02-21-2010, 12:16 PM
Noor
I am not having IFRSs book at this moment so may not be able to quote exact refrences; still would like to answer your query.
Cash equivalents include highly liquid investments (here short term categorization is not an issue) that can be readily converted into known amount of cash.
The words "highly liquid", "readily convertible " and "known amount of cash" are vital to understand the issue. I hope these words have been used by IAS-7 (as per my memory).
Mutual funds can either be Open End or Close End funds.let's think on both separately.
In case the fund is a close end, you have to sell your shares/units in a secondary market since these cannot be redeemed by the Fund/AMC. In doing so, unpredictable amount of time is required (to locate a customer and to agree the pricing) and the amount to be fetched from sale is also unpredictable (mostly close end funds are listed and rate can fluctuate).
Therefore, in my view investment in close end mutual funds cannot be treated as cash equivalent since it is not "readily convertible" and "amount is not readily known".
In case of open end funds, NBFC rules and regulations have provided a specific time period (probably six days) to AMCs to act upon investee's request of redemption. Such requests are routed through "distributors" appointed by AMCs which process even against the law oftenly take more than the precribed limit of days. Besides this, even if process is completed within prescribed time, the convertible amount will depend upon NAV of the day on which conversion will actually take place and not as per the NAV on the day request has been made.so convertible amount is always unknown and even cannot exactly be predicted on the date when request for redemption is forwarded.
Therefore, in my view investment in open end mutual funds can also not be treated as cash equivalent since it is not "readily convertible", and the amount it will fetch on redemption is "not readily known" on any reporting date.
I hope query is answered.
Regards,
Kamran.
I am not having IFRSs book at this moment so may not be able to quote exact refrences; still would like to answer your query.
Cash equivalents include highly liquid investments (here short term categorization is not an issue) that can be readily converted into known amount of cash.
The words "highly liquid", "readily convertible " and "known amount of cash" are vital to understand the issue. I hope these words have been used by IAS-7 (as per my memory).
Mutual funds can either be Open End or Close End funds.let's think on both separately.
In case the fund is a close end, you have to sell your shares/units in a secondary market since these cannot be redeemed by the Fund/AMC. In doing so, unpredictable amount of time is required (to locate a customer and to agree the pricing) and the amount to be fetched from sale is also unpredictable (mostly close end funds are listed and rate can fluctuate).
Therefore, in my view investment in close end mutual funds cannot be treated as cash equivalent since it is not "readily convertible" and "amount is not readily known".
In case of open end funds, NBFC rules and regulations have provided a specific time period (probably six days) to AMCs to act upon investee's request of redemption. Such requests are routed through "distributors" appointed by AMCs which process even against the law oftenly take more than the precribed limit of days. Besides this, even if process is completed within prescribed time, the convertible amount will depend upon NAV of the day on which conversion will actually take place and not as per the NAV on the day request has been made.so convertible amount is always unknown and even cannot exactly be predicted on the date when request for redemption is forwarded.
Therefore, in my view investment in open end mutual funds can also not be treated as cash equivalent since it is not "readily convertible", and the amount it will fetch on redemption is "not readily known" on any reporting date.
I hope query is answered.
Regards,
Kamran.
