IAS 7 Statement of Cash Flows Classification of short-term loans and credit facilities (Agenda Paper 6)

Background

The Committee received a request asking about the types of borrowings an entity can include in its statement of cash flows as a component of cash and cash equivalents. In the fact pattern described in the request the entity has short-term loans and credit facilities (short-term arrangements) that have a short contractual notice period (eg 14 days) that are an integral part of the entity’s cash management. However, while the balance of the short-term arrangements fluctuates it is always overdrawn (negative) and does not fluctuate from being in to out of funds.  

IAS 7.8 states that a characteristic of banking arrangements that can be included as a component of cash and cash equivalents “is that the bank balance often fluctuates from being positive to being overdrawn.”

The submitter is seeking clarification on whether fluctuation from negative to positive is a requirement for classification as cash and cash equivalents or just an indication.

Staff analysis

IAS 7.8 states that bank borrowings are generally considered to be financing activities. They can only be included as a component of cash and cash equivalents if the banking arrangement is a bank overdraft that is repayable on demand and forms an integral part of the entity’s cash management.

Assessing whether a banking arrangement is an integral part of an entity’s cash management is a matter of facts and circumstances. If the balance of a banking arrangement is consistently negative and does not often fluctuate from positive to negative, then this is a strong indicator that the arrangement does not form an integral part of the entity’s cash management and, instead, represents a form of financing.

The staff concluded that, in the fact pattern described in the request, the short-term arrangements are not components of cash and cash equivalents, because they are not repayable on demand. The fact that the balance is almost always negative indicates that the short-term arrangements are a form of financing rather than an integral part of the entity’s cash management.

Staff recommendation

The staff are recommending that the Committee not add the item to its agenda, on the grounds that the requirements in IFRS Standards provide an adequate basis for an entity to assess whether to include in its statement of cash flows the short-term arrangements described in the request as components of cash and cash equivalents.

Discussion

The members agreed with the staff analysis. One member worried that the decision goes beyond what was asked. Intention of the paragraph is limited to bank overdrafts.

The staff will look at amending the wording to say that the balance should generally be positive.

They did discuss whether this required an interpretation, but the sense of the meeting was that an agenda decision was sufficient.

The Committee decided (14:0) to issue a tentative decision not to add this item to its agenda.