Is it a Cash Equivalent? If not, what is it?

Interpretation of the Standard

The crux of the questions above is the plausible interpretation of Paragraphs 6 and 7 of International Accounting Standard 7 [Statement of Cash Flows], which provide that:

7. Cash equivalents are held for the purpose of meeting short‑term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. (Italics supplied.)
Effect of Investment Maturity in Determining a Cash Equivalent

Misconstruction of the Provisions

The foregoing provisions have been misconstrued to mean that to qualify as a cash equivalent, an investment must have a maturity of less than (or equal to) 90 days! Does this mean that the maturity of an investment is the sole basis of determining whether or not it is a cash equivalent? How about accessibility of the investment, any penalty for obtaining access thereto, its convertibility into cash, and any restrictions for use thereof?

The TWIFOO Diagram

We will cogitate those issues as we strive to rectify the preceding delusion through what shall henceforth be known as the TWIFOO Diagram, as shown below.

The TWIFOO Diagram

Twifoo is my pseudonym and it is the acronym for my motto: “ The world is full of opposites.” As we can see, the TWIFOO Diagram resolves the recognition issues with opposite answers, which are either a No or a Yes!

Conclusions from the TWIFOO Diagram

Based on the TWIFOO Diagram, we can easily deduce these conclusions:

  1. Cash Equivalents are investments that: (a) are accessible within one working day, with insignificant penalty; (b) are readily convertible to known amounts of cash; and (c) are not earmarked for any purpose or earmarked for a purpose without any due date ( for example, an investment is earmarked for the purchase of equipment, the acquisition of which is remote as at the end of the reporting period).
  2. Restricted Cash Equivalents classified as Current Assets are investments that: (a) are accessible within one working day, with insignificant penalty; (b) are readily convertible to known amounts of cash; and (c) earmarked for a specific purpose, the occurrence of which is less than 12 months after the end of the reporting period.
  3. Restricted Cash Equivalents classified as Non-current Assets are investments that: (a) are accessible within one working day, with insignificant penalty; (b) are readily convertible to known amounts of cash; and (c) are earmarked for a specific purpose, the occurrence of which is at least 12 months after the end of the reporting period.

Classification of Credit Cards Receivable

How about Credit Cards Receivable? Are they Cash Equivalents? If so, why? If not, what are they and how are they classified? Equipped with the TWIFOO Diagram, I’m certain that you can easily answer those questions. If so, please disclose your thoughts thereon by writing a response or leaving a note!

Originally published at https://twifoo.wixsite.com on June 23, 2020.

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