6.2: Cash and Cash Equivalents

Recognition, Measurement, and Disclosure

Cash is the most liquid of the financial assets and is the standard medium of exchange for most business transactions.

Cash is usually classified as a current asset and includes unrestricted:

• Coins and currency, including petty cash funds
• Bank accounts funds and deposits
• Negotiable instruments such as money orders, certified cheques, cashiers' cheques, personal cheques, bank drafts, and money market funds with chequing privileges.

Cash can be classified as a long-term asset if they are designated for specific purposes such as a plant expansion project, or a long-term debt retirement, or as collateral.

Petty cash funds are classified as cash because these funds are used to meet current operating expenses and to pay current liabilities as they come due. Even though petty cash has been set aside for a particular purpose, its balance is not material, so it is included in the cash balance in the financial statements.

Excluded from cash are:

• Post-dated cheques from customers and IOUs (informal letters of a promise to pay a debt), which are classified as receivables
• Travel advances granted to employees, which are classified as either receivables or prepaid expenses
• Postage stamps on hand, which are classified as either office supplies (asset) or prepaid expenses (asset)

Restricted Cash and Compensating Balances

Restricted cash and compensating balances are reported separately from regular cash if the amount is material. Any legally restricted cash balances are to be separately disclosed and reported as either a current asset or a long-term asset, depending on the length of time the cash is restricted and whether the restricted cash offsets a current or a long-term liability. In practice, many companies do not segregate restricted cash but disclose the restrictions through note disclosures.

A compensating balance is a minimum cash balance in a company's chequing or savings account as support for a loan borrowed from a bank (or other lending institution). By requiring a compensating balance, the bank can use the restricted funds that must remain on deposit to invest elsewhere resulting in a better rate of return to the bank than the stated interest rate (also called a face rate) of the loan itself.

Foreign Currencies

Many companies have bank accounts in other countries, especially if they are doing a lot of business in those countries. A company's foreign currency is reported in Canadian dollars at the exchange rate at the date of the balance sheet.

For example, if a company had cash holdings of US $85,000 during the year at a time when the exchange rate was US $1.00 = Cdn $1.05, at the end of the year when the exchange rate had changed to US $1.00 = Cdn $1.11, the US cash balance would be reported on the balance sheet in Canadian funds as $94,350 (). Since the original transaction would have been recorded at Cdn $1.05, the adjusting entry would be for the difference in exchange rates since that time, or $5,100 ():

Usually, this cash is included in current assets. However, if the cash flow out of the country is restricted, the cash is treated in the accounts as restricted and reported separately.

Bank Overdrafts

Bank overdrafts (a negative bank balance) can be netted and reported with cash on the balance sheet if the overdraft is repayable on demand and there are other positive bank balances in the same bank for which the bank has legal right of access to settle the overdraft. Otherwise, bank overdrafts are to be reported separately as a current liability.

Cash Equivalents

Cash equivalents are short-term, highly liquid assets that can readily be converted into known amounts of cash and with little risk of price fluctuations. An example of a short-term cash equivalent asset would be one that matures in three months or less from the acquisition date. They may be considered as "near-cash," but are not treated as cash because they can include a penalty to convert back to cash before they mature. Examples are treasury bills (T-bills), money market funds, short-term notes receivable, and guaranteed investment certificates (GICs). For companies using ASPE, equities investments are usually not reported as cash equivalents. For IFRS, preferred shares that are acquired within three months of their specified redemption date can be included as cash equivalents.

Disclosures of Cash and Cash Equivalents

Cash equivalents can be reported at their fair value, together with cash on the balance sheet. Fair value will be their cost at acquisition plus accrued interest to the date of the balance sheet.

Below is a partial balance sheet from Orange Inc. that shows cash and cash equivalents as at December 31, 2020 along with the corresponding notes:

CONSOLIDATED BALANCE SHEETS
(in millions)
		December 31			December 31
		2020			2019
ASSETS:
Current assets:
Cash and cash equivalents		$	18,050		$	12,652
Short-term marketable securities			36,800			27,000

Financial Instruments

Cash Equivalents and Marketable Securities

All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents and are combined and reported with Cash. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the designations at each balance sheet date. For example, the Company classifies its marketable debt securities as either short term or long term based on each instrument's underlying contractual maturity date. If they have maturities of 12 months or less, they are classified as short term. Marketable debt securities with maturities greater than 12 months are classified as long term. The Company classifies its marketable equity securities, including mutual funds, as either short term or long term based on the nature of each security and its availability for use in current operations. The Company's marketable debt and equity securities are carried at fair value, with the unrealized gains and losses, reported either as net income or, net of taxes, as a component of shareholders' equity (IFRS 9). The cost of securities sold is based on the specific identification model. This will be discussed in more detail in Chapter 8, Investments.

Effective cash management includes strong internal controls and a strategy to invest any excess cash into short-term instruments that will provide a reasonable return in interest income but still be quickly convertible back into cash, if required.

Summary of Cash, Cash Equivalents, and Other Negotiable Instruments
Asset Classification	Description and Examples
Cash (current asset)	Unrestricted: coins, currency, foreign currencies, petty cash, bank funds, money orders, cheques, and bank drafts
Cash equivalent (current asset)	Short-term commercial paper, maturing three months or less at acquisition, such as T-bills, money market funds, short-term notes receivable, GICs
Cash (long-term asset)	Cash funding set aside for plant expansion, or long-term debt retirement, or collateral
Cash (current or long-term asset)	Separate reporting for legally restricted cash and compensating bank balances
Receivables (current or long-term asset)	Post-dated cheques, IOUs, travel advances
Office supplies inventory (current asset)	Postage on hand
Bank indebtedness (current liability)	Bank overdraft accounts not offset by same bank positive balances