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Red 7 … the Winning Number for Money Market Funds? 

by François Masquelier, Head of Corporate Finance and Treasury, RTL Group, and Honorary Chairman, EACT

This article describes the accounting issues often encountered by many treasurers when they invest in money market funds (MMF). The IMMFA (Institutional Money Market Funds Association www.immfa.org) has recently issued two interesting policy papers about the international standards IAS 7 and IFRS 7. These documents aim to provide guidance for fund users.

Accounting issues

The accounting issues related to investments in treasury-style money market funds, such as those offered by members of IMMFA, are two-fold:

(1) The classification as ‘cash & cash equivalents’ in order to be deductible from gross debt or to increase the company’s net cash flow, and

(2) More recently, the methodology used and reported in IFRS for Fair Value Measurement. 

IMMFA’s aim was to explain how to account for these short-term investments and to facilitate the work of users with their external auditors (www.iasb.org). These elements also need to be put into perspective with IMMFA’s recently revised Code of Practice, as well as several other similar initiatives aimed at redefining better the criteria of treasury-style MMFs (e.g., CESR – Committee of European Securities Regulators – published in May 2010 and effective in July 2011, cfr. www.cesr-eu.org).  

Qualification as ‘Cash & Cash Equivalent’

IMMFA has issued a document intended to provide investors in its own money market funds with further guidance on the treatment of investments under IAS 7 statement of cash flows (effective since July 1994). These are recommendations that need to be confirmed by external auditors and to comply with internal accounting policies of the concerned reporting entities. The purpose of this standard (IAS 7 para. 6) is to give information to users on the ability to generate cash and the utilisation of this cash, as well as the net liquidity position. The tenor of the investments is a key element to assess the highly liquid character of a placement. These days, after the financial crisis, this classification is not neutral for companies having a large indebtedness and highly leveraged. 

The standard gives a definition and sets out the four main criteria to be met for such a classification. 

1. Short-term

2. Highly liquid

3. Readily convertible to known amounts of cash

4. Subject to insignificant risk of changes in value

This analysis is determined on a case-by-case basis, each quarter. It consumes a lot of treasurers’ time and does not bring any added value.

IFRIC (International Financial Reporting Interpretation Committee) received a request in December 2008 to provide guidance on this definition of ‘cash equivalents’.  It answered in March 2009 that ‘MMF which operate under a specific regulatory regime (such as rule 2a-7 of investment act 1940 in the US) should meet the definition of cash equivalents[1].  It also later stated that ‘existing criteria within IAS 7 were sufficiently clear’. It is not because an investment can be converted to cash at any time that it is automatically cash equivalent. The amount of cash to be received must be known at the time of the investment. The last criterion on the change in value is also very important for this analysis. Ideally, what IMMFA and treasurers would recommend is the automatic classification of their MMF’s into ‘cash equivalents’ without having to demonstrate these criteria are met. Being IMMFA funds should be a sufficient proof that these criteria are fully met. They wanted to give some guidance on this de facto accounting treatment. Furthermore, this determination should be feasible from the terms and conditions of the instruments and without having to look though the whole underlying assets. At least, it gave us an idea of IFRIC thinking and gives elements for discussions with external auditors on this classification.

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