When is a borrowing Cash and Cash Equivalent - Some guidance* - IAS 7

IFRIC Update – June 2018

The IFRS Interpretations Committee has released an agenda decision~ that considers when short-term loans and credit facilities should be considered as part of cash and cash equivalents in accordance with paragraphs 7 – 9 of IAS 7 Statement of Cash Flows. More detail can be found in the agenda paper including the specific facts and circumstances that were submitted to the committee.

The Committee observed that:

1. Applying paragraph 8 of IAS 7, an entity generally considers bank borrowings to be financing activities.
2. An entity, however, includes a bank borrowing as a component of cash and cash equivalents only in the particular circumstances described in paragraph 8 of IAS 7—ie the banking arrangement is a bank overdraft that is repayable on demand, and forms an integral part of the entity’s cash management.
3. Cash management includes managing cash and cash equivalents for the purpose of meeting short-term cash commitments rather than for investment or other purposes (paragraphs 7 and 9 of IAS 7).
4. Assessing whether a banking arrangement is an integral part of an entity’s cash management is a matter of facts and circumstances.
5. If the balance of a banking arrangement does not often fluctuate from being negative to positive, then this indicates that the arrangement does not form an integral part of the entity’s cash management and, instead, represents a form of financing.

The staff had noted that “repayable on demand” means that the entity is required to repay any negative balance in the bank overdraft as soon as the lender requests such payment (emphasis added). In the fact pattern submitted the bank was required to provide 14 days notice of repayment, and this was not considered to meet the requirement of being repayable on demand.

*Any personal views expressed in this article are my own and do not represent the IASB Board or the IFRS Foundation.

~Agenda decisions that are not added to the standard-setting agenda indicate that the committee believes the Standards provide an answer, but there may be an opportunity to provide education or guidance on application of the Standard.