What counts as cash and cash equivalents
Which balances belong in a client's cash and cash equivalents under IAS 7, how to test deposits and petty cash, and how the cash flow must reconcile.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
"Cash" looks like the one figure in a set of statements nobody can argue about. Then the preparer finds a fixed deposit, a money market account, a call account, the petty cash tin, a credit card with a balance in the client's favour and an overdraft. Which of these count as cash and cash equivalents decides the opening and closing figures of the cash flow statement, and an error there runs through every line of it.
Cash, and the test for cash equivalents
IAS 7 states that cash comprises cash on hand and demand deposits. It defines cash equivalents as short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.
Read the definition as a set of tests, all of which must be met:
- Short-term. The investment matures soon after it is acquired.
- Highly liquid. It can be turned into cash quickly.
- Readily convertible to a known amount. The client knows what it will receive.
- Insignificant risk of changes in value. Market movements cannot materially change it.
Listed shares fail the last two tests however easily they can be sold. A deposit the client can withdraw whenever it likes, without losing anything, passes them all.
Which side of the line: common balances
| Balance | Usual answer |
|---|---|
| Current account in credit | Cash: a demand deposit |
| Notes and coins on hand | Cash |
| Petty cash | Presented within cash and cash equivalents |
| Call account withdrawable on demand | Usually cash, as a demand deposit |
| Fixed deposit | Depends on its term and any penalty for breaking it; test it |
| Money market fund units | Test against the definition, especially the value risk |
| Listed shares | Not a cash equivalent |
| Bank overdraft | A judgement: check IAS 7 and how the client uses the facility |
On petty cash, Investopedia notes that petty cash is not a cash equivalent but is listed within "Cash and cash equivalents" on the balance sheet. It is simply cash on hand, however small.
For a fixed deposit, the length of the term and the conditions for breaking it decide the answer. A deposit locked away for a long term, with a heavy penalty for early withdrawal, is an investment, not a cash equivalent. Avoid the habit of treating every deposit as cash just because it is held at a bank.
Disclosing the components and reconciling
IAS 7 requires an entity to disclose the components of cash and cash equivalents and to present a reconciliation of the amounts in its statement of cash flows with the equivalent items reported in the statement of financial position.
In a simple set, the closing cash in the cash flow statement equals the cash line on the balance sheet, and the note lists the current account, call account and petty cash. Where the two differ, for example because an overdraft is netted in the cash flow statement but shown as a liability on the balance sheet, the reconciliation explains the gap. Once the classification is settled, apply it consistently from year to year, and explain any change.
How individual cash flows are classified is a separate question, covered in classifying cash flows.
Starting from proven bank balances
The cash note is only as reliable as the bank balances behind it. Achekam lets staff import bank statements as PDF, CSV, Excel, OFX, QIF, MT940 or CAMT.053 files, and checks that the opening balance plus the movements equals the closing balance. Scanned or photographed statements are read by text-recognition software on Achekam's own server, which is on by default, and checked against the running balance. A person accepts each suggested bank match.
That check matters here because it proves the year-end balance from the bank's own record rather than from the client's ledger. Where the ledger and the statement disagree, the difference must be explained before the cash figure is used; see bank reconciliations with every item explained.
When the derived cash flow figure is wrong
In Achekam's Financials Studio, the current-year column of the cash flow statement is worked out from the change in balances. Staff can type their own figure for any line, and that figure then takes priority. Comparatives can come from a person's figures, last year's issued statements or a prior-year set a person reviews.
This matters when a balance moves across the cash equivalents line. If a fixed deposit was reclassified into or out of cash equivalents, a figure derived from balance movements may present the change as a cash flow when no cash moved. Check the derived lines against the reconciliation, type over any line that is wrong, and keep the working. The comparatives side is covered in comparatives and the cash flow column.
Before signing off the cash note
- Every bank account open at year end is listed, including dormant and foreign currency accounts.
- Each balance agrees to a bank statement whose opening and closing balances add up.
- Every deposit and investment has been tested against the IAS 7 definition, with the reasoning on file.
- Petty cash has been counted or confirmed by someone independent of the person who holds it.
- The closing figure in the cash flow statement reconciles to the statement of financial position.
The IFRS Foundation's summary of IAS 7 explains how an entity presents the changes in its cash and cash equivalents during the period.
The line between cash and investment is drawn once, carefully, and then held steady. A client whose definition of cash moves each year will have a cash flow statement that nobody can compare with the last one.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
