IFRIC agenda decision - Demand deposits with contractual restrictions on use

Fact pattern

• Vendor sells one of its businesses to Buyer
• Sale agreement required Vendor to keep a specified amount of cash in a separate demand deposit to indemnify Buyer for potential warranty claims
• The warranty claims extend over several years
• Demand deposit can be withdrawn at any time by Vendor from the bank
• Contract with Buyer says Vendor can only use the money to settle warranty claims by Buyer (contractual restriction).

Question

Is the demand deposit presented as a component of ‘cash and cash equivalents’ in the statement of cash flows?

Rationale for agenda decision

• Yes
• IAS 7.6: ‘cash’ comprises cash on hand and demand deposits
• Do not need to look at definition of ‘cash equivalents’ and guidance in IAS 7.7, which says: ‘Cash equivalents are held for purpose of meeting short-term cash commitment…’
• IAS 7.7 is not relevant because a demand deposit is cash
• From the bank’s perspective, the Vendor can withdraw the money at any time
• Contractual restriction from the Buyer does not affect presentation as ‘cash’
• Classification would only change if the restriction changed the nature of the deposit, such that it could not be withdrawn on demand.

Additional presentation and disclosure considerations

Presentation

• The demand deposit is presented as ‘cash and cash equivalents’ in the statement of financial position (IAS 1.54(i))
• If relevant to an understanding of the entity’s financial position, the ‘cash and cash equivalents’ line item in the statement of financial position would be disaggregated (IAS 1.55), meaning it would show ‘Cash subject to restrictions’ as a separate line item on balance sheet
• The demand deposit is classified as a CURRENT ASSET unless IAS 1.66(d) applies, meaning the asset is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period.

Disclosure

• Amounts of significant cash and cash equivalent balances held that are not available for use by the entity (IAS 7.48)
• Additional information about liquidity risk (IFRS 7).

Conclusion

A demand deposit that is subject to restrictions on its use, arising from a contract with a third party, is included as ‘cash and cash equivalents’ in the statement of cash flows.

The principles and requirements in IFRS standards provide an adequate basis to deal with this fact pattern.

The Committee therefore decided not to add a standard-setting project to its work plan.