This chapter provides guidance on the determination and presentation of cash and cash equivalents in the statement of cash flows. In accordance with ASC 230-10-45-4, when the total amounts of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position, an entity must provide additional disclosures to reconcile (1) the amounts disaggregated by line item, as reported in the statement of financial position, to (2) what is shown in the statement of cash flows.
4.1 Definition of Cash and Cash Equivalents
4.2 Book and Bank Overdrafts
ASC Master Glossary
Consistent with common usage, cash includes not only currency on hand but demand deposits with banks or other financial institutions. Cash also includes other kinds of accounts that have the general characteristics of demand deposits in that the customer may deposit additional funds at any time and also effectively may withdraw funds at any time without prior notice or penalty. All charges and credits to those accounts are cash receipts or payments to both the entity owning the account and the bank holding it. For example, a bank’s granting of a loan by crediting the proceeds to a customer’s demand deposit account is a cash payment by the bank and a cash receipt of the customer when the entry is made.
Entity A invests excess funds in short-term (less than three months) bank repurchase agreements. The underlying securities in the transaction may have maturities greater than three months. Entity A may classify these repurchase agreements as cash equivalents in its balance sheet and statement of cash flows. The investment (the repurchase agreement), in substance, meets the criteria in ASC 230. The critical factor is the maturity of the repurchase agreement itself, not the underlying securities that serve to secure the investment.
A parent company and its subsidiaries may have centralized cash management arrangements in which excess cash is invested in a cash pool. Subsidiary cash requirements are met through withdrawals or borrowings from the pool. The pool is invested in assets (e.g., deposits at banks) that are in the parent company’s name. Under this type of arrangement, the parent company and its subsidiaries have sweep arrangements with their respective banks in which cash is transferred between the parent’s and subsidiaries’ bank accounts daily. This arrangement reduces lending costs and yields higher rates of return on investments (by allowing an entity to invest larger “blocks” of cash).
Money market funds (MMFs) are investment funds that maintain a constant per-share net asset value (NAV) by adjusting the periodic interest rates paid to investors. The NAV is usually set at $1 per share. Generally, investors can make withdrawals from MMFs on short notice without incurring a penalty. However, as a result of the most recent credit crisis, certain money market mutual funds incurred losses on their investments, causing some of the funds to “break the buck” when the NAV fell below the constant per-share amount. As the fair values of MMFs declined as a result of deterioration in the creditworthiness of their assets and general illiquidity conditions, redemptions by investors increased. Accordingly, some funds were forced to impose limits on redemptions, liquidate their assets, or obtain support from related entities.
The requirement to transact at a floating NAV applies to institutional prime MMFs but not to government or retail MMFs.
Variable-rate demand notes (VRDNs), also called “low floaters” or “seven-day floaters,” generally are municipal securities that have long-term stated maturities. However, they also have certain economic characteristics of short-term investments, such as their rate-setting mechanism and their liquidity provisions. These notes are normally secured by a letter of credit. The rates on VRDNs are reset periodically (e.g., daily, weekly, monthly) through an auction process. If there is a failed auction, the VRDNs can be tendered (i.e., put) by the investor for par plus accrued interest. The counterparty to the put is typically the third party that provided a letter of credit. However, in certain cases in which no letter of credit is involved, the counterparty may be the original issuer of the VRDN itself (e.g., a state, municipality, county, or other governmental entity).
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).
We have observed diversity in practice in how entities classify credit and debit card receivables on their balance sheets. Depending on their specific facts and circumstances (see discussion below), some entities classify these receivables as cash and cash equivalents while others classify them as receivables. This balance sheet diversity affects the statement of cash flows. If these items are classified as cash and cash equivalents, they are included in the beginning and ending balances of cash and cash equivalents (i.e., recognition of the receivable is the equivalent of collecting the cash). Otherwise, they are included in the change in net assets in the reconciliation from net income to cash flows from operating activities, provided that entities are using the indirect method of presenting operating cash flows (i.e., they are presented as operating cash inflows when the entity receives the cash in its bank account).