Cash Equivalents explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Two tests decide what sits on the cash line — how soon it matures, and whether the company can actually use it. A balance can fail the second while passing the first.
The classification
- Balances with banks (of the nature of cash and cash equivalents);
- Cheques, drafts on hand;
- Cash on hand;
- Others (specify nature).
Bank balances other than cash and cash equivalents shall be disclosed below cash and cash equivalents on the face of the balance sheet — a separate line, not a note.
What qualifies
The term is not defined in Ind AS Schedule III. Ind AS 7 supplies it: cash includes cash on hand and demand deposits with banks; cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
And the working threshold: 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 — including term deposits with an original maturity of three months or less.
A three-month term deposit passes the maturity test. If it is pledged, it still fails.
Bank balances (including term deposits) held as margin money or security against borrowings are neither in the nature of demand deposits, nor readily available for use by the company, and accordingly do not meet the definition of cash equivalents.
They move to bank balances other than cash and cash equivalents, which collects two things: balances held as margin money or security against borrowings, guarantees etc., and bank deposits with original maturity of more than three months but less than twelve months.
Note the two different maturity concepts now in play. Original maturity governs whether a deposit is a cash equivalent; remaining maturity governs whether a deposit over twelve months sits in other financial assets. Applying one where the other belongs mis-states both lines.
The overdraft question
Ind AS 7 para 8 permits it: where bank overdrafts which are repayable on demand form an integral part of an entity's cash management, bank overdrafts are included as a component of cash and cash equivalents — the characteristic being that the bank balance often fluctuates from being positive to overdrawn.
But for balance sheet presentation the conclusion is different: it is not appropriate to include a bank overdraft as a component of cash and cash equivalents unless the offset conditions in paragraph 42 of Ind AS 32 are complied with. In the balance sheet, a bank overdraft should be included as "borrowings" under financial liabilities.
So the same overdraft can be netted within cash for the cash flow statement and presented gross as a borrowing on the balance sheet. Generally, there should not be a difference in the amount of cash and cash equivalents as per Ind AS 1 and as per Ind AS 7 — the overdraft is the recognised exception.
The three restriction disclosures
From Note 6(C) of the General Instructions:
- Earmarked balances with banks — for example for unpaid dividend — shall be separately stated;
- balances held as margin money or security against borrowings, guarantees, other commitments shall be disclosed separately;
- repatriation restrictions, if any, in respect of cash and bank balances shall be separately stated.
Where each balance lands
| Balance | Presentation |
|---|---|
| Current account, freely usable | Cash and cash equivalents |
| Term deposit, original maturity ≤ 3 months, unencumbered | Cash and cash equivalents |
| Term deposit, original maturity 3–12 months | Bank balances other than cash and cash equivalents |
| Margin money deposit, any maturity | Bank balances other than cash and cash equivalents |
| Deposit, remaining maturity over 12 months | Other financial assets (non-current) |
| Bank overdraft | Borrowings under financial liabilities |
Common mistakes
- Treating pledged deposits as cash equivalents because they mature soon.
- Netting an overdraft against bank balances on the face of the balance sheet.
- Using remaining maturity for the three-month test.
- Omitting the earmarked and repatriation-restriction statements.