Time Deposits in IFRS


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Hello,

Which one of these is "cash equivalent" and which one isn't:
1- A time deposit with a maturity of 3 months, the company opened it for investment but the bank refused to open it for a longer maturity to avoid the high interest. It will be renewed automatically upon maturity.
2- A time deposit with a matrurity of 4 months, the company opened it for only four months as it is expected to be needed to cover a liability that will become due then. It also has the option of being renewed automatically.

Thanks in advance...
 
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Fidget

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Cash equivalents are usually entered into to meet short term debts rather than for investment, so that would suggest that the 4 month deposit better fits the bill than the 3 month deposit.

But, the rule under IFRS is cash equivalents need to mature within 3 months of being entered into. So that rules out the 4 month deposit.

That leaves us with the 3 month deposit which does qualify as a cash equivalent, despite being for investment purposes, because it has a maturity date of 3 months from acquisition date, and although automatically renewed, I presume the company can choose to take the money instead.
 
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Cash equivalents are usually entered into to meet short term debts rather than for investment, so that would suggest that the 4 month deposit better fits the bill than the 3 month deposit.

But, the rule under IFRS is cash equivalents need to mature within 3 months o
f being entered into. So that rules out the 4 month deposit.
Thanks. Actually, that's the point I'm inquiring about. I know it's a common practice to consider investments with 3 months or less as cash equivalent. But IAS7.7 mentions the 3 month limit in what seems to be an example "... an investment qualifies as a cash equivalent only when it has a short maturity of, say, three months. ."

But by definition, cash equivalent is what you mentioned first...
??!
 
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Fidget

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Remember though that cashflow statements have a section for investing activities, so IAS 7 is pointing out that if an investing activity matures within 3 months of being entered into, then it qualifies as a cash equivalent rather than an investing activity.
 
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Cash equivalents are intended for short term debts and investments are intended for medium to long term debts. So, every deposit for short term has to be categorized under cash equivalents and medium to short term deposits are to be categorized under Investment.

In case 2, maturity is longer than short term so it will not fit into cash equivalent.

In case 1, purpose of the debt "investment" and the option of "renew" makes it unfit for the cash equivalent as well. If you see any possibility that company may not extend the period and considering this assumption you qualify it for being cash equivalent, you can't role out the purpose of the investment.

Hope this will help!

Thanks
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