity discloses, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the entity that are not available for use by the group.
• IAS 7 §49There are various circumstances in which cash balances are not available for use by the group, for example balances held by a subsidiary that operates in a country where exchange controls or other legal restrictions apply, preventing their general use by the parent or other subsidiaries.
• IAS 7 §50Additional information may be relevant to an understanding of the financial position and liquidity; its disclosure, together with a commentary by management, is encouraged (not required): the amount of undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments, indicating any restrictions; the aggregate amount of cash flows that represent increases in operating capacity, separately from those required to maintain operating capacity; the operating, investing and financing cash flows of each reportable segment.
• IAS 7 §51Separate disclosure of cash flows that represent increases in operating capacity and those required to maintain it enables users to determine whether the entity is investing adequately in the maintenance of its operating capacity; an entity that does not invest adequately may be prejudicing future profitability for the sake of current liquidity and distributions.
• IAS 7 §52The disclosure of segmental cash flows enables users to obtain a better understanding of the relationship between the cash flows of the business as a whole and those of its component parts and the availability and variability of segmental cash flows.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

11 questions

• The entity discloses, with a management commentary, the amount of significant cash balances it holds that the group cannot use.L2
• Disclosure of the amount of undrawn borrowing facilities is mandatory.L2
• Which of these cases illustrates cash not available for use by the group?L2
• Why does the standard encourage separate disclosure of cash flows that increase operating capacity and those that maintain it?L2
• Which of these disclosures is encouraged, rather than required, by the standard?L3
• Among these disclosures, which are required (not merely encouraged)?L2
• The Kerlis group holds cash in several countries. Which of these balances call for the restricted cash disclosure, if significant?L3
• The Morlis group holds 12 million of cash, of which 5 million in a subsidiary subject to strict exchange controls; its notes do not mention it. What is the error?L2
• An auditor reports as non-compliance the lack of disclosure of Talvis's undrawn borrowing facilities. What is the auditor's error?L3
• Peldane's subsidiary, in a country where currency transfers require prior authorisation rarely granted, holds 2 million out of group cash of 9 million (case data). What disclosure should be given?L3
• Brelmira's management, which cut maintenance capital spending to pay an exceptional dividend, is hesitant to publish the split between capacity-maintaining and capacity-increasing investment. What advice should be given?L3