There are a number of factors that will influence a treasurer’s decision-making process if he/she is in the enviable position of investing surplus cash. Is it secure? Is it liquid? What return will it earn? As importantly, how will it appear on the balance sheet and cash flow statement? The cash flow statement, often the first page in the accounts to which analysts turn, discloses information regarding cash generation and liquidity and is used as one of the key indicators of a company’s health.
The cash flow statement
The International Accounting Standards Board (IASB) establishes the standards for producing a cash flow statement. International Accounting Standard 7 (IAS 7) documents how the cash flow statement should be presented. As part of this standard, the reporting entity should disclose inflows and outflows of cash and cash equivalents. Cash equivalents are defined as short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value.
Money market funds provide a viable treasury management solution, combining the provision of capital security with liquidity. They are widely used by corporate treasurers, and therefore their treatment under IAS 7 is important to many treasurers. Auditors tend to assess each situation on individual merits, and there is no blanket statement of whether or not money market funds should be considered as cash equivalent. Recognising the importance of this issue, the Institutional Money Market Funds Association (IMMFA) prepared a paper to assist corporate treasurers in categorising money placed in a money market fund.
How should money market funds be categorised?
To determine the treatment of investment in an IMMFA money market fund, we must consider the constituent parts of the cash equivalents definition and how these apply to an IMMFA fund: