IAS 7 Cash and Cash Equivalents: Classification and Reconciliation

What belongs in IAS 7 cash and cash equivalents?

IAS 7 cash and cash equivalents determine the opening and closing totals in your cash flow statement. Before calculating any movement, you need a clear answer to a practical question: which accounts belong in those totals? A deposit, an investment fund and an overdrawn account can appear together on a treasury report while requiring different treatment.

Start with the definitions. Cash covers physical cash and demand deposits. Cash equivalents are investments with a short life, ready access to a determinable cash amount and very little exposure to changes in value. Their purpose is to meet near-term payment commitments. The [IFRS Foundation's IAS 7 overview](https://www.ifrs.org/issued-standards/list-of-standards/ias-7-statement-of-cash-flows/) explains the distinction and the reconciliation to the statement of financial position.

Your [balance sheet](/glossary#balance-sheet), also called the statement of financial position, can contain other current financial assets that do not qualify. Being collectible within a year answers a broader classification question than being a cash equivalent. Keep a separate decision for each balance.

The [cash flow statement preparation guide](/learn/how-to-prepare-cash-flow-statement) covers the operating, investing and financing sections. Here, we focus on the accounts those movements must reconcile to. You will build a classification schedule, test two fictional Saudi businesses and explain differences between statement totals.

The examples use Saudi riyals and supplied carrying amounts. They isolate classification and reconciliation; investment returns, fees, impairment, tax and foreign currency effects are outside the numerical cases. They illustrate accounting decisions, without recommending any banking product.

How do acquisition dates and investment terms change the decision?

Write down the acquisition date and contractual maturity date before looking at the reporting date. IAS 7 paragraph 7 normally points to a maturity of about three months or less measured from acquisition. The [May 2013 agenda decision](https://www.ifrs.org/content/dam/ifrs/supporting-implementation/agenda-decisions/2013/ias-7-may-2013.pdf) confirms that the remaining time at year-end does not replace that assessment.

A six-month placement does not become a cash equivalent simply because five months have passed. Conversely, the original issue date of a security is not necessarily your acquisition date. A purchased instrument requires a documented assessment based on when your business acquired it and the other qualifying conditions.

Short duration is only one part of the decision. Ask what cash amount you can realise, how promptly you can realise it, what could change its value, and why treasury holds it. A short-dated investment with material exposure to loss fails the value-risk condition. A product name such as liquidity fund does not establish any of these facts.

The [July 2009 money-market-fund agenda decision](https://www.ifrs.org/content/dam/ifrs/supporting-implementation/agenda-decisions/2009/ias-7-july-2009.pdf) addresses another frequent shortcut: the ability to redeem units at a quoted market price is insufficient by itself. The known-amount and value-risk conditions still need evidence.

For your working paper, retain the contract, acquisition confirmation, redemption terms and treasury explanation. Separate facts from conclusions. For example, daily redemption is a fact; qualifying as a cash equivalent is the conclusion you reach after assessing the complete arrangement. If evidence is missing, record the unresolved question and obtain it before finalising the classification.

Worked example: IAS 7 cash and cash equivalents at Rimal Trading

Rimal Trading is a fictional Riyadh wholesaler preparing its accounts at 30 November 2026. Its treasury schedule contains five assets. Bank balances are already reconciled. The 60-day deposit was acquired on 1 November and matures on 31 December; it is readily convertible to a known amount, has insignificant value risk and is held to meet December supplier payments.

The six-month deposit was placed on 1 July and matures on 1 January 2027. Its contract does not allow early access. The investment-fund units can be sold daily at a variable market price and have significant value risk. Use these explicit facts rather than filling gaps with assumptions.

Rimal reports SAR 320,000 as cash and cash equivalents on these facts. Reconcile independently: the SAR 510,000 treasury asset total less SAR 150,000 and SAR 40,000 equals SAR 320,000. Keep the excluded assets in their appropriate financial-asset categories. Exclusion from this total does not mean the assets disappear from the accounts.

When Rimal originally transferred SAR 100,000 from its demand account into the qualifying deposit, its [journal entry](/glossary#journal-entry) was:

Both sides remain within cash and cash equivalents. Under IAS 7 paragraph 9, that principal transfer is excluded from operating, investing and financing cash flows. See the [equivalent paragraph text published by XRB](https://standards.xrb.govt.nz/standards-navigator/nz-ias-7/), without applying its New Zealand-specific concessions. A balanced entry and a reportable cash flow answer different questions. Retain the entry in the accounting records even though the transfer does not appear as a cash-flow activity.

Does a restriction automatically remove a deposit from cash?

Read what the restriction changes. A contract with a customer might require your business to keep money in a separate demand account for a specified project. If the bank would still pay the balance immediately on request, the deposit can remain cash even though using it for another purpose would breach that customer contract.

That is the distinction addressed by the [April 2022 demand-deposit agenda decision](https://www.ifrs.org/content/dam/ifrs/supporting-implementation/agenda-decisions/2022/demand-deposits-with-restrictions-on-use-arising-from-a-contract-with-a-third-party-apr-2022.pdf). A restriction that changes the deposit's nature requires another assessment. Do not extend the conclusion automatically to an account where the bank actually prevents access or to a long-term locked placement.

Your review therefore needs two documents: the bank terms and the agreement creating the use restriction. A bank confirmation showing the amount does not necessarily explain the purpose restriction. Equally, a project agreement does not by itself tell you whether the bank will release money on demand.

Keep classification, availability and presentation as separate questions in the working paper. A qualifying balance may still need disaggregation and an explanation of restrictions. Inclusion in cash does not tell the reader that all of it is freely available for payroll or dividends.

For a demand deposit, current or non-current presentation also requires attention to restrictions lasting at least twelve months after the reporting period. The [January 2026 updated agenda decision](https://www.ifrs.org/content/dam/ifrs/supporting-implementation/agenda-decisions/2026/demand-deposits-with-restrictions-on-use-jan-26.pdf) replaces IAS 1 references with IFRS 18 references. These examples assume 2026 reporting without early application of IFRS 18, which is [effective for annual periods beginning on or after 1 January 2027](https://www.ifrs.org/issued-standards/list-of-standards/ifrs-18-presentation-and-disclosure-in-financial-statements/). The restriction analysis remains relevant under both frameworks.

Worked example: when can Waha include a bank overdraft?

Bank borrowing normally represents financing. IAS 7 has a specific exception for an overdraft repayable on demand that forms an integral part of cash management. Frequent movements between positive and overdrawn balances help demonstrate its role. The [June 2018 agenda decision](https://www.ifrs.org/news-and-events/updates/ifric/2018/ifric-update-june-2018/) explains why a short-notice credit facility does not qualify merely because management describes it as cash management.

Consider fictional Waha Logistics in Dammam at 30 September 2026. It has SAR 430,000 in an unrestricted demand account, SAR 70,000 in a separate demand account reserved by customer contract for project payments during the next four months, and a qualifying short-term deposit of SAR 100,000. The bank pays either demand balance immediately on request.

Waha also has an SAR 80,000 overdraft that is repayable on demand. Daily records demonstrate that the account routinely switches between positive and overdrawn positions as customer receipts and supplier payments pass through it. On the stated facts it is integral to cash management. A separate SAR 120,000 loan requires fourteen days' notice for repayment and is used as continuing financing.

The SAR 120,000 loan stays outside the cash-equivalent reconciliation. The SAR 70,000 project balance stays inside it, with appropriate disclosure. Neither decision cancels the contractual obligations.

Assume Waha does not meet the offsetting conditions for presentation of financial assets and liabilities. Its statement of financial position therefore shows the SAR 600,000 assets and SAR 80,000 overdraft separately, while the cash flow statement reconciles to SAR 520,000. The [IAS 32 overview](https://www.ifrs.org/issued-standards/list-of-standards/ias-32-financial-instruments-presentation/) explains that offsetting requires an enforceable set-off right plus an intention to settle net or realise the asset and settle the liability simultaneously. Cash-flow classification supplies no automatic permission to net balance-sheet amounts.

Your conclusion should identify the qualifying overdraft account and cite the repayment clause and observed account behaviour. A generic label applied to every bank facility would miss the difference between Waha's two borrowing arrangements.

How do you reconcile opening balances, movements and disclosures?

Build the reconciliation from the same account population at both dates. Waha began the period with SAR 450,000 of qualifying assets and a qualifying overdraft of SAR 50,000. Its opening cash-flow total was therefore SAR 400,000. Closing assets are SAR 600,000 and the closing overdraft is SAR 80,000.

The financing inflow consists of SAR 60,000 of additional proceeds on the separate loan, which increased from SAR 60,000 to SAR 120,000; assume no other financing cash flows. There are no exchange-rate effects in this case. The three activity totals sum to SAR 120,000, matching the increase from SAR 400,000 to SAR 520,000.

Cross-check another way: qualifying assets rose by SAR 150,000, while the qualifying overdraft increased by SAR 30,000. The net increase is again SAR 120,000. Do not also insert the overdraft increase into the financing section when it is already treated as part of cash and cash equivalents.

Tie each component to the [general ledger](/glossary#general-ledger) and the supporting account schedule. Complete the [bank reconciliation](/learn/bank-reconciliation-guide) first so unexplained timing differences or unrecorded charges do not contaminate the classification exercise. Record required corrections separately from presentation decisions.

IAS 7 paragraphs 45, 46 and 48 address components, reconciliation, the composition policy and significant unavailable balances. For Waha, a useful note identifies the qualifying deposit, explains the project account's restriction, describes the overdraft policy and bridges SAR 600,000 of assets to the SAR 520,000 cash-flow total. Attach the supporting contracts and explain each reconciliation line so another accountant can reproduce your answer.

What common mistakes make the classification unreliable?

Most errors start before the arithmetic. The schedule can add up perfectly while including the wrong accounts. Review the decision attached to each line and then recalculate the total.

• Using remaining maturity at the reporting date. Preserve the acquisition date and maturity date together. Rimal's six-month placement remains excluded under the stated facts even when its maturity approaches.
• Treating three months as the only condition. Document convertibility, value risk and purpose as well. A short holding period cannot repair significant exposure to changes in value.
• Accepting daily redemption as enough evidence. Read how the redemption amount is determined. A current market quotation and a known cash amount are different facts.
• Removing every restricted demand account. Inspect whether the restriction changes access to cash and explain any limits on use. Waha's project agreement and bank terms must be considered together.
• Netting every short-term borrowing. Test each facility individually. The fourteen-day loan and the qualifying overdraft have different terms and functions.
• Counting transfers twice. Check whether both accounts sit within the qualifying population before recording a cash-flow activity. Keep the underlying accounting entry.
• Copying a prior-year policy without checking the contracts. Renewals, revised access rights or changed treasury use may require a fresh assessment. Retain dated evidence for your conclusion.

A concise review comment is more useful than a tick beside the balance. Write the decisive fact, the applicable requirement and the resulting treatment. This makes disagreements visible while the supporting documents are still easy to retrieve.

How can you practise the classification and explain your answer?

Rebuild both examples on a blank worksheet. Use one column for the carrying amount, one for inclusion or exclusion, and one for the reason. Calculate the closing total only after you have finished the individual decisions. Then compare your schedule with the worked answers above.

Try two independent variations. First, replace Rimal's SAR 150,000 six-month placement with a newly acquired 60-day deposit that meets every cash-equivalent condition. Leave all other facts unchanged. The revised qualifying total is SAR 470,000: the original SAR 320,000 plus SAR 150,000. Explain which facts justify the change. This is a replacement scenario, rather than the original deposit simply ageing into qualification.

Second, revisit only Waha's closing overdraft. Suppose it is instead a borrowing requiring fourteen days' repayment notice and does not meet the exception. Its closing cash-flow population would contain SAR 600,000 of assets, with that borrowing outside the total. This variation changes the closing classification; a complete period cash flow statement would also require reassessing opening classification and the related borrowing movements consistently.

Use [Accountery's practice workspace](/practice) to work on the supporting accounting skills, then keep your classification memo beside your own worksheet. The fictional cases here are self-contained exercises; this article does not claim they are specific exercises in the app. Aim to explain the dates, access terms and reconciliation clearly enough for a colleague to check.

Sources were checked on 29 September 2026. The IASB's [Statement of Cash Flows and Related Matters project](https://www.ifrs.org/projects/work-plan/statement-of-cash-flows-and-related-matters/) is developing possible improvements, including consistent application of the cash-equivalent definition. Project discussions and tentative decisions are distinct from issued requirements. When you revisit your worksheet, check the reporting period and the applicable standards before carrying forward its conclusions.