FASB ASC 305 – Cash and Cash Equivalents

The Financial Accounting Standards Board (FASB) released the 300 section of the Accounting Standards Codification for the purpose of discussing the broad topic of Assets.

Accounting Standards Codification 305 (ASC 305) was released to address the more specific topic of cash and what equivalents can be considered cash on a company’s balance sheet. The FASB has defined this to increase awareness of the liquidity of a company as when recessions loom or business is slow, the ability for a company to be liquid is very important. The items that make up the “cash” line item of a balance sheet thus must fit into a certain definition.

Definition of Cash under ASC 305

All of the following criteria must be met in order for an investment to be classified as a Cash Equivalents in GAAP financials:

  1. Short term
  2. Highly liquid
  3. Convertible to known amounts of cash
  4. So near their present maturity that it is negligible risk of changes in value due to interest rates
Other Examples of Cash Included in ASC 305
Some of the best examples of these items that represent cash equivalents are treasury bills, commercial paper, and money market funds.  Cash, of course, is defined as the coins and currency on hand, as well as any balances in checking accounts that would be available for immediate withdrawal.  One could also consider such items as an undeposited check, money orders, drafts, and demand deposits to be cash.  Cash is by definition assumed to be unrestricted, and any material balances which are restricted should be separately disclosed as such.  It is important to note that if a compensating balance arrangement exists based on a borrowing arrangement, those balances should also be considered for separate disclosure if material.

Related Topics:
+Petty Cash and Expense

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