Demand deposits and Cash and cash equivalents

Demand deposits are not defined in IFRS. However, in order to qualify as cash, the related balance needs to have the same liquidity as cash itself, and so funds on ‘demand deposit’ need to be capable of being withdrawn at any time without penalty.

In general, deposits which can be withdrawn without penalty within 24 hours, or one working day, are regarded as being demand deposits. These include amounts deposited at financial institutions (such as funds in a bank current account), and may extend to cover deposits at non-financial institutions such as legal advisers, if funds are held for client in separate and designated accounts that can be called upon by the client at any time.

If a deposit does not qualify to be regarded as cash, it may qualify to be classified as a cash equivalent.

Questions arise about whether investments that can be withdrawn on demand could qualify to be regarded as cash equivalents.

This is possible, but only in very limited circumstances. This is because, in addition to the existence of the demand feature, all of the other requirements of IAS 7 need to be met.

An interest bearing deposit at a financial institution might result in the amount of cash that would be received being known, and there might be an insignificant risk of changes in value (in particular in the current low interest rate environment), even if there is an early withdrawal penalty.

However, it is also necessary for it to be demonstrated that the investment is being held for the purpose of meeting short-term cash commitments rather than for investment or other purposes (IAS 7.7). It may be difficult to reconcile this last requirement to the characteristics of the investment, particularly as its maturity (excluding the demand feature) increases.

Demand deposits and Cash and cash equivalents Demand deposits and Cash and cash equivalents Demand deposits and Cash and cash equivalents

Leave a Reply

Your email address will not be published. Required fields are marked *