Cash equivalents: test a deposit when you acquire it
At 31 December 2026, two deposits both mature on 1 March 2027. One was acquired on 1 December and the other on 1 September. They have the same time left, but they need not both be cash equivalents. Under UK-adopted IAS 7, the usual short-maturity assessment starts at acquisition, alongside purpose, convertibility and value risk. In the hypothetical example below, only the December deposit qualifies. The cash flow statement's closing cash total therefore differs from a total of all bank balances and deposits.
Short term is only part of the definition
IAS 7 paragraph 6 defines cash as cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value.
Paragraph 7 adds purpose. Cash equivalents are held to meet short-term cash commitments rather than for investment or other purposes. An investment normally qualifies only with a short maturity, for example three months or less from acquisition. Three months is an example within that assessment, not a substitute for the other conditions.
A current financial asset is not automatically a cash equivalent. Equity investments are generally excluded, with a limited exception where they are, in substance, cash equivalents. This is the UK-adopted full IFRS perimeter for a cash flow statement, not a deposit-protection assessment or a general measure of available liquidity.
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Two deposits and two overdrafts
Assume demand bank balances are £10,000. A £6,000 deposit acquired on 1 December 2026 matures on 1 March 2027, is held to meet short-term commitments, converts readily into a known amount and carries insignificant value-change risk. It qualifies on the stipulated facts.
A separate £4,000 deposit acquired on 1 September 2026 also matures on 1 March 2027. It has no earlier demand right and began with a six-month term. Having only two months left at year end does not turn this deposit into a cash equivalent.
The business also has a £2,000 demand overdraft integral to daily cash management, with the balance frequently moving between positive and overdrawn. A separate £5,000 overdraft finances the business outside that arrangement. There is no accrued interest or foreign exchange in the example.
| Item | Included in cash and cash equivalents |
|---|---|
| Demand bank balances | £10,000 |
| Three-month deposit acquired in December | £6,000 |
| Six-month deposit acquired in September | Excluded on these facts |
| Integral demand overdraft | (£2,000) |
| Separate financing overdraft | Excluded |
| Cash flow statement total | £14,000 |
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Demand repayment alone does not settle the overdraft
Paragraph 8 generally treats bank borrowings as financing activities. It permits a bank overdraft to be a component of cash and cash equivalents when it is repayable on demand and forms an integral part of cash management. Frequent fluctuations between positive and overdrawn balances are a characteristic of that arrangement.
Both conditions matter. A facility being callable does not, by itself, show that it is part of day-to-day cash management. In this example, the £2,000 reduces the cash total, while the separate £5,000 remains financing. The conclusion follows the assumed arrangement, rather than the account's overdraft label.
The £14,000 cash-flow total is not permission to offset assets and liabilities in the statement of financial position. Keep the bridge to the gross bank, deposit and borrowing balances so the presentation can be assessed separately.
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Use the same boundary for movements and disclosures
Paragraph 9 excludes movements between qualifying cash components from cash flows because they are part of cash management. An internal transfer into a qualifying cash equivalent is therefore different from acquiring an investment outside that boundary. Decide what belongs in cash before classifying the movements.
Paragraphs 45 to 49 require component and policy disclosures and a reconciliation to the equivalent statement-of-financial-position items. Significant cash and cash-equivalent balances unavailable for use by the group require disclosure with management commentary. A restriction needs its own assessment; it does not justify a blanket rule that every restricted balance is excluded.
For each deposit and overdraft, record acquisition date, maturity, demand rights, purpose, conversion amount and value risk. Approve the conclusion, then reconcile the included items at both ends of the cash flow statement. Start with investments nearing maturity: their short remaining term can hide a longer original term.
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