IFRIC tentatively decided that demand deposit with restricted use is cash and cash equivalents.

The IFRS Interpretations Committee (“IFRIC”) received a submission to provide guidance on the presentation of demand deposits with restriction of use. This issue was discussed at IFRIC meeting in September 2021.

Background of the issue 

The submitter provided IFRIC with the following fact pattern in its submission: 

  • The entity holds a demand deposit whose terms and conditions do not prevent the entity from accessing the amounts held. This means the entity would receive the deposit amount upon request (on-demand). 
  • It has a contractual obligation with a third party to keep a specified amount of cash in that separate demand deposit. The entity can only use the cash for specified purposes as agreed with the third party. If the entity used the amounts for other purpose, it would be in breach of its contractual obligation. 

The submitter seeks clarification whether it needs to present the demand deposit as a component of “cash and cash equivalents” in the statement of cash flows and financial position. This takes into consideration that the demand deposit is subject to contractual restrictions on use agreed with a third party.  

IFRIC tentative agenda decision 

IFRIC tentatively decided not to add a standard-setting project on this issue. It believed that the principles and requirements in IFRS Standards provide an adequate basis or guidance relating to the issue.

They are as follows: 

1. Presentation in the statement of cash flows 

With regard to the presentation in the statement of cash flows, the following are the relevant paragraphs:

  • Cash comprises cash on hand and demand deposits [paragraph 6 of IAS 7 Statement of Cash Flows]​
  • An entity shall disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the entity that are not available for use by the group [paragraph 48 of IAS 7]​
  • An entity shall classify an asset as current when the asset is cash or a cash equivalent (as defined under 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. [paragraph 66(d) of IAS 1 Presentation of Financial Statements]​

IFRIC is of the view that the restriction on the use of a demand deposit does not result in the deposit no longer being cash, unless those restrictions change the nature of the deposit in a way that it would no longer meet the definition of cash in IAS 7.  

Based on the fact pattern, the contractual restrictions on the use do not change the nature of the deposit. This is because the entity can still access those amounts on demand – regardless of the restriction imposed on its use.  

Accordingly, IFRIC tentatively concluded that the entity includes the demand deposit as a component of “cash and cash equivalents” in the statement of cash flows. 

2. Presentation in the statement of financial position 

The following are the technical guidance referred by IFRIC to come to the tentative decision:

  • The statement of financial position shall include line items that present cash and cash equivalents. [paragraph 54(i) of IAS 1]​
  • An entity shall present additional line items (including by disaggregating the line items listed in paragraph 54), headings and subtotals in the statement of financial position when such presentation is relevant to an understanding of the entity’s financial position. [paragraph 55 of IAS 1]​

Accordingly, the entity presents the demand deposit as “cash and cash equivalents” in the statement of financial position. An entity disaggregates the “cash and cash equivalents” line item. It presents such deposit separately in an additional line item if it is relevant to an understanding of its financial position.

As for current and non-current classification, IFRIC believed that it should be presented as current unless the deposit is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period.  

3. Disclosure of demand deposits with contractual restrictions on use

IFRIC tentatively concluded that the entity discloses the following:

  • the demand deposit subject to contractual restrictions on use as a component of cash and cash equivalents 
  • The amount of significant cash and cash equivalent balances unavailable for use by the group together with information about that amount. 

Additionally, the entity considers whether it need to disclose additional information on:

  • Liquidity risk arising from financial instruments and how an entity manages that risk in the context of the requirements in IFRS 7 Financial Instruments: Disclosures.
  • Any other information to enable users to understand the impact of the restrictions on the entity’s financial position.  

Conclusion 

Drawing a conclusion from the tentative agenda decision, an entity does not need to consider its contractual restriction with the third party. The restriction on use imposed by the third party has no bearing on the classification of a demand deposit.

The important principle is the entity’s right on the demand deposit with the financial institutions. Meaning, an entity only considers its legal right on the demand deposit rather than the substance of the whole arrangement. 

In practice, there are also some arrangements which require an entity to place demand deposits arising from laws and regulations. Whether it should treat such deposit similarly is something that an entity or IFRIC may want to consider.

As part of the due process, the tentative agenda decision is now open for public comments. Public can provide feedback to the tentative agenda decision by 25 November 2021. We will update you again once IFRIC finalises the decision after the comment period.

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