FD is Equivalent to cash or not?

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This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

16 December 2009 Please can you tell me that FD for the period of 6 months or more, is equivalent to cash or not. Furthermore, please tell whether FD for the period more than 1 year can be assumed as current asset.

And please support your suggestions with logical reasons also.

Thanks

CA SURENDRA KUMAR RAKHECHA

CA SURENDRA KUMAR RAKHECHA (Expert)

16 December 2009 As per AS-3 Cash Flow Statement :

Cash equivalent consiss of short-term highly liquid investment having maturity less than 3 months, which can be readily converted into cash without decline in its value.

When FD is for 6 months; the maturity period of which is not less than 3 months; then it is not a cash equivalent.

If it is for 6 months; you can say that without any decline in value; we can receive the money hence it is cash equivalent. This is not so because instrument says a maturity period of 6 months and the accounting standard says that this is not cash equivalent when it is so.

It is altogether a different matter that you can have premature payment. If your intetion is to have premature payment; then why you made such investment.

Even fixed assets/investment you can sell today if desire. But it does not mean that we have such assets for sale.

Murtaza I Bhagat

Murtaza I Bhagat (Expert)

16 December 2009 Cash equivalents are held for the purpose of meeting short-term cash
commitments rather than for investment or other purposes. For an investment
to qualify as a cash equivalent, it must be readily convertible to a known
amount of cash and be subject to an insignificant risk of changes in value.
Therefore, an investment normally qualifies as a cash equivalent only when it
has a short maturity of, say, three months or less from the date of acquisition.
Investments in shares are excluded from cash equivalents unless they are, in
substance, cash equivalents; for example, preference shares of a company
acquired shortly before their specified redemption date (provided there is only
an insignificant risk of failure of the company to repay the amount atmaturity).