Let’s look at some of the reaction to IFRIC’s tentative agenda decision, Demand Deposits with Restrictions on Use
As we addressed here, the fact pattern concerned an entity that holds a demand deposit whose terms and conditions don’t prevent the entity from accessing the amounts held in it, and that has a contractual obligation with a third party to keep a specified amount of cash in that separate demand deposit and to use the cash only for specified purposes. IFRIC received a request about whether an entity includes such a demand deposit as a component of cash and cash equivalents in its statements of cash flows and financial position.
As we noted before, IFRS doesn’t have much to say about what actually constitutes “cash.” IAS 7.6 only states, somewhat circularly, that cash “comprises cash on hand and demand deposits.” It does specify that 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,” adding that “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.” But those concepts only apply to cash equivalents, not to cash itself. IFRIC took the view that the demand deposit meets the definition (such as it is) of cash and can therefore be classified as such, regardless of any attached restrictions.
Here’s how PricewaterhouseCoopers reacted to that (“TAD” is the acronym for “tentative agenda decision” – I expect I’m the only person for whom it evokes the title, albeit not the substance, of the 1962 film It’s Trad, Dad!) –
- The demand deposits discussed in the TAD are de-facto not available to meet the entity’s short-term cash commitments. Nevertheless based on the conclusions reached in the TAD they should be presented as part of ‘cash and cash equivalents’ both in the statement of financial position and in the statement of cash flows because they fall under the definition of cash in IAS 7. If an entity was assessing a potential cash equivalent (e.g. money market fund) that had the same restriction as discussed in the TAD, it might be argued that the classification of that instrument as a cash equivalent would not be consistent with the description in paragraph 7 of lAS 7. This is because paragraph 7 states that ‘cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes’. As a result, two very similar assets might be presented differently, although the attached restrictions might be of the same nature. We believe that the guidance in assessing the attached restrictions and their impact to the presentation of the assets in the financial statements should be consistent regardless of whether it relates to cash or cash equivalents. We would recommend that this potential inconsistency is considered in the lAS 7 comprehensive review project that the IASB is considering to undertake and that we prioritized as one of the projects to be added to the IASB work plan for 2022 -2026 in our comment letter to the IASB’s Third Agenda Consultation.
KPMG commented that the fact pattern in the agenda decision is “not representative of the diversity and complexity of fact patterns commonly seen in practice” and provided an example of an economically similar arrangement that might be accounted for differently:
- The fact pattern is identical to that described in the TAD except that the entity decides to deposit the amount into a 7-day deposit account (that is, were the entity to request any amount from the deposit, it would receive that amount after 7 days). Following the logic in the TAD, since the amount is not accessible on demand, it is not a demand deposit and is therefore not ‘cash’. The deposit would be subject to the ‘purpose test’ under IAS 7.7 and arguably would not be classified as a ‘cash equivalent’ either given the purpose test would not be met.
On the other hand, Deloitte expressed no objection to the agenda decision, suggesting only that a small change be made to its title, and Ernst & Young (in common with most other accounting firms) didn’t comment on it at all. Personally though, I think the other two firms have the best of the argument. Put in non-technical terms, suppose you had no idea what an orange was, but were presented with an item described as an “orange equivalent.” It would seem like an abuse of logic and language if this orange equivalent differed in key respects from the actual, undefined orange (as it would, as the cliché goes, if it were in fact an apple). How can we expect practitioners to make a reasonable stab at applying the standards in a substantial, principle-based fashion, when even the simplest matter (cash!) is as it stands infected by technicalities…?
The opinions expressed are solely those of the author