ThinkTWENTY20

By David Hardidge, CPA, Technical Director, CPA Australia Centre of Excellence for Digital Transformation

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David provides expert, authoritative leadership on financial reporting and the audit response in the not-for-profit and for-profit sectors. He is technical director at an Australian state government Auditor-General’s office and has extensive experience in accounting advisory functions of large accounting firms providing advice, insights and explanations on Australian accounting and International Financial Reporting Standards and external financial reporting requirements for the public and private sectors. David has been promoting the use of digital financial reporting for over 20 years and served on the XBRL International Inc Steering Committee during its early years.  David is a member of the CPA Australia Centre of Excellence for Digital Transformation and was member and chair of the CPA Australia COE for Financial Reporting.
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Is cash-in-transit cash?  No, I do not mean cash in armoured cars in transit around the city. I mean funds in the banking system that are in transit to you and settled after a delay. Do you know the implications of this question may upend decades of accrual accounting for cash in the balance sheet and how you do bank reconciliations?

What Is Cash-In-Transit?

Let’s use an example. A customer (trade receivable) sends you funds today, but because of delays in the banks’ payments processing system, you will not have access to those funds for a further two days.

How would you account for this transaction? I think most people would credit (reduce) trade receivables, and would debit (increase) cash at bank. For the bank reconciliation, the amounts would be uncredited deposits. But is this technically correct under the accounting standards?

To recognize a financial asset, you need to have the contractual rights from the asset (the recognition criteria under IFRS 9 Financial Instruments (paragraph 3.1.1). When considering cash at the bank, do you have the contractual rights to use the cash when the funds are not available for a couple of days?  If the funds are not cash at the bank, then what are they? This is what I am calling cash-in-transit.

What Is the Accounting for Cash-In-Transit?

The above example was recently considered by the IFRS Interpretations Committee (IFRIC) under the title “Cash Received via Electronic Transfer as Settlement for a Financial Asset” (IFRS 9).

At its June 2022 meeting, IFRIC concluded that you need to apply the derecognition criteria under IFRS 9 (paragraph 3.2.3) for the trade receivable and the recognition criteria (paragraph 3.1.1) for the cash. Further, if you have to wait for settlement, you cannot “demand” the use of the funds immediately, so they are not cash until settled.

IFRIC did not conclude whether cash-in-transit represented cash equivalents. IFRIC discussions did raise doubt as to whether the definition would be met. For example:

• Was there a contract with the bank to receive the funds (you need a contract to be in scope of IFRS 9)?
• Whether the funds were an investment (under IAS 7, the term “cash equivalents” is defined as “short‑term, highly liquid investments…”).

Implications

While IFRIC decided that the issue was “sufficiently narrow” to issue a final agenda decision, there are many implications. When do the contractual rights expire to the trade receivable (that is, derecognition), if the customer can cancel the payment before it settles? Doesn’t the cash-in-transit issue also apply to cheques and credit card receivables?

Aren’t trade payables also affected? Most people would reduce cash and trade creditors when the payment is initiated, even if the cash has not been taken out of the bank account. Think of unpresented cheques.

Where Are We at on June 30, 2022? Half-Year and Full-Year Reporting?

Before being issued as a formal final agenda decision, the draft needs to be reviewed by the International Accounting Standards Board (IASB) at its next public meeting (where practical). The IASB has the power to veto the agenda decision under some circumstances. The plan is that the concerns of respondents to the IFRIC tentative agenda decision be put to the IASB.

At the time of writing (end of June 2022), the final agenda decision agreed to at the IFRIC June 2022 has not been published, and the next IASB meeting is scheduled for mid-July.

At the moment, it seems to be wait-and-see whether the IASB intervenes. If the IASB does not veto the issue of the IFRIC final agenda decision, then preparers will have sufficient time to make any changes. If the IASB agrees to standard setting, this may take some months (and maybe years) to undertake.

If the final agenda decision is issued, and any change is not material to you, your auditors will probably want you to identify any difference, and have that difference evaluated as an unadjusted difference. And your directors and management may want your systems changed to the accounting standard “correct” answer – even though the current approach has been working well for decades and avoids double spending.

You may also ask, is any change from current practice worth it? Would it improve financial reporting? Is there really some diversity that makes a material impact? If so, would disclosure solve the issue?

The good news is that the issue does not apply when funds transfers are immediate, for example, the Australian real-time National Payments Platform.

For those of you preparing US GAAP, have you considered whether the same issue exists?

Useful Links:

IFRS - Cash Received via Electronic Transfer as Settlement for a Financial Asset (IFRS 9).

https://www.ifrs.org/projects/work-plan/cash-received-via-electronic-transfer-as-settlement-for-a-financ/.