Expand
Resize
Add to favorites
While the definition of cash is generally understood, what constitutes a cash equivalent is not as straightforward. ASC 230 defines cash equivalents.

ASC 230-10-20 Glossary

Cash Equivalents: Cash equivalents are short-term, highly liquid investments that have both of the following characteristics:
  1. Readily convertible to known amounts of cash
  2. So near their maturity that they present insignificant risk of changes in value because of changes in interest rates.
Generally, only investments with original maturities of three months or less qualify under that definition. Original maturity means original maturity to the entity holding the investment. For example, both a three-month U.S. Treasury bill and a three-year U.S. Treasury note purchased three months from maturity qualify as cash equivalents. However, a Treasury note purchased three years ago does not become a cash equivalent when its remaining maturity is three months. Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an entity with banking operations).


The definition presumes that all cash equivalents have two attributes: they must be (1) short-term and (2) highly liquid. The definition then provides two characteristics that elaborate on the required attributes. In practice, reporting entities sometimes place undue focus on the maturity characteristic (short-term), while overlooking the readily convertible characteristic (highly liquid). While the FASB’s definition seems to focus more on the maturity characteristic, this does not diminish the requirement for a cash equivalent to be readily convertible to known amounts of cash. The definition of "readily convertible to cash" is included in the FASB Codification Master Glossary. To be considered "readily convertible to cash," an instrument must have both interchangeable units and quoted prices that are available in an active market. The active market must be able to handle a reporting entity's conversion of an instrument to cash quickly and without significantly affecting the quoted price.
Both characteristics included in the definition of cash equivalents must be met for an investment to be considered a cash equivalent. Accordingly, an investment with a maturity of less than three months that is not readily convertible to known amounts of cash is not a cash equivalent. Similarly, an investment that is readily convertible into a known amount of cash, but that has a maturity greater than three months, is also not a cash equivalent.
In its deliberations of ASU 2016-18, the EITF considered whether restricted cash could be a cash equivalent. Although they did not conclude, the Basis for Conclusions provides a helpful way to think about the interaction between restricted cash and the definition of cash equivalents.

Excerpt from BC9 in ASU 2016-18



… only those financial instruments that first meet the definition of cash or cash equivalents before considering the restrictions that exist in a separate provision outside those financial instruments should be included in the … total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents on the statement of cash flows.

For an example of how slight degradations to liquidity can impact the ability to classify an investment as a cash equivalent, see FSP 6.5.2.2 regarding an SEC rule that impacts the classification of certain money market funds as cash equivalents.
Expand

Welcome to Viewpoint, the new platform that replaces Inform. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory.

Your session has expired

Please use the button below to sign in again.
If this problem persists please contact support.

signin option menu option suggested option contentmouse option displaycontent option contentpage option relatedlink option prevandafter option trending option searchicon option search option feedback option end slide