What are cash and cash equivalents?
Cash includes money an entity holds and money deposited with financial institutions that can be withdrawn without notice.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].
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.
source:http://www.pwcglobal.com/Extweb/service.nsf/
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].
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.
source:http://www.pwcglobal.com/Extweb/service.nsf/
docid/B76785C4D55263C88025713F0044A853#zero