Background

The Committee received a submission asking whether an entity includes demand deposits with restrictions on use as a component of cash and cash equivalents (C&CE). In the fact pattern described, an entity sells a business to a third party and the agreement requires the entity to keep a specified amount of cash in a separate demand deposit to indemnify the buyer for potential warranty claims over years. The terms and conditions of the demand deposit do not prevent the entity from accessing amounts held in the demand deposit. However, the entity would be in breach of its contractual obligation if the entity uses the cash for any purpose other than indemnifying the buyer.

Staff analysis

Most of the respondents of the outreach performed said restricted demand deposits similar to the one described in the submission are common and the amount involved can be material. The restrictions may arise either from commitments to third parties or from the terms and conditions of agreement. Many of them said there is diversity in the way entities report those deposits in their statements of cash flows and financial position. Some respondents commented that entities may report them differently depending on the nature or source restriction. If they are restricted legally, they might be excluded from C&CE while if the restrictions arise from contractual agreements, they might be included in C&CE with additional disclosures.  

The staff analysed that such demand deposits with restrictions could be included in the C&CE in the statement of cash flows because it meets the definition of "cash" under IAS 7:6. IAS 7 includes no other requirements with respect to determining whether an item qualifies as "cash", particularly, it does not require "cash" to include only items that an entity holds for the purpose of meeting short-term cash commitments. Such criteria is considered in determining whether an item qualifies as a "cash equivalent". Moreover, both IAS 7 and IAS 1 indicate that C&CE can be subject to restrictions on use, with disclosures required. Therefore, the staff considered the contractual obligation to use the demand deposits only for the specified purpose does not change the nature of the asset, where the entity has no restrictions on its ability to access.

In respect of the presentation in the statement of financial position, an entity could present the demand deposit as C&CE, unless presenting it separately as an additional line item is relevant to an understanding of the entity's financial position applying IAS 1:55. Furthermore, an entity should classify the demand deposit as non-current asset to the extent the deposit is restricted from being used to settle a liability for at least twelve months after the end of reporting period.

In order to comply with the disclosure requirements under IAS 7:45, the entity would need to disclose demand deposits with restrictions on use as a component in C&CE, as well as provide a reconciliation if the amounts included as C&CE differ from the amounts presented as such in its statement of financial position. The amount of C&CE with restrictions and the information about the restrictions are also required to be disclosed under IAS 7:48, if the amount is significant. In addition, an entity would consider disclosing additional information about restrictions on use of C&CE if such information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk as required by IFRS 7:33 & 39(c).

Staff recommendation

Based on the above analysis, the staff concluded that the principles and requirements in IFRS Standards provide an adequate basis to determine the classification, presentation and disclosures of the demand deposit with restrictions on use in the fact pattern described and not to add the matter to the Committee's standard-setting agenda but to publish a tentative agenda decision.  

Discussion

All of the Committee members agreed with the staff's analysis and the conclusion that the demand deposit with restrictions in the fact pattern should be included in C&CE in the statement of cash flows. Some of them emphasised the importance of the disclosures in the financial statements in different aspects.

The Committee members particularly agreed with the analysis that the restrictions on use do not change the nature of the deposit because the entity can access those amounts which met the definition of "cash" in IAS 7. A number of the Committee members commented that it is important to emphasise the separation of the restriction due to a contractual arrangement with a third party from the nature of the deposit placed in bank. They were of the view that the conclusion may be different if the restriction is embedded in the contractual arrangement with the bank which makes an entity unable to access it.

A few Committee member raised concerns on the reference to IAS 1:66(d) which is one of the conditions that an asset cannot be classified as current. They were worried that such reference would mean the demand deposits in the fact pattern should be classified as non-current. One Committee member said it is contradictory if the deposit is classified as non-current while C&CE is supposed to be immediately available for use. The staff responded that the classification as current and non-current is not part of the analysis of this agenda decision. Quoting IAS 1:66(d) aimed to explain that an entity can classify a deposit as C&CE even if there is restriction on use but not to give conclusion that it is classified as non-current.

Many Committee members said the disclosure aspects of such demand deposits are important because it is relevant for readers to understand such an arrangement and the impact on the liquidity of an entity. Besides quoting the requirements in IAS 7 and IFRS 7, the Staff suggested it would be useful to add a reference to IAS 1 where it states that extra disclosure may be needed if it is useful to reader. 

The Committee members provided suggestions on the drafting of the tentative agenda decision to emphasise  the separation of the contractual restriction with third parties from the nature of deposit held in a bank and adding IAS 7:48 which relates to the disclosure of the unavailability of C&CE for use by Group.

The Committee decided, by a unanimous vote, not to add the matter to the standard-setting agenda. Also, by a vote of majority, the Committee members agreed with the suggested edits to the tentative agenda decision.