24 April 2001

Mr Keith Alfredson
Chairman
Australian Accounting Standards Board
530 Collins Street (Level 3)
MEBOURNE 3000

Dear Keith

Implementation of Abstract 31
"Accounting for Goods & Services Tax (GST)"

In response to your letter of 2 April 2001, the views of a number of G100 member organisations were sought on the implementation of Abstract 31 as it relates to the presentation of GST in the Statement of Cash Flows. On the basis of the responses received a number of members experienced and/or expected implementation difficulties. The comments of members are set out in the attachment.

On the basis of these comments the Group of 100 believes that a reconsideration of the requirement to present cash flows inclusive of the GST is warranted because compliance with the existing requirements imposes significant burdens and costs on some reporting entities.

I trust that this information is useful to the UIG in its consideration of the Issue Proposal.

Yours sincerely

Tom Pockett
National President

Comments received from G100 Members

My review identified that the organisation currently records expenses on a gross basis and income on a net basis. (GST recovered is recognised as a negative expense for reporting purposes).

In order to comply with Abstract 31 (gross cash flows) we would therefore need to change our procedures for recognising both revenue and GST collected. This may include amendments to approximately 10 source systems and interfaces and significant input from the organisation's technology area. In addition, systems accounting would have to roll out these changes to all business units.
The primary issue confronted by the organisation in managing and reporting GST related to joint ventures. As the operator of a large number of joint ventures ... mainly accumulates input tax credits which are claimed back. Resolution of the issue of who will prepare the return (each venturer or operator) lead to the organisation as operator submitting GST returns at the 100% (gross) level for all venturers. GST cash flow information included in our 2000 annual financial statements was extracted from summary venture records and Corporate GST flows.
In terms of cost versus benefit consideration, reporting cash flows net would save reporting entities from undertaking additional work to identify the GST component of the cash flow items reported as part of "Payments to Suppliers and Customers" in the statement of cash flows. This work would be particularly onerous for those entities that adopt "grouping" for their tax treatment, because the gross GST amounts to be allocated to each entity within the group would need to be identified.
Because businesses, which account for around 50% of Australian revenues, are predominantly but not exclusively GST free, to do the gross up in perfect detail would be a large job. We operate a common chart of accounts, so that the revenue accounts contain a mix of taxable and GST free revenue and the purchases and expense accounts contain a mix of taxable and GST free expenditure. Whilst it is difficult to cost the collection, summarisation and reconciliation of this information there would be several days work each half year.

What we have done in practice is to estimate the GST free revenue and then derive the GTS received or receivable on the balance. We have then analysed the net GST payable/receivable to derive the GST on purchases. We are yet to have this approach audited.

In our case it would probably be more meaningful for users of our accounts to include a footnote explaining broadly what revenue and expenditure is not subject to GST rather than grossing up cash flows which is pretty meaningless in our context.
The organisation has two issues it would like to raise in respect of the Urgent Issues Group determination in respect of requiring the gross method be utilised for determining cash flows:
- the additional burden this requirement places on offshore staff who, in accordance US GAAP or International Standards, had previously accounted for such cash flows on a net basis. In some instances staff have migrated to the gross method, whilst in other instances due to computer programming costs, the staff have utilised the net methodology for local reporting and adopted a hybrid 'gross' methods for the organisation's reporting requirements, in effect significantly increasing workloads. Given the current harmonisation program, we were surprised that the net method was not allowed at the outset; and
- the cost to amend SAP structures in the general ledger to cater for this requirement. The cost to amend the organisation's accounting systems to cater for the gross cash flow requirement has been estimated to cost in excess of $1M.
The main difficulty arises from the requirements of the Abstract to show "Payments to Suppliers" gross of GST and "Investing and Financing Activities" net of GST.

Our general ledger accounting system records all revenue and expense on a net GST basis and this information is used to prepare the statutory Statement of Financial Performance. Our accounting system does not collect information as to the GST in relation to the relevant reporting classifications required by the AASB.

To comply with Abstract 31 we reviewed the details reported in the BAS to attempt to gather data to correctly capture Gross GST cash flow information. The initial assumption was that G10 "capital acquisitions" would relate to investing and financing activities and G11 "other acquisitions" would relate to payments to suppliers. However there was insufficient detail in the BAS classifications to align with the AASB 1026 classifications.

In particular, in a company such as ours which has significant capitalised expenditure from normal operating costs (exploration, development, feasibility costs) these will be shown as G11 on the BAS (ie inclusive with all normal payments to suppliers). However, on the Statement of Cash Flows these costs are classified as investing activities and are shown net of GST and therefore it was difficult to dissect the GST between "Payment to Suppliers" being shown gross and "Investing Activities" which are shown net. As a result there was considerable cost in terms of resources to review this information in details to be able to correctly classify the GST payments into the categories required by AASB 1026.