Cash includes money an entity holds and money deposited
with financial institutions that can be withdrawn
without notice. Cash equivalents are defined as
short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value
[IAS7.6]. Cash and cash equivalents should be separately
disclosed on the face of the balance sheet and should
present a reconciliation of these balances to the
equivalent amounts reported in the cash flow statement
[IAS1R.68(i)] [IAS7.45].
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The classification of a short-term investment
as a cash equivalent not only requires the investment
to meet the definition of a cash equivalent,
but also depends on the purpose for which the
investment is held. Short-term investments must
be investments that are purchased and sold,
generally, as part of the entity's cash management
activities, rather than as part of its operating,
investing or financing activities to qualify
as cash equivalents [IAS7.9].
Cash equivalents can be designated as available-for-sale
investments, Held-to-maturity investments
or Originated loans . However, amounts are disclosed as
cash equivalents provided that they meet the
definition of a cash equivalent. The "short-term"
characteristic of a cash equivalent is generally
taken as a maturity of three months from the
date of acquisition [IAS7.7] .
The classification of an investment as a
cash equivalent is not restricted to investments
with financial institutions, such as banks,
or government bonds. Debt instruments issued
by corporate entities may also be classified
as cash equivalents provided they meet the
definition of a cash equivalent. Redeemable
preferred shares could also be capable of
qualifying as cash equivalents [IAS7.7] .
An entity may classify bank overdrafts, repayable
on demand, as part of its cash equivalents
if management, as part of its cash management
strategy, uses the overdrafts, rather than
part of its financing strategy [IAS7.8]. Such
overdrafts are classified as interest-bearing
liabilities in the balance sheet rather than
within cash equivalents .
Recognition of cash and cash equivalents
Cash should be recognised when received and cash
equivalents should be recognised when the investment/deposit
is made. Although the recognition is generally straightforward,
there are certain matters which should be considered
carefully.
Restrictions over the use of cash
Governments in some countries impose exchange controls,
restricting the amount of cash that can be removed
from the country. There may be other legal restrictions
over an entity's ability to use cash and cash equivalents
for general purposes. Such balances should continue
to be recognised as cash and cash equivalents, but
adequate disclosure of the restrictions should be
given [IAS7.48-49] .
Concerns over redemption
Securities should not be classified as a cash equivalent
if there are concerns that the issuer may not fully
redeem the security at maturity. Instead the security
should be classified as an available-for-sale investment
or a held-to-maturity investment.
Initial measurement
Cash should be recognised initially at the amount
received by the entity or the amount received into
the entity's bank account. Cash equivalents should
initially be recognised at cost [F.100(a)]. Cost is the fair
value of the consideration given to acquire the
cash equivalent. Bank overdrafts classified as cash
equivalents should be initially recognised at the
amount of principal repayable to the lender [F.100(a)].
Any amounts denominated in foreign currency should
be translated into the entity's reporting currency
at the exchange rate ruling on the date of receipt
[IAS21R.21].
Measurement subsequent to initial measurement
Normally, no adjustment should be required to cash
and cash equivalents balances except to update the
exchange rate applied to balances denominated in
foreign currencies and to reflect the effect of
subsequent cash transactions [IAS21R.23(a)].
Impairment losses and write-downs
Cash and cash equivalent balances held with another
entity should reflect the cash flows expected to
be received from that entity. The balance would
cease to meet the definitions of cash and cash equivalents
if there are serious concerns over the other entity's
credit worthiness. The balance would be reclassified
to available-for-sale and written down to the present
value of expected future cash flows
[IAS39R.58].
Effect of use of financial instruments on the measurement of cash and cash equivalents
Cash and cash equivalent balances denominated in
a foreign currency represent an exposure to foreign
exchange risk. An entity may enter into a currency
swap, contracted to mature at the same time as the
cash equivalent, to manage this risk. The cash balance
should be translated using the spot rate at the
balance sheet date and the currency swap marked
to market. The movements in value would be taken
to the income statement [IAS39R.89].
Presentation and disclosure
Cash and cash equivalents should be presented as
a separate line item on the face of the balance
sheet [IAS1R.68(i)].
The following information should be given in the
notes:
a)
Description of
balances included in cash and cash equivalents
[IAS7.45,46];
b)
Explanation of how short-term investments
are classified between cash equivalents and
other investments [IAS7.46];
c)
Reconciliation of cash and
cash equivalents included in the cash flow statement
to the balance sheet [IAS7.45];
d)
Terms attached to cash and
cash equivalent balances, for example interest
rates and average maturity [IAS32R.67]; and
e)
Restriction over use of cash
and repatriation [IAS7.48]. Where appropriate,
an explanation of why balance qualifies as a
current asset [IAS1R.57]. This is not required
in respect of currency restrictions.
