FD is Equivalent to cash or not?

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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)
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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)
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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).