4.6 Auction Rate Securities
Auction rate securities (ARSs) are distinct from other, more traditional securities. ARSs generally have long-term stated maturities; the issuer is not required to redeem the security until 20 to 30 years after issuance. However, for the investor, these securities have certain economic characteristics of short-term investments because of their rate-setting mechanism. The return on these securities is designed to track short-term interest rates through a “Dutch” auction process, which resets the coupon rate (or dividend rate).
Generally, ARSs cannot be classified as cash equivalents in an investor’s statement of cash flows. Because ARSs have stated maturities of more than three months, investments in ARSs do not meet the definition of a cash equivalent in ASC 230-10-20 unless the ARSs are purchased very near their contractual maturity (i.e., three months or less). This conclusion is consistent with the views expressed in Section II.H.3 of the SEC’s Current Accounting and Disclosure Issues in the Division of Corporation Finance (updated November 30, 2006).