Cash and Cash Equivalents

[LYAK]

A standard definition of cash equivalents that I have often seen is as follows: "amounts on
deposit with financial institutions and investments, primarily held in money market accounts, with original maturities of less than 90 days." Another definition I came across is as follows: "A balance sheet heading or grouping that includes both cash and those marketable assets that are very close to their maturity dates."

Do investments whose current maturity dates are very close but original maturity dates are beyond 90 days fit into this classification? What if the original and current maturity dates are both beyond 90 days but managements intends to sell them very shortly? Also, how would equity securities fit into this classification, since they have no maturity dates? If they are trading securities, are they classified as cash equivalents based on when management intends to sell?

 

[cmesh]

The standard indicates that cash equivalents includes investments with an original maturity--to the entity holding the investment--of three months or less. As a result, it would only be considered a cash equivalent if the maturity date was 90 days or less from the date the reporting entity originally purchased the investment. Note that the standard also explicitly states that an investment can't become a cash equivalent simply due to the passage or time (i.e. its original maturity was more than 90 days from the original purchase date, but is now less than 90 days because of the passage of time).

The standard doesn't mention equity securities in the definition of cash equivalents; however, I'd probably take the position that they aren't readily convertible into known amounts of cash (because the amount of cash that could be received is subject to risks like trading volume, market volatility, etc.).

 

[Counterofbeans]

The 2012 XBRL taxonomy definition of cash and cash equivalents is as follows:

"Amount of currency on hand as well as demand deposits with banks or financial institutions. Includes other kinds of accounts that have the general characteristics of demand deposits. Also includes short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Excludes cash and cash equivalents within disposal group and discontinued operation"

The bolded part represents the definition of cash equivalents that I would probably go with.

CMESH is correct. Generally, only investments with original maturities of three months or less qualify under this definition. Original maturity is measured as the period from the holder’s date of purchase to the instrument’s maturity. For example, both a three-month US Treasury bill and a three-year US Treasury note purchased three months from maturity qualify as cash equivalents. However, a US Treasury note purchased three years ago does not become a cash equivalent when its remaining maturity is three months.

Debt securities that are considered cash equivalents are subject to the accounting and disclosure requirements of ASC 320-10, such as disclosure of amortized cost and fair value by major security types (ASC 320-10-45-12).

In regards to equity securities, the longer the term of the investment, the greater the risk that a change in market conditions (such as interest rates) can have an effect on its value that is other than insignificant. For this reason, ASC 230 excludes equity investments from cash equivalents (because equity securities do not have a stated maturity and the issuers are not obligated to redeem the securities) and restricts the inclusion of other investments to those with a short maturity of, say, three months or less from the date of their acquisition by the entity.

An investment that is quoted in an active market would be readily convertible to known amounts of cash and, therefore, could be regarded as highly liquid. However, this is not enough to meet the definition of a cash equivalent. Investments that are redeemable at any time can be classified as cash equivalents provided that the amount of cash that will be received upon redemption is known at the time of the initial investment. That is, the investments cannot be considered cash equivalents simply because they can be converted to cash at any time at the then market price in an active market.

Hope that helps.