Cash Equivalents
The term cash equivalents refer to investments that are so close to being realized as cash that they are viewed essentially as the equivalent of cash. The definition of what is considered a cash equivalent originated in the rules for preparing statements of cash flows (which will be discussed in Chapters 4 and 6). These rules for determining what can be considered a cash equivalent were promulgated by GASB Statement No. 9, “Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Accounting” (GASBS 9). These requirements define cash equivalents as short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present an insignificant risk of changes in value because of changes in interest rates. This is interpreted by GASBS 9 to mean that for an investment to be considered a cash equivalent, it must mature within three months of being bought by the organization. This means that a one-year treasury note that is purchased by a government two months before it matures can be considered a cash equivalent. However, if the government purchased the one-year treasury note when it was first issued (so that it matured in one year), it would not be considered a cash equivalent. Also, this investment would not be considered a cash equivalent if it was held by the organization and then reached a point where it only had three months left to maturity. Classification as a cash equivalent occurs when the investment is acquired by the organization. Examples of cash equivalents include Treasury bills, money market funds, and commercial paper. Note again that the term original maturity refers to the length of time to maturity at the time that the security is purchased by the government, not to the security’s original duration before maturity.
Taken From : Governmental Accounting Made Easy