Tip #3 to prepare your cash flow statement – Classification of bank borrowings and investments as cash and cash equivalents

Tip #3 to prepare your cash flow statement – Classification of bank borrowings and investments as cash and cash equivalents

Entities are sometimes unsure which items are “cash and cash equivalents” in the cash flow statement. An item is part of “cash and cash equivalents” if it is held to meet short-term commitments, rather than for investment or other purposes.

Bank borrowings, that are generally considered to be financing activities, are not cash equivalents. The exception is if the bank overdraft is repayable on demand and forms an integral part of the entity’s cash management activities. This will typically be evident where the bank balance often fluctuates between positive and negative.

Management’s intention for having or holding an investment plays an important consideration in determining whether the investment qualifies as a cash equivalent. An investment is a cash equivalent if it is:

• Short term and highly liquid – GRAP 2 explains that an investment should have a maturity date of three months or less from the acquisition date. This does, however, not automatically excludes investments from being cash equivalents if they have a maturity date of more than three months.
• Readily convertible to know amounts of cash – for an investment to be a cash equivalent, it must be convertible into cash without an undue period of notice, and without the entity incurring significant penalties on withdrawal. The amount of cash to be received on withdrawal must be known to the entity when the investment is made.
• Insignificant risk of changes in values – this means that the investment is similar to cash and any changes in its value are insignificant.

The Secretariat of the ASB has issued a Frequently Asked Question that explains what items should be included in “cash and cash equivalents”. The FAQ can be accessed by following this link: https://www.asb.co.za/frequently-asked-quesions/.