The statement of cash flows, under the various national and international standards, may or may not include transactions in cash equivalents as well as cash. Under US standards, for example, preparers may choose to define cash as “cash and cash equivalents,” as long as the same definition is used in the balance sheet as in the statement of cash flows (i.e., the statement of cash flows must tie to a single caption on the balance sheet). IAS 7, on the other hand, rather clearly required that the changes in both cash and cash equivalents be explained by the statement of cash flows.
Cash and cash equivalents include unrestricted cash (meaning cash actually on hand, or bank balances whose immediate use is determined by the management), other demand deposits, and short-term investments whose maturities at the date of acquisition by the enterprise were 3 (three) months or less.
Equity investments do not qualify as cash equivalents unless they fit the definition above of short-term maturities of three months or less, which would rarely, if ever, be true. Preference shares carrying mandatory redemption features, if acquired within three months of their predetermined redemption date, would meet the criteria above since they are, in substance, cash equivalents. These are very infrequently encountered circumstances, however.
Bank borrowings are normally considered as financing activities. However, in some countries, bank overdrafts play an integral part in the enterprise’s cash management, and as such, overdrafts are to be included as a component of cash equivalents if the following conditions are met :
- The bank overdraft is repayable on demand, and
- The bank balance often fluctuates from positive to negative (overdraft)
Statutory (or reserve) deposits by banks (i.e., those held with the central bank for regulatory compliance purposes) are often included in the same balance sheet caption as cash. The financial statement treatment of these deposits is subject to some controversy in certain countries, which becomes fairly evident from scrutiny of published financial statements of banks, as these deposits are variously considered to be either a cash equivalent or an operating asset.
If the latter, changes in amount would be presented in the operating activities section of the statement of cash flows, and the item could not then be combined with cash in the balance sheet. In the appendix to IAS 7, which illustrates the application of the standard to statement of cash flows of financial institutions, does not include statutory deposits with the central bank as a cash equivalent. Given the fact that deposits with central banks are more or less permanent (and in fact would be more likely to increase over time than to be diminished, given a going concern assumption about the reporting financial institution) the presumption must be that these are not cash equivalents in normal practice.
(Source : WILEY – 2010 Interpretation and Application of International Financial Reporting Standards, Barry J. Epstein and Eva K. Jermakowicz)