IAS 7 — Determination of cash equivalents

Date recorded:

At its March meeting the IFRIC agreed that units of money market funds and other readily redeemable funds do not qualify as cash equivalents. This is because they are essentially equity instruments that have no maturity.

Consequently, the IFRIC decided that it needed to consider whether units in money market funds should be in-substance cash equivalents. The IFRIC also decided that the criterion in the definition that cash equivalents must be convertible to known amounts of cash means that the amount of cash that will be received must be known at the time of the initial investment. That is, the units cannot be considered cash equivalents simply because they can be converted to cash at any time at the then market price. This would not necessarily satisfy the criterion that they be subject to an insignificant risk of changes in value.

The staff introduced the paper by stating that the objective of the paper is to provide the additional analysis requested by the IFRIC on the issue and make a recommendation on whether the IFRIC should add the issue to the agenda.

At the March meeting, the IFRIC concluded that it would not add the issue to its agenda but requested the staff to bring back wither proposed wording for a tentative agenda decision or proposed wording for an amendment to IAS 7 Statement of Cash Flows. As a result of the analysis in the staff paper, the staff did not believe that an amendment to IAS 7 was required as the essential criteria are clear in the standard. The staff proposed wording for a tentative agenda decision.

After the March meeting, the IFRIC received a further request for guidance in relation to IAS 7, which the staff included as an addendum to the staff paper. That request related to the classification as cash equivalents of fixed deposits or similar instruments with an original term of longer than three months. The instruments bear interest at a fixed rate determined at the date of deposit, are redeemable on demand but are subject to a penalty on early redemption. The amount of the penalty decreases depending on the period the instrument is outstanding. The submission clearly stated that the principal amount is always redeemed in full.

The staff recommendation was that redeemable fixed-term deposits are cash equivalents because they meet the critical criteria in the definition:

  1. readily convertible to a known amount of cash throughout their term
  2. subject to an insignificant risk of change in value assessed against the amount at inception.

One IFRIC member did not believe that the agenda decision covers the addendum facts. A number of IFRIC members said that the key was that the instrument was redeemable on demand.

Another IFRIC member said that the only amount of cash equivalent is the par amount. Any interest receivable should be accounted for separately. Another IFRIC member said that if an instrument is puttable within three months, it can still be a cash equivalent even if maturity is longer.

The staff then added that a key point to being a cash equivalent is that you get back what you put in, not only part of it. For example, if you put in 100 and can only get 50 back at any time, it would not be a cash equivalent.

Another IFRIC member suggested that management intent is important. For example, if an investment is intended to be held for 5 years it would not be considered to be a cash equivalent.

It was then suggested that perhaps wording could be added to the agenda decision along the lines of 'as long as there is an insignificant risk of change in the carrying value at reporting date it could be a cash equivalent'. Some had concerns around this. If the entity intends to leave the amount invested it is not a cash equivalent.

The Chairman then asked the IFRIC if they agreed with the decision not to add the issue to the agenda. The IFRIC members agreed.

The Chairman then asked the IFRIC to consider each of the fact patterns in turn.

In relation to the original fact pattern, the IFRIC discussed variation in cash flows, and agreed to modify the agenda decision to add in wording that reflects the first sentence of IAS 7 paragraph 7 that the purpose must be to meet the short-term cash commitments rather than for investment or other purposes.

In relation to the addendum, the IFRIC agreed that in light of the change to the agenda decision, the specific fact pattern does not need to be separately addressed.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.