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Classification of Accrued Interest on Short-Term Fixed and Flexi Deposits under Ind AS

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Introduction

In the financial world, companies regularly seek to optimize cash management through short-term deposits that are highly liquid, known as "cash equivalents." However, under the Indian Accounting Standards (Ind AS) framework, the classification of accrued interest on such deposits can create debate, particularly during the audit process. This blog explores how accrued interest on short-term fixed and flexi deposits should be classified under Ind AS, with insights from recent Expert Advisory Committee (EAC) opinions and Ind AS 7, the Statement of Cash Flows.

The Scenario

Sonu Limited, a company specializing in infrastructure projects, classifies its investments in Flexi Deposits and Fixed Deposits with a maturity of three months or less as "cash and cash equivalents" under its current accounting policies. This classification includes any accrued interest on these deposits. However, during the audit, the auditors raised concerns, suggesting that this treatment might not align with the requirements of Ind AS. Let’s dive into the provisions of Ind AS 7 and relevant guidance from EAC to clarify the appropriate treatment of accrued interest on such deposits.

Understanding Cash Equivalents under Ind AS 7

Ind AS 7, Statement of Cash Flows, defines cash equivalents as "short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value." According to Ind AS 7, investments typically qualify as cash equivalents if they:

  • Have an original maturity of three months or less from the date of acquisition.
  • Are held for the purpose of meeting short-term cash commitments rather than as long-term investments.

Given this, deposits like flexi and fixed deposits with short maturities can be treated as cash equivalents. The question arises, however, on whether the interest accrued on these deposits should also fall under "cash and cash equivalents."

Classification of Accrued Interest on Short-Term Deposits: Relevant Provisions

In line with Ind AS 7, cash comprises cash on hand and demand deposits, while cash equivalents include short-term investments that meet specific criteria of liquidity and low risk. According to the Guidance Note on Division II - Ind AS Schedule III, cash and bank balances must be disclosed in two categories:

  1. Cash and cash equivalents
  2. Bank balances other than cash and cash equivalents

This guidance provides a clear framework for classifying cash and cash equivalents, which includes balances with banks, cheques, drafts on hand, and other cash items. Bank balances that do not meet cash equivalency criteria should be presented separately on the balance sheet.

Expert Advisory Committee (EAC) Opinion

The EAC recently reviewed a case similar to Sonu Limited's, examining the classification of accrued interest on short-term deposits under Ind AS. According to the EAC, deposits with a maturity of less than three months qualify as cash equivalents if they:

  • Have a fixed interest rate
  • Allow both the principal and interest to be determinable at the time of investment
  • Are subject to minimal risk of value fluctuation

The EAC concluded that accrued interest on these deposits should also be treated as cash equivalents, given that it meets the criteria of being readily convertible to cash with minimal risk. Thus, companies can include the accrued interest on short-term fixed and flexi deposits as part of cash and cash equivalents in their financial statements.

Applying EAC Guidance to Sonu Limited

The guidance provided by the EAC aligns with Sonu Limited’s current practice of classifying accrued interest on short-term fixed and flexi deposits under cash and cash equivalents. Since these deposits meet the criteria outlined in Ind AS 7 — specifically, high liquidity, short-term maturity, and low risk — the accrued interest on these deposits can be recognized as cash equivalents. This classification helps provide a clear picture of the company’s cash resources available for meeting short-term commitments.

Practical Implications for Financial Reporting

1. Balance Sheet Presentation

  • Companies should classify short-term fixed and flexi deposits with maturities of three months or less, along with accrued interest, under cash and cash equivalents on the balance sheet. This classification improves clarity in financial reporting, aligning with Ind AS requirements.

2. Audit Alignment and Transparency

  • By adhering to Ind AS standards and EAC guidance, companies can ensure that their accounting policies align with regulatory requirements, avoiding conflicts during audits. This approach fosters transparency and consistency, both critical for stakeholder trust.

3. Liquidity Management

  • Treating accrued interest as cash equivalents enhances liquidity visibility, allowing companies and stakeholders to better understand available short-term resources for operational needs.

Conclusion

The classification of accrued interest on short-term deposits as cash and cash equivalents aligns with the Ind AS 7 framework and recent EAC opinions. For companies like Sonu Limited, this classification is both appropriate and compliant, given the minimal risk and high liquidity of such deposits. By including accrued interest in cash equivalents, businesses can present a clearer, more accurate picture of their short-term financial resources, supporting better cash management and enhancing transparency for stakeholders.

References

  • Ind AS 7, Statement of Cash Flows
  • Expert Advisory Committee (EAC) Opinion on Cash Equivalents
  • Division II - Ind AS Schedule III, Companies Act, 2013

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