AFP to FASB: Define Cash

The trade group claims that the Big Four accounting firms are reinterpreting the cash flow standard without oversight.
Stephen TaubJuly 19, 2006

A trade group representing corporate finance professionals is calling on Financial Accounting Standards Board (FASB) to clarify its definition of cash and cash equivalents.

The Association for Financial Professionals (AFP) asserted that the lack of clarity in Financial Accounting Standard No. 95, Statement of Cash Flows, has allowed the Big Four accounting firms, “with no regulatory authority, oversight, or due process,” to unilaterally reinterpret the standard, creating confusion and requiring companies to modify or restate financial statements.

“As FAS 95 is currently written, it is not responsive to today’s markets and fails to recognize today’s investment infrastructure,” stated Jim Kaitz, president and CEO of the AFP, in a letter to FASB. “Twice in the past two years companies were forced to abandon accepted practices when the Big 4 firms made immediate, unilateral and retroactive changes applying narrow logic to the cash definition.”

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He added that the standards are no longer being applied universally and CFOs and corporate treasurers are now questioning if money market accounts can still be considered a cash equivalent, or whether these accounts will be the next target.

The AFP said that the problem arose in February 2005 when PricewaterhouseCoopers changed the accounting treatment for Auction Rate Securities (ARS) without any due process and without the opportunity for feedback on the possible impact of the change. The other three major accounting firms followed suit, “ignoring significant liquidity protection and risk mitigation built into the ARS market,” according to the AFP official. More important, a broad range of companies were required by their external auditor to modify current financial statements and to restate prior financial statements, explained the letter.

The trade group noted that in March 2006, PwC again issued a document “applying the same narrow logic” they used on ARS to Variable Rate Demand Notes (VRDN). “The accountant’s advisory said that VRDN no longer qualified as a cash equivalent on the balance sheet even though these investment vehicles did not change in character and were always considered as a cash equivalent based on generally accepted principles,” the AFP elaborated.

The letter points out that in both cases, all four major accounting firms acted at the same time. “These decisions created confusion and difficulty in financial comparability as well as future uncertainties,” the AFP stated.

“FAS 95 was adopted in 1987 when it was assumed that traditional financial institutions were the only acceptable vehicle to hold cash and cash equivalents,” Kaitz noted in the letter. “As our market-based economy continually evolves … AFP believes that it is important to have one authoritative source of standards for financial accounting and reporting and that FASB is that source.”