IFRS Interpretations Committee issues an agenda decision clarifying the classification of short-term loans and credit facilities

The IFRS Interpretations Committee issued an agenda decision at its June 2018 meeting clarifying how short-term loans and credit facilities should be classified.

What is the IFRS Interpretations Committee?

The IFRS Interpretations Committee ("the Committee") is the interpretative body of the International Accounting Standards Board. Its role is to provide guidance on financial reporting issues which have not specifically been addressed in International Financial Reporting Standards ("IFRS"), or where unsatisfactory or conflicting interpretations either have developed, or appear likely to develop.

What are agenda decisions?

Where an issue is not added to its agenda, the Committee publishes agenda decisions. These do not represent authoritative guidance; however, they set out the Committee’s rationale for not taking an issue onto its agenda. In practice, it is expected that entities reporting in accordance with IFRS will take account, of and follow, the Committee's agenda decisions (and this is the approach which is followed by securities regulators worldwide).

Fact pattern

The fact pattern submitted to the Committee sought to clarify what types of borrowings an entity could include as part of cash and cash equivalents in the statement of cash flows if:
  • The entity had short-term loans and credit facilities that have short contractual notice periods (e.g. 14 days)
  • The entity uses the sort-term arrangements for cash management, and
  • The balance of the short-term arrangements does not often fluctuate from being negative to positive.

Committee observations

In making its agenda decision, the Committee observed that:
  • Bank borrowings are generally considered to be financing activities and are only included as part of cash and cash equivalents in particular circumstances as described in IAS 7 Statement of Cash Flows ("IAS 7"), paragraph 8, i.e. the banking arrangement is an overdraft, it is repayable on demand, and it forms an integral part of an entity’s cash management
  • Cash management means that cash and cash equivalents are managed for the purpose of meeting short-term commitments, and not for investment or other purposes (this is based on facts and circumstances), and
  • If the balance on the relevant accounts does not fluctuate from being negative to positive, this indicates that the arrangement is not an integral part of the entity’s cash management (i.e. it is a form of financing).

Agenda decision

For the particular fact pattern submitted, the Committee concluded that the short-term arrangements do not form part of cash and cash equivalents because:
  • They are not repayable on demand, and
  • The balance does not fluctuate from being negative to positive, indicating that it is rather a form of financing.
The Committee also concluded that the principles and requirements in IFRS standards provide an adequate basis for entities to assess whether short-term arrangements such as those described in the fact pattern form part of cash and cash equivalents.
The Committee also noted the IAS 7, paragraphs 45 and 46, requirement to disclose the components of cash and cash equivalents, present a reconciliation of these amounts to the statement of financial position, and disclose the policy for determining the composition of cash and cash equivalents.
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