Cash and cash equivalents under Ind AS 7 are not simply cash-on-hand plus every bank balance. Classification depends on liquidity, convertibility, risk of value changes and why an instrument is held. That matters because the closing cash figure in the statement of cash flows can differ from the cash-and-bank lines in the balance sheet, especially when term deposits, overdrafts or restricted balances are involved.
ICAI’s Educational Material page for Ind AS 7 explains the framework and links to the Institute’s detailed guidance. The ICAI Educational Material on Ind AS 7 addresses demand deposits, term deposits, bank overdrafts and restricted balances in practical terms.
What counts as cash and cash equivalents?
Cash includes cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and are subject to an insignificant risk of changes in value. The label on an instrument is therefore not decisive. A bank deposit can be a cash equivalent, another bank balance or an investment depending on its terms and purpose.
The three-month test uses original maturity
ICAI’s guidance states that an investment normally qualifies as a cash equivalent when it has a short maturity of about three months or less from the date of acquisition and meets the other conditions. For term deposits, this is assessed from the date the deposit is made, not by looking at the remaining maturity on the reporting date.
Example: a company places a six-month fixed deposit on 1 October. If only two months remain at a later reporting date, that does not convert the original six-month deposit into a cash equivalent. By contrast, a qualifying short-term deposit made for genuine short-term cash-management needs may be a cash equivalent even though it earns interest.
Demand deposits versus term deposits
A demand deposit is generally available for withdrawal on demand and has liquidity similar to cash. Current-account and similar on-demand balances ordinarily fit within cash, subject to their terms.
A term deposit needs a fuller test. Short original maturity alone is not enough: it should be readily convertible into a known amount of cash, have insignificant value-change risk and be held to meet the entity’s own short-term cash commitments. A short-duration placement made for an investment purpose does not automatically become a cash equivalent merely because its tenure is three months.
When can a bank overdraft be included?
Bank borrowings are normally financing activities. Ind AS 7 has a narrow exception for bank overdrafts that are repayable on demand and form an integral part of the entity’s cash management. ICAI notes that a characteristic of such an arrangement is that the bank balance often fluctuates between positive and overdrawn positions.
An overdraft should therefore not be included simply because it is short-term or used for working capital. The facts should show that it actually operates as part of day-to-day cash management. ICAI’s Educational Material also distinguishes a continuing cash-credit facility from such an overdraft: continuing cash credit is financing rather than automatically a cash-equivalent component.
Cash-flow and balance-sheet presentation can differ
A qualifying overdraft included in cash and cash equivalents for the statement of cash flows is not automatically netted against positive bank balances in the balance sheet. ICAI’s guidance explains that the overdraft is presented within financial liabilities in the balance sheet, while Ind AS 7 requires disclosure of cash-and-cash-equivalent components and reconciliation of the cash-flow amount with equivalent balance-sheet items.
What about restricted or earmarked cash?
Restriction requires judgment. Ind AS 7 requires disclosure, with management commentary, of significant cash and cash-equivalent balances that are not available for use. A restriction therefore does not automatically mean that an item can never qualify as cash or a cash equivalent.
An ICAI Expert Advisory Committee opinion on client funds under the Ind AS framework illustrates the point. The Committee considered funds contractually limited to client purposes where the bank deposits themselves remained accessible and otherwise met the Ind AS 7 definition. The practical lesson is to analyse the nature of the restriction rather than applying a blanket rule based on the word “restricted”.
Balances held as margin money or security against borrowings or guarantees may be different because they may not be readily available for ordinary cash management. Such items require separate analysis and appropriate presentation instead of automatic inclusion in cash equivalents.
Worked example
Assume a company has ₹30 lakh in a current account, ₹20 lakh in a two-month original-maturity deposit used for routine liquidity, ₹25 lakh in a six-month fixed deposit, and a ₹10 lakh overdraft repayable on demand that regularly moves between positive and overdrawn as part of daily treasury management.
The current account is cash. The two-month deposit can qualify as a cash equivalent if the other Ind AS 7 conditions are met. The six-month original-maturity deposit does not qualify merely because its remaining maturity later falls below three months. The overdraft may be included in cash and cash equivalents for the statement of cash flows if the facts demonstrate the cash-management exception. The closing cash-flow amount should then be reconciled to the balance sheet because the overdraft may still appear within financial liabilities.
Practical classification checklist
- Identify the instrument: cash, demand deposit, term deposit, overdraft, cash credit or restricted balance.
- Check access and convertibility: can it be converted to a known amount of cash when required?
- Check original maturity: assess maturity from acquisition or deposit date, not remaining life at year end.
- Check value risk: confirm that risk of changes in value is insignificant.
- Check purpose: is it held for short-term cash commitments or for investment or financing?
- For overdrafts: test repayability on demand, integration with cash management and the actual banking pattern.
- Assess restrictions: determine whether they change the item’s nature or merely limit use.
- Reconcile presentation: map the cash-flow components to the balance sheet and explain legitimate differences.
Common mistakes to avoid
- Using remaining maturity at the reporting date instead of original maturity for term deposits.
- Assuming every deposit of three months or less is automatically a cash equivalent.
- Including any working-capital borrowing merely because it is short-term.
- Netting a qualifying overdraft against balance-sheet cash without separately considering presentation requirements.
- Classifying every restricted balance outside cash equivalents without analysing the restriction.
- Failing to reconcile cash-flow cash and cash equivalents with equivalent balance-sheet items.
Practical takeaway
Classify cash and cash equivalents under Ind AS 7 by substance, not bank-account labels. Ask how quickly and predictably the item converts to cash, why it is held, whether access is restricted, and whether an overdraft genuinely forms part of daily cash management. Then reconcile the cash-flow conclusion to the balance-sheet presentation. That avoids treating every short-term balance as cash and every restriction or overdraft as automatically disqualifying.
