Bank overdrafts and cash and cash equivalents

IAS 7.8 notes that although bank borrowings are generally considered to be financing activities, in some countries bank overdrafts form an integral part of an entity’s cash management. In such cases, bank overdrafts are included as a component of cash and cash equivalents meaning that bank overdraft balances would be offset against any positive cash and cash equivalent balances for the purposes of the statement of cash flows.

However, care is required when presenting bank overdrafts, and cash and cash equivalents, in the statement of financial position. This is because, even though IAS 7 permits offset of balances in the statement of cash flows, this may not be permitted by IAS 32 Financial Instruments: Presentation.

The IAS 32 requirements mean that balances are only offset when an entity:

  • Currently has a legally enforceable right to set off the recognised amounts; and
  • Intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Consequently, some balances may be offset in the statement of cash flows, but not in the statement of financial position.

It may be appropriate for entities to include narrative in their accounting policies, highlighting the distinction between cash flows that are offset in the statement of cash flows, and cash and cash equivalent balances that are offset in the statement of financial position.

Example

Entity A has two bank accounts with different financial institutions, Bank X and Bank Y. As at entity A’s reporting date, the two bank balances are:

––Bank X: positive balance of CU1,000,

––Bank Y: overdraft of CU200.

From Entity A’s perspective, the bank overdraft is an integral part of its cash management. However, there is no arrangement involving Entity A, Bank X and Bank Y that give Entity A a legally enforceable right to offset the two recognised amounts.

(Note: in practice, it is very unlikely that any such offset arrangement between two separate banks would be entered into.)

Consequently, Entity A recognises amounts in its primary financial statements as follows:

Statement of financial position CU

Current assets

  •  Cash and cash equivalents               1,000

Current liabilities

  • Bank overdraft                                     (200)

Statement of cash flows

Cash and cash equivalents                         800

In addition, for those entities that operate in a range of different jurisdictions worldwide, it will be important to distinguish those countries in which bank overdrafts form part of the entity’s cash management, and those where they do not.

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