Demand deposits with restrictions on use (IAS 7)
IAS 7 Statement of Cash Flows—Demand Deposits with Restrictions on Use (Agenda Paper 3)
Background
In September 2021, the Committee published a tentative agenda decision as to whether an entity includes demand deposits with restrictions on use as a component of cash and cash equivalents.
17 comment letters were received. Most respondents agreed (or did not disagree) with the Committee’s technical analysis and conclusions. However, they expressed concerns on the classification outcome, unclear definitions in IAS 7 and whether it could be applied to other fact patterns.
Staff analysis
Some respondents had concerns that some restrictions on use that would not preclude an item from meeting the definition of "cash" might nonetheless preclude an item from qualifying as "cash equivalents" and classifying as cash demand deposits with contractual restrictions on use would not provide useful information to users of financial statements. The staff agreed with this because under the current standard, the classification as "cash" depends only on the nature of the item while the classification of "cash equivalent" would depend also on the purpose for which the item is held. Such classification requirements are worth to be reconsidered but is beyond the scope of the submission. The staff noted that the IASB might decide to review the definition of cash and the criteria for an item to qualify as cash equivalents.
Moreover, some respondents observed that IAS 7 does not define "demand deposit" and "restrictions" and considered that the Committee's conclusion would be circular if no further clarification or guidance were provided to assess whether restrictions would change the nature of a demand deposit. They were of the view that both "use" and "ability to access" should be considered to determine the nature of the deposit. However, the staff disagreed with this because the proposed agenda decision simply states that restrictions on use do not necessarily preclude a deposit from meeting the definition of cash in IAS 7 and explains why contractual restrictions on use do not change the nature of the demand deposit in the way that it would no longer meet the definition of cash (i.e. the entity can access those amounts on demand).
A number of the respondents questioned whether the agenda decision would apply when restrictions on use arise from laws and regulations, rather than from contractual agreements. Nonetheless, the staff said the agenda decision focuses on the fact pattern where the restrictions arise from a contract with a third party and other fact patterns are beyond the scope of the question asked in the submission.
There were a few respondents who disagreed with the Committee’s technical analysis because they were of the view that demand deposits with restrictions on use that are unavailable to meet short-term cash commitments cannot be classified as cash. The staff responded that while cash and cash equivalents may be subject to restrictions on use, the short-term cash commitments requirement is applicable to "cash equivalent" only.
Staff recommendation
The staff recommended finalising the agenda decision with some editorial changes.
Committee discussion
Most of the Committee members continued to agree with the conclusion in the tentative agenda decision and therefore to finalise it. There was an extensive discussion on whether there is inconsistency in the definition of "cash" and "cash equivalents" in IAS 7 and the Committee members had different views on that.
Some Committee members said that it is good to clarify that the nature of "cash" is not affected by the commitment to a third party. The disclosure requirements in IAS 7 on restrictions would be sufficient for the users of financial statements to consider when making a decision. One Committee member suggested to emphasise that the restricting party (i.e. the party to whom the entity commits regarding the restriction) is not the deposit taker but a different party to better explain that the restriction does not affect the demand deposit to be no longer "on demand".
Some Committee members thought that the inconsistent definition of "cash" and "cash equivalents" in IAS 7 results in diversity in application. Cash is determined by the nature while cash equivalent is determined by the purpose. This somehow puts a higher hurdle to meeting the definition of "cash equivalents". However, there were also Committee members who considered that they are fundamentally different assets which could have different definitions.
One Committee member continued to disagree with the conclusion in the tentative agenda decision. He considered that the statement of "unless those restrictions change the nature of the deposit in a way that it would no longer meet the definition of cash in IAS 7" may imply that there is a scenario in which such a restriction would affect the nature of cash. There is circularity in this. However, another Committee member considered that there was no circularity in whether the restriction affects the ability to access the deposit.
The staff and the departing Chair summarised that the agenda decision focuses on the analysis whether the demand deposit is "cash" but not expanding beyond analysing the definition of "cash equivalents" which aims at simplifying and focusing on the question asked in the submission.
Committee decision
The Committee decided, by a vote of 12 out of 13, to finalise the tentative agenda decision.