Financial Accounting: Components of Cash

Cash is often used as a synonym for money. However, is it really the same?

As defined by IFRS 9, “cash refers to cash on hand and demand deposits with banks or other financial institutions.” In addition, Cash Equivalents are defined as “short-term, highly liquid investments that are readily convertible to known amounts of cash which are subject to an insignificant risk of changes in value.” Only highly liquid investments that are acquired three months before maturity can qualify as cash equivalents.

Cash and Cash Equivalents are the first examples of financial assets provided in IAS 32. As such, they are to be measured at Fair Value. When the company has held cash in the form of currency and coins, the fair value is equal to the face value of the cash. If a company receives cash in foreign currency, its fair value to the current exchange rate.

What are examples of Cash and Cash equivalents?

1. Currency, Checks, Demand Deposits, etc. are generally regarded as cash, as long as it is unrestricted. “Unrestricted” means that cash can be used for any purpose and not set aside for a specific use. If they are set a side for a specific purpose, they can either be classified as current or non-current assets separate from cash.

For example, a cash that is set aside specifically for the payment of a future purchase of equipment shall be classified as non-current assets under “Other Assets.” A cash that is set aside for the payment of a payable due 3 months from now is also classified as other current assets. However, for a cash that is deposited under payroll account, it will still be classified as cash, because it’s simply a budget for payroll, which is regularly incurred.

2. Petty cash is a cash system that is commonly implemented as payment for small, regular expenses which are not practical to pay through checks. Although it is regarded as cash, there are non-cash items that need to be reported and excluded from the petty cash fund, such as:

                a. Advances/IOUs as Receivables

                b. Unreplenished expenses as Expenses

                c. Post-dated checks as receivables

                d. Unused postage stamps

3. Foreign currencies, converted to Philippine Peso are generally reported as cash; however, they should be presented separately if it is subject to any foreign exchange restriction. On the other hand, deposits to foreign country are also presented cash, but shall be presented as noncurrent asset if it’s subject to \

foreign exchange restriction and details shall be disclosed in the financial statements.

4. Short-term papers (money market placement, and certificates of deposit) will only be reported as cash equivalents if it has a maturity of three months or less from the date of acquisition.

Issues in Cash

1. Compensating Balance refers to the amount that must be maintained in a bank account. Such amount will be used by the bank to loan out to other borrowers. If compensating balance restricts withdrawal of cash, such amount will not be presented as cash and cash equivalents.
2. Overdrafts are negative amounts in bank balance due to excess disbursements over the cash balance. They are excluded from cash and cannot be offset, but if the company has multiple accounts under their name for the same bank, offset is allowed.