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Cash and cash equivalents
Cash
Transactions
As a rule, the accounting for cash is obvious and does not need illustrating.
Nevertheless, for the sake of completeness, some journal entries are shown here.
Capital invetment
| 1/1/X1 | 1.1.X1 | |||
| Cash |
1,000,000 |
||
| Paid-in Capital |
1,000,000 |
||
| 12/31/X1 | 31.12.X1 | |||
| Retained earnings |
10,000 |
||
| Cash |
10,000 |
||
Note, quarterly interest
| 1/1/X1 | 1.1.X1 | |||
| Cash |
1,000,000 |
||
| Note |
1,000,000 |
||
| 3/31/X1 | 31.3.X1
So accruing entries need not be illustrated, the payment was made and recognized the last day of the quarter. |
|||
| Interest |
18,750 |
||
| Cash |
18,750 |
||
| 12/31/X5 | 31.12.X5 | |||
| Note |
1,018,750 |
||
| Cash |
1,018,750 |
||
Loan, quarterly repayment
| 1/1/X1 | 1.1.X1 | |||
| Cash |
1,000,000 |
||
| Loan |
1,000,000 |
||
| 3/31/X1 | 31.3.X1
So accruing entries need not be illustrated, the payment was made and recognized the last day of the quarter. |
|||
| Interest |
18,245 |
||
| Loan |
41,881 |
||
| Cash |
60,126 |
||
While the accounting for goods and service sales is more complex, the cash side is usually straightforward.
The accounting for the sale and production of goods and services is covered in in detail here:
This page only provides a brief summary.
| 1/1/X1 | 1.1.X1 | |||
| Merchandise |
10,000 |
||
| Accounts payable |
10,000 |
||
| 1/2/X1 | 2.1.X1 | |||
| Cash on hand |
100 |
||
| Revenue (merchandise) |
100 |
||
The perpetual method is illustrated on the Inventory and cost of sales page.
| 1/2/X1 | 2.1.X1 | |||
| Cash in bank |
200 |
||
| Revenue (merchandise) |
200 |
||
| 1/2/X1 | 2.1.X1 | |||
| Cash in bank: Merchant account |
294 |
||
| Charge card processing expense |
6 |
||
| Revenue (merchandise) |
300 |
||
For some reason, the accounting for credit card fees led to an active discussion.
Even though the amounts involved are on the edge of materiality and the accounting treatment seems obvious, this discussion (link: proformative.com) went on for several years.
Note: it is not clear which EITF Zach was referring to as EITF 99-19 deals with net revenue in an agent/principal context, while EITF 92-5 and EITF 93-1 discuss deferred origination costs (not that it makes much difference as they have all been superseded by the ASC anyway).
Why? when it seems clear a fee charged to a merchant is for a service (payment processing), so should be treated as any other fee for any other service (expensed as incurred).
Perhaps it is because ASC 310-20-25-17 (edited, emphasis added) states: Credit card origination costs [the expense] shall be netted against the related credit card fee [the revenue], if any...
While this guidance applies to cardholders, not merchants, if applied by analogy to merchants, it would justify netting. Nevertheless, as the discussion suggests, netting is not common practice and justifying it by analogy would be a stretch.
Note: since we are on the topic, IFRS does not provide similar, explicit guidance for cardholders and some experts suggest this lack of guidance could lead to some differences (link / local link).
Also note: those that find this issue interesting could also read this paper (link / local link) where the TRG members discus the interaction between ASC 310 and ASC 606 when it comes to credit card fees.
| 1/2/X1 | 2.1.X1 | |||
| Cash at payment processor |
67.38 |
||
| Payment processing expense |
2.52 |
||
| Revenue (merchandise) |
69.90 |
||
Instead of going to the trouble of accepting payments directly, many online resellers, like this web site, prefer to use payment processors such as Stripe or PayPal. Other than requiring an additional account, the accounting procedure is comparable.
| 28/2/X1 | 2.28.X1 | |||
| Cash in bank |
6,738 |
||
| Cash at payment processor |
6,738 |
||
Products:
| 1/1/X1 | 1.1.X1 | |||
| Raw material |
10,000 |
||
| Accounts payable: ABC company - Invoice # 123456 |
10,000 |
||
| 1/2/X1 | 2.1.X1 | |||
| Work in process |
100 |
||
| Raw material |
100 |
||
| Work in process |
300 |
||
| Wages payable |
300 |
||
| 1/3/X1 | 3.1.X1 | |||
| Finished goods |
700 |
||
| Work in process |
700 |
||
The accounting for fixed and variable indirect costs is illustrated on the Inventory and cost of sales page.
| 1/4/X1 | 4.1.X1 | |||
| Accounts receivable: DEF company - Invoice # 23456 |
1,400 |
||
| Revenue |
1,400 |
||
| Cost of goods sold |
700 |
||
| Finished goods |
700 |
||
| 2/1/X1 | 1.2.X1 | |||
| Accounts payable: ABC company - Invoice # 123456 |
10,000 |
||
| Cash |
10,000 |
||
| Wages payable |
30,000 |
||
| Cash |
30,000 |
||
| 2/5/X1 | 5.2.X1 | |||
| Cash |
1,400 |
||
| Accounts receivable: DEF company - Invoice # 23456 |
1,400 |
||
Restricted cash
1/1/X1, XYZ sold 1000, 10 year, 4.5% bonds with a sinking fund. XYZ paid both the coupon and 21,036 fund contribution each quarter. The fund's custodian guaranteed repayment.
Neither IFRS nor US GAAP define restricted cash but, in addition to sinking funds, it may be associated with:
As discussed in ASU 2016-18, the EITF considered but rejected defining restricted cash.
Specifically, in BC8 (edited) it states: The Task Force considered, but rejected, classifying changes in restricted cash or restricted cash equivalents that result from transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents on the basis of either the nature of the restriction (that is, investing activities) or the purpose for the restriction. The Task Force believes that internal transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents do not represent a cash inflow or outflow of the entity because there is no cash receipt or cash payment with a source outside of the entity that affects the sum of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents...
In BC9 (edited, emphasis added) it continues... The Task Force considered defining restricted cash; however, it ultimately decided that the issue resulting in diversity in practice is the presentation of changes in restricted cash on the statement of cash flows. The Task Force's intent is not to change practice for what an entity reports as restricted cash or restricted cash equivalents.
Reading between the lines, what the EITF seems to be saying is: we would rather not define restricted cash because, to paraphrase Supreme Court Justice Potter Stewart, "You know it when you see it."
IFRS also eschews defining restricted cash, but fails to discuss its reasons.
Note: in addition to cash, cash equivalents or other securities may also be restricted.
While many of the below are considerably more common, ASC 210-10-45-4.a specifically focuses on "funds that are clearly to be used in the near future for the liquidation of long-term debts, payments to sinking funds, or for similar purposes," which is why this page illustrates a sinking fund first.
- Pensions
- Security deposits
- Customer pre-payments
- Compensating balances
- Mandatory deposits at central banks
- Letters of credit or standby LOCs
- Collateral
- Escrow
- Etc.
The only restriction specifically discussed in IFRS is (IAS 7.48 to 52): "cash equivalent balances held by a subsidiary that operates in a country where exchange controls or other legal restrictions apply when the balances are not available for general use by the parent or other subsidiaries." This issue is not addressed by US GAAP nor, as it is even less common than sinking funds, illustrated here.
Foreign exchange restrictions, controls, or other governmentally imposed uncertainties are addressed by ASC 810-10-15-10.a.1.iii, but this guidance applies to foreign subsidies, not just cash balances.
As a rule, bond buyers prefer a lump-sum principal repayment at the end of a bond's term. However, as the default risk associated with term bonds is greater than serial bonds, only the most highly rated public and private entities are generally able to issue term bonds.
One way less credit worthy organizations can do so is to insure them. However, the cost of insurance can be prohibitive.
Depending on the circumstances, a more cost effective option may be to, in effect, convert the term bond into a serial bond using sinking fund. With a sinking fund, the bond issuer makes periodic payments to a trustee in that the trustee retires the debt. Assuming the trustee also guarantees retirement, the effect is the same as insurance as it, in effect substituting trustee's credit standing for the issuer's.
In this illustration, the trustee's rating was AA while XYZ's only B. If XYZ had placed the bonds itself (assuming it could have), it would have had to offer a coupon in line with its credit standing. Assuming a AA rate of 4.5% and 3% spread, it would have had to offer a 7.5% coupon.
Thus, while the trustee did lock XYZ into a sub-market return, it was offset by the lower coupon.
A contribution of 21,036 implies a 3.5% annual return. At the time of the issue, the yield on AAA rated corporate debt implied an annual market rate of 4.2%. The difference compensated the trustee for the guarantee.
To determine the contribution, the trustee made this calculation:
21,036 = 1,000,000 ÷ (((1 + (1 + 3.5%)1÷4 - 1)10x4 - 1) ÷ ( (1 + 3.5%)1÷4 - 1))
In excel syntax (rounded): 21036=1000000/(((1+(1+3.5%)^(1/4)-1)^(10*4)-1)/((1+3.5%)^(1/4)-1))
or simplified 21036=1000000/(((1+(1+3.5%)^(1/4)-1)^40-1)/((1+3.5%)^(1/4)-1)).
Note: the calculation may also be made: 20988=1000000/(((1+3.5%/4)^(10*4)-1)/(3.5%/4)). However, as this fails to scale the annual rate to an interim rate accurately, it should only be used by those, like the authors of this page (link), afraid of good math.
In excel syntax (rounded): 3.5%=((1+RATE(40,-21036,0,1000000,0))^4)-1.
As the sinking fund allowed XYZ to, in effect, substitute the trustee's credit standing for its own, it was able to offer a 4.5% coupon instead of (at minimum) 7.5%. The difference between the total cash outlay associated with the bond plus sinking fund (1,291,449) and a 7.5% loan (1,417,590) was significant.
In Excel syntax (rounded): 1291449=(40*21036)+10*1000000*4.5%.
In Excel (rounded): 1417590=40*1000000/((1-(1/(1+((1+7.5%)^(1/4)-1))^(10*4)))/((1+7.5%)^(1/4)-1)).
Note: the trustee had the option of buying the bonds on the open market, in effect, retiring them earlier. However, it was obligated to hold any such bonds until maturity as XYZ's creditor.
Also note: for simplicity, the illustration assumes the bonds were placed at face value. See the liabilities page for illustrations of bond discounts / premiums.
Dr / Cr
| 1/1/X1 | 1.1.X1 | |||
| Cash |
1,000,000 |
||
| Bond |
1,000,000 |
||
| 3/31/X1 | 31.3.X1
So accruing entries need not be illustrated, the payment was made and recognized the last day of the quarter. |
|||
| Bond sinking fund (restricted cash) |
21,036 |
||
| Cash |
21,036 |
||
| Interest expense |
11,250 |
||
| Cash |
11,250 |
||
While both address the issue, IFRS and US GAAP only provide cursory guidance. This is unfortunate because the lack of specificity leads to differences of opinion as to what qualifies as "restricted cash."
For example, neither explicitly define "restricted cash."
This does not, however, mean they fail to address it at all.
For example, the IFRS definition of current assets (sub-paragraph d) suggests that a restriction turns cash, normally current, into a non-current asset. This in turn implies restricted cash must be evaluated as a separate, stand-alone accounting item regardless of whether it is specifically defined as such.
Similarly, IAS 7.7 specifies that for an investment to be reported as a cash equivalent, it must have a maturity of three months or less. As the economic substance of a restriction is comparable to a maturity, if applied to cash by analogy, this guidance suggests that any cash subject to a restriction exceeding three months cannot be classified as regular cash.
Also, in its Tentative Agenda Decision on Demand Deposits with Restrictions on Use arising from a Contract with a Third Party, the IFRIC addressed this issue. In the fact pattern described, the entity "holds a demand deposit whose terms and conditions do not prevent the entity from accessing the amounts held..." Based on this fact pattern, the IFRIC concluded "the entity presents the demand deposit as cash and cash equivalents." Thus, by implication, if entity held a demand deposit whose terms and conditions did prevent it from accessing the amounts held, it would not classify it as cash or cash equivalents. While, obviously, the Tentative Agenda Decision does not specify what it would be classified as, restricted cash seems the logical choice.
US GAAP also avoids explicitly defining restricted cash. However, ASC 210-10-45-4.a does require non-current restricted cash to be reported separately. While the guidance does not explicitly state it must be classified as "restricted cash," doing so makes sense.
Specifically, ASC 210-10-45-4.a requires restricted cash to be segregated from regular cash if the restriction is for over a year.
While the guidance also suggests restricted cash need not be segregated at the bank account level, this is common (and good) practice.
In ASU 2016-18.BC9 (edited) the EITF also states: ... The Task Force considered defining restricted cash; however, it ultimately decided that the issue resulting in diversity in practice is the presentation of changes in restricted cash on the statement of cash flows. The Task Force's intent is not to change practice for what an entity reports as restricted cash or restricted cash equivalents...
What this (somewhat cryptic) explanation seems to be suggesting: restricted cash is too broad to define but, to paraphrase Supreme Court Justice Potter Stewart, "You know it when you see it."
More importantly, at least for entities registered with it, the US SEC sees it this way (edited, emphasis added):
Separate disclosure shall be made of the cash and cash items which are restricted as to withdrawal or usage. The provisions of any restrictions shall be described in a note to the financial statements. Restrictions may include legally restricted deposits held as compensating balances against short-term borrowing arrangements, contracts entered into with others, or company statements of intention with regard to particular deposits; however, time deposits and short-term certificates of deposit are not generally included in legally restricted deposits... (CFR § 210.5-02: link).
Nevertheless, this lack of specificity does not mean restricted cash can be ignored. Instead, it needs to be reported separately, especially if the restriction exceeds one year.
IAS 1.66.d specifies that if cash or a cash equivalent is "restricted from being exchanged or used to settle a liability for at least twelve months," it cannot be classified as current. Similarly, in IASB XBRL, RestrictedCashAndCashEquivalents is a separate item with reference is IAS 1.55 (rather than 1.66.d). This reference implies that material (link) restricted cash needs to be recognized and reported separately from unrestricted cash even in an order of liquidity balance sheet.
In US GAAP, ASC 210-10-45-4.a specifies that restricted cash is to be segregated from regular cash if the restriction is for over a year.
Note: while the paragraph also suggests restricted cash need not be segregated at the bank account level, keeping this cash in separate bank, or similar, accounts is good practice.
Similarly, ASC 230-10-50-8 suggests restricted cash and cash equivalents need to be disaggregated on the statement of financial position if material.
Note: if various reasons for restrictions exist, restricted cash would be further disaggregated by type.
To emphasize the point, in FASB XBRL, RestrictedCash and RestrictedCashEquivalents have the same prominence as Cash and CashEquivalentsAtCarryingValue.
In addition to the balance sheet, additional footnote disclosure is also required. Specifically, ASC 230-10-50-7 (edited) states: An entity shall disclose information about the nature of restrictions on its cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents...
While IFRS does not define restricted assets, the Glossary does define current assets (edited, emphasis added): ...(d) the asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.
Similarly, as outlined in 210-10-45-4.a, noncurrent restricted cash and claims cannot be included in current assets. To reinforce this guidance, the FASB XBRL includes RestrictedCashCurrent and RestrictedCashEquivalentsCurrent, and RestrictedCashNoncurrent and RestrictedCashEquivalentsNoncurrent tags. The items also point to ASC 230-10-50-8, suggesting each is to be presented as separate balance sheet line item if material.
For example, the authors of some web pages do not draw a distinguish between cash restricted due to legal or contractual constraints and simple management intent (link, link, link) classifying, for example, cash reserved for capex as restricted. Fortunately, the authors other pages (link, link, link) are more enlightened.
As far as ifrs-gaap.com is concerned, to be reported on the balance sheet as restricted, the cash must be restricted due to a legal or contractual obligation. Any cash "restricted" simply on the basis of management intent (i.e. cash held for expected future major repairs, capex, M&A, etc.) may be (if at all) disclosed in the footnotes only.
In CFR § 210.5-02 (link) the SEC specifies (emphasis added): Separate disclosure shall be made of the cash and cash items which are restricted as to withdrawal or usage. The provisions of any restrictions shall be described in a note to the financial statements. Restrictions may include legally restricted deposits held as compensating balances against short-term borrowing arrangements, contracts entered into with others, or company statements of intention with regard to particular deposits; however, time deposits and short-term certificates of deposit are not generally included in legally restricted deposits. In cases where compensating balance arrangements exist but are not agreements which legally restrict the use of cash amounts shown on the balance sheet, describe in the notes to the financial statements these arrangements and the amount involved, if determinable, for the most recent audited balance sheet required and for any subsequent unaudited balance sheet required in the notes to the financial statements. Compensating balances that are maintained under an agreement to assure future credit availability shall be disclosed in the notes to the financial statements along with the amount and terms of such agreement.
As the SEC makes fairly clear, legal or contractual restrictions should be presented on the balance sheet while restrictions based solely on company intent should only be discussed in the footnotes.
If good enough for the SEC, good enough for us.
This also applies to cash equivalents and securities.
Since the restriction exceeded one year, XYZ reported the sinking fund (restricted cash) in non-current assets.
Note: if an order of liquidity balance sheet is prepared for IFRS purposes, the sinking fund would be reported in other financial assets (OtherFinancialAssets) not cash and cash equivalents (CashAndCashEquivalents).
In excel syntax (rounded): 21036 = 1000000/(((1+(1+3.5%)^(1/4) - 1)^40-1)/((1+3.5%)^(1/4) - 1)).
In excel syntax: 11250 = 1000000 * 4.5% / 4
| 6/30/X1 | 30.6.X1 | |||
| Bond sinking fund |
21,218 |
||
| Cash |
21,036 |
||
| Interest income |
182 |
||
| Interest expense |
11,250 |
||
| Cash |
11,250 |
||
|
P |
Fund contribution |
Accumulated contribution |
Interest |
Interest income |
Interest payment |
|
A |
B |
C=B+C(C+1)+E |
D=(1+3.5%)1÷4-1 |
E=CxD |
F |
|
1 |
21,036 |
21,036 |
0.86% |
0 |
11,250 |
|
2 |
21,036 |
42,254 |
0.86% |
182 |
11,250 |
|
3 |
21,036 |
63,655 |
0.86% |
365 |
11,250 |
|
- |
- |
- |
- |
- |
- |
|
39 |
21,036 |
970,580 |
0.86% |
8,131 |
11,250 |
|
40 |
21,036 |
1,000,000 |
0.86% |
8,383 |
11,250 |
|
|
841,449 |
|
|
|
450,000 |
1,291,449 = 841,449 + 450,000
1/1/X1, XYZ leased office space for an indefinite term and collected a 100,000 security deposit. It kept the funds in separate account. 12/31/X10, the lessee vacated the premises and XYZ returned the deposit.
Although ASC 210-10-45-4.a suggests restricted cash need not be segregated at the bank account level, doing so is good practice. IFRS does not specifically discuss this issue.
Neither IFRS nor US GAAP define restricted cash but, in addition to security deposits, it may be associated with:
As discussed in ASU 2016-18, the EITF considered but rejected defining restricted cash.
Specifically, in BC8 (edited) it states: The Task Force considered, but rejected, classifying changes in restricted cash or restricted cash equivalents that result from transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents on the basis of either the nature of the restriction (that is, investing activities) or the purpose for the restriction. The Task Force believes that internal transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents do not represent a cash inflow or outflow of the entity because there is no cash receipt or cash payment with a source outside of the entity that affects the sum of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents...
In BC9 (edited, emphasis added) it continues... The Task Force considered defining restricted cash; however, it ultimately decided that the issue resulting in diversity in practice is the presentation of changes in restricted cash on the statement of cash flows. The Task Force's intent is not to change practice for what an entity reports as restricted cash or restricted cash equivalents.
Reading between the lines, what the EITF seems to be saying is: we would rather not define restricted cash because, to paraphrase Supreme Court Justice Potter Stewart, "You know it when you see it."
IFRS also eschews defining restricted cash, but fails to discuss its reasons.
Note: in addition to cash, cash equivalents or other securities may also be restricted.
Unlike a sinking fund (previous example), a security deposit is recognized point of time. Also unlike a sinking fund, it is not discounted.
Specifically, ASC 835-30-15-3.c exempts "amounts intended to provide security for one party to an agreement (for example, security deposits, retainages on contracts)" from ASC 835-30-55-2 to 55-3 (which prescribe the interest method) so the restricted cash associated with these items is recognized at nominal value.
While IFRS does not provide similar, blanket guidance on interest imputation, IFRS 15.62.c does specify that deposits whose purpose is to provide protection to a service provider, in this case a lessor, need not be discounted.
Note: as ASC 606 and IFRS 15 are converged standards, the same result would be achieved by applying ASC 606-10-32-17.c instead of ASC 835-30-15-3.c.
- Pensions
- Sinking funds
- Customer pre-payments
- Compensating balances
- Mandatory deposits at central banks
- Letters of credit or standby LOCs
- Collateral
- Escrow
- Etc.
The only restriction specifically discussed in IFRS is (IAS 7.48 to 52): "cash equivalent balances held by a subsidiary that operates in a country where exchange controls or other legal restrictions apply when the balances are not available for general use by the parent or other subsidiaries." This issue is not addressed by US GAAP nor, as it is even less common than sinking funds, illustrated here.
Foreign exchange restrictions, controls, or other governmentally imposed uncertainties are addressed by ASC 810-10-15-10.a.1.iii, but this guidance applies to foreign subsidies, not just cash balances.
Dr / Cr
| 1/1/X1 | 1.1.X1 | |||
|
Cash (restricted) |
100,000 |
||
|
Returnable security deposit |
100,000 |
||
| 12/31/X10 | 31.12.X10 | |||
|
Returnable security deposit |
100,000 |
||
|
Cash (restricted) |
100,000 |
||
Same facts except XYZ kept the funds in a 3.5% CD account.
| 1/1/X1 | 1.1.X1 | |||
|
Cash: CD (restricted) |
100,000 |
||
|
Returnable security deposit |
100,000 |
||
| 3/31/X1 | 31.3.X1 | |||
|
Cash: CD (restricted) |
864 |
||
|
Returnable security deposit |
864 |
||
|
P |
Opening |
Interest rate |
Interest |
Closing |
|
A |
B=E(E+1) |
C=(1+3.5%)(1/4)-1 |
D=B*C |
E=B+D |
|
1 |
100,000 |
0.86% |
864 |
100,864 |
|
2 |
100,864 |
0.86% |
871 |
101,735 |
|
- |
- |
- |
- |
- |
|
39 |
138,654 |
0.86% |
1,198 |
139,852 |
| 40 |
139,852 |
0.86% |
1,208 |
141,060 |
For the sake of simplicity, this example assumes the interest rate did not change throughout the lease term.
| 12/31/X10 | 31.12.X10 | |||
|
Returnable security deposit |
141,060 |
||
|
Cash: CD (restricted) |
141,060 |
||
Cash in transit
In some jurisdictions, cash in transit is not an issue.
12/31/X1, XYZ withdrew 500 to replenish petty cash, paid 250,000 rent, 850,000 wages, and collected 25,000 and 75,000 from two customers. It's operations were in a jurisdiction where real-time banking was the norm.
For example, SEPA (Single Euro Payment Area) payments usually clear the same day while Instant Credit Transfers (SCT Inst) clear in seconds.
| 12/31/X1 | 31.12.X1 | |||
| Petty cash |
500 |
||
| Cash in bank |
500 |
||
| Pre-paid rent |
250,000 |
||
| Cash in bank |
250,000 |
||
| Wages payable |
850,000 |
||
| Cash in bank |
850,00000 |
||
| Cash in bank |
25,000 |
||
| Accounts receivable: ABC |
25,000 |
||
| Cash in bank |
75,000 |
||
| Accounts receivable: DEF |
75,000 |
||
In other jurisdictions, the bank balance and balance sheet balance need to be reconciled.
12/31/X1, XYZ paid 250,000 rent, 850,000 wages, and collected 25,000 and 75,000 from two customers. It's operations were in a jurisdiction where bank transfers clear in 48 hours.
While SEPA (Single Euro Payment Area) payments usually clear the same day, depending on the time submitted, they can clear the next business day. (Non-SEPA) IBAN payments generally clear withing 24 to 48 hours, though they may take longer in some situations. In jurisdiction not part of IBAN, SWIFT (BIC) payments may take a week or more to clear.
While not specifically targeted at cash, the guidance for trade date versus settlement date should applied by analogy to cash receipts/payments. The timing of receipt/payment recognition may also be influenced by national legislation.
IFRS 9.B3.1.3 (edited) states: A regular way purchase or sale of financial assets is recognised using either trade date accounting or settlement date accounting as described in paragraphs B3.1.5 and B3.1.6...
- The trade date is the date that an entity commits itself to purchase or sell an asset...
- The settlement date is the date that an asset is delivered to or by an entity...
ASC 965-320-25-1 states: The accrual basis of accounting requires that purchases of securities be recorded on a trade-date basis. However, if the settlement date is later than the financial statement date, accounting on a settlement-date basis for such purchases is acceptable if both of the following conditions exist:
- The fair value less costs to sell, if significant, of the securities purchased just before the financial statement date does not change significantly from the trade date to the financial statement date.
- The purchases do not significantly affect the composition of the plan's assets available for benefits.
For example, one EU member state's legal requirements are: The moment of accounting recognition is the day of payment or currency acceptance, day of purchase or sale of currencies, foreign exchange, or of securities, date of payment, or direct debit from the client's account, the day of the order to the correspondent to make the payment, the settlement day of the bank's orders with the national bank clearing center, the day of crediting (currency) of the funds according to the report received from the bank's correspondent (message means a message in the SWIFT system, a bank notice, adopted medium, account statement, or other documents), negotiation date and settlement date spot trades (the accounting unit chooses whether to use accounting by day for spot trades trade or settlement day and consistently follows the chosen method within each group), date of negotiation and settlement of derivative transactions, date of issuance or acceptance of guarantee, or of the loan promise, the day the values are taken into custody, the day in accordance with paragraph 2.3.
| XYZ Inc. Bank reconciliation schedule 12/31/X1 | 31.12.X1 |
||
| Cash on statement |
2,000,000 |
|
| - | Unrealized bank transfer (rent) |
(250,000) |
| - | Unrealized bank transfer (payroll) |
(850,000) |
| + | Unrealized bank transfers (accounts receivable: ABC, DEF) |
100,000 |
| Cash in bank |
1,000,000 |
|
Assuming XYZ's bank sends preadvice notices of an incoming payments. Otherwise:
| XYZ Inc. Bank reconciliation schedule 12/31/X1 | 31.12.X1 |
||
| Cash on statement |
2,000,000 |
|
| - | Unrealized bank transfer (rent) |
(250,000) |
| - | Unrealized bank transfer (payroll) |
(850,000) |
| Cash in bank |
900,000 |
|
Same facts except, XYZ's jurisdiction was vieux jeu.
While most of the world has shifted to electronic cash transfers, some jurisdictions cling to physical bills of exchange (link). For example, in the United States, paper checks are still used for around 20% of all payments (link).
| XYZ Inc. Bank reconciliation table 12/31/X1 | 31.12.X1 |
||
| Cash on statement |
2,000,000 |
|
| - | Check number 2510549 |
(250,000) |
| - | Checks number 2510550 to 2510933 |
(850,000) |
| + | Checks number 5441058 (ABC) and 287710 (DEF) |
100,000 |
| Cash in bank |
1,000,000 |
|
Same facts except XYZ elected to journalize.
In some jurisdictions, particularly with legalistic national GAAPs that prescribe accounting procedures, accountants think they must journalize everything. As neither IFRS nor US GAAP dwell on accounting formalities, a reconciliation is sufficient. Nevertheless, journalizing is not disallowed and can be done.
| 12/31/X1 | 31.12.X1 | |||
| Rent |
250,000 |
||
| Wages & salaries |
850,000 |
||
| Cash: Cash in transit (clearing account) |
100,000 |
||
| Cash: Cash in transit (clearing account) |
250,000 |
||
| Cash: Cash in transit (clearing account) |
850,000 |
||
| Receivables |
100,000 |
||
| 1/2/X2 | 2.1.X2 | |||
| Cash: Cash in transit (clearing account) |
250,000 |
||
| Cash: Cash in transit (clearing account) |
850,000 |
||
| Cash: Cash in bank |
100,000 |
||
| Cash: Cash in bank |
250,000 |
||
| Cash: Cash in bank |
850,000 |
||
| Cash: Cash in transit (clearing account) |
100,000 |
||