The Removal of Cash Equivalents - Special Academic Support

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Under the current rules, the statement of cash flows features both cash and cash equivalents, short-term stable liquid investments that can easily be converted into cash. However, the FASB is currently considering eliminating the second category, working purely with money, and reclassifying noncash transactions as different categories on the statement. The change has not yet been settled on and is currently under deliberation by the organization, but the idea of such a change has existed for some time. The author disagrees with the change, as it aims to increase transparency in reporting but would only complicate it further instead.

The definition of cash equivalent is broad and somewhat imprecise, which can lead to misconceptions, both intentional and otherwise. As Novak et al. (2019) note, there have been incidents in the past where companies classified investments that were not necessarily suitable as cash equivalents and had to reissue their financial statements after the correction. With the new policy, such actions would no longer be possible, as each investment would have to be listed in its separate category. As a result, the companys liquidity would not be misrepresented, enabling analysts to understand its situation as it is.

However, while there may be less deception, the statements would become substantially more convoluted. Per Klammer (2018), the change would also mean that noncash transactions would need to be reported in a separate financial statement note. As a result, it would take substantially more effort to parse the statements and comprehend the companys financial state. As a result, the accessibility of this reporting to investors would become lower. Ultimately, some companies inappropriate actions should not serve as the cause to complicate the processes of all businesses and involved parties.

References

Klammer, Tom. 2018. Statement of Cash Flows: Preparation, Presentation, and Use. Hoboken: Wiley.

Novak, Lori, Valerie Warren, Donald E. Kieso, Jerry J. Weygandt, Paul D. Kimmel, and Barbara Trenholm. 2019. Accounting Principles. 8th ed. Hoboken: Wiley.

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