Cash and cash equivalents: sometimes not so simple

In teaching about financial statements, some topics are known to be difficult. The item Cash and cash is getting some attention, apparently from the idea that this is a very simple topic. Nevertheless, even with this seemingly simple subject, various issues have arisen in practice which are not so simple on closer examination. This is partly due to the fact that the rules are also not aware of what liquid assets are.

cryptocurrencies

A current topic is the treatment of bitcoins and other cryptocurrencies. Is bitcoin money or a currency, and does it therefore fall under liquid assets? You can use bitcoins as a means of payment for some things, for example to buy your ransomware. Still, the prevailing view is that bitcoins are not treated as money in the accounts. The key point here is that unlike other money, bitcoins are not issued by a state central bank. Despite the fact that bitcoins are in practice seen as an innovative form of money, they are not treated as such in the financial statements. Professional discussions often conclude that these are intangible assets, which is why valuation at market value with price changes in the result is not possible.

Payment organizations within a group

Another nuance is the role of a bank in payment organizations within a group. Within some groups, all payments with the ‘outside world’ go through a specific group company. The other group companies have current balances with the payment company in question. They send payment requests to this payment company, which then executes them, and receipts from, for example, customers arrive at this payment company, which processes this in current account balances. It is clear that the transferred euros are money, but can such a current account balance be presented in the financial statements as if it were a bank account? Or can a bank account only be kept in an official bank? At that point, a common perception is that this is not necessary. As long as such an account is actually part of the payment system and the characteristics are also the same as in a bank account, such a credit can be presented as liquid assets.

third party funds

In some industries, funds are managed on behalf of third parties. This is seen, for example, in notaries and lawyers. Funds are temporarily stored on behalf of customers to continue to pay them when a (notarial) transaction is settled. This is referred to as ‘third party funds’ in the financial statements. The money is in a bank account with, for example, a notary, but the notary may in no way use this money for his own purposes. Is this money an asset to be on the balance sheet, or should an equally large debt to these ‘third parties’ be included against this money? The rules provide no further explanation in this regard. The practice is therefore diverse. Sometimes third-party funds are included under liquid assets with an equally large liability on the credit side. However, this obligation is sometimes presented as a deductible item within the item cash, or the existence and amount of the third party funds are only mentioned in the notes.

Blocked accounts

Bank balances with limited usability are often seen today in the new phenomenon ‘SPACs’, special purpose acquisition companies. These are listed companies that have already raised money from investors but have not yet decided which company they want to take over. Investors say, ‘I already have money here, look for a good investment object for this’. This invested money may therefore only be used to make purchases. This money is therefore in a ‘blocked account’. It is essentially a bank account, but the company can only use this money to pay for a takeover or to pay back to the shareholders if in the end no takeover candidate can be found. Something to compare with a g-account as usual for payment of (only) payroll taxes. Such blocked bank accounts are usually presented in cash. However, blocked accounts can sometimes have specific provisions that are so restrictive, such as external authorization to make payments, that the conclusion is that these are ‘other receivables’ rather than cash. This classification requires careful analysis.

Transfers around the balance sheet date

Transfers around the balance sheet date can also lead to discussions about liquid assets. In many countries, a bank transfer takes several days. What if a buyer on December 30 gives an irrevocable instruction to his bank to pay an invoice, but the amount is not credited to the seller’s account until January 2? If so, were there already or no cash on December 31, or was there still only one claim? In some countries, the current practice is to consider the invoice as paid by the buyer, ie liquid assets of the seller. But with strict application of IFRS, it seems to be in conflict with having control over this money, which is still on the way on 31 December.

Some of these issues relate only to classification. With some explanation, the nature of the position can still be clarified. But sometimes problems also affect valuation, balance sheet total and cash flow statement.

Author: Dr. Bart Kamp RA

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This article was published in cm: 2022, ep. 5.

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