AFP Calls on Financial Accounting Standards Board (FASB) to Update FAS-95 Definitions of Cash Equivalents

“Big-4” Accounting Firms Imposing Rule Changes without Authority

JULY 19, 2006 - BETHESDA, MD - The Association for Financial Professionals today called on the Financial Accounting Standards Board (FASB) to provide clarification for the definition of cash and cash equivalents used by corporations in their financial reporting. The AFP believes that the lack of clarity in Financial Accounting Standards-95 (FAS-95) has allowed the "Big 4" 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," said Jim Kaitz, President and CEO of the AFP. "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. 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 time has come for FASB to update FAS-95 to assist practitioners in better understanding the definition of cash equivalents."

According to AFP's letter to FASB, 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 CPA firms, which along with PwC, make up the "Big-4" followed suit ignoring significant liquidity protection and risk mitigation built into the ARS market. A broad range of companies were required by their external auditor to modify current financial statements (balance sheet and cash flow statement) and to restate prior financial statements.

A year later, in March 2006, PwC again issued a document applying the same narrow logic they used on ARS to Variable Rate Demand Notes (VRDN), according to AFP's letter. 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.

In both cases, all four of the major accounting firms followed suit at the same time. These decisions created confusion and difficulty in financial comparability as well as future uncertainties. Some auditors are continuing to allow ARS or VRDN to be classified as a cash equivalent if the amount is not material to the financial statements. Further, like ARS and VRDN, the underlying securities supporting money market accounts create questions if these popular accounts meet the definitions contained within FAS-95. When corporations ask their auditor for written clarification, even the auditors are reluctant in providing a written position on this matter, the AFP states.

AFP is not only concerned with the substance of the changes to accounting for ARS and VRDN, but also with the policy question on how accounting standards and interpretations will be set in the future. The process used by the accounting firms surrounding the change in accounting treatment for both ARS and VRDN was in direct contrast to the procedures followed by FASB in adopting new or amended rules.

While AFP is renewing its call for clarity for the definition of cash and cash equivalents, AFP does not suggest in its letter that FAS-95 necessarily needs fundamental revision.

"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," concluded Kaitz. "As our market-based economy continually evolves, and examples or illustrations of one time period do not always fit properly at a later time. AFP believes that it is important to have one authoritative source of standards for financial accounting and reporting and that FASB is that source."

A copy of AFP's complete letter to FASB can be found on the AFP website at www.afponline.org.

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The Association for Financial Professionals, headquartered in Bethesda, Maryland, supports more than 15,000 individual members from a wide range of industries throughout all stages of their careers in various aspects of treasury and financial management. AFP is the preferred resource for financial professionals for continuing education, career development, certifications, research, representation to legislators and regulators, and the development of industry standards. Sponsored by the Association for Financial Professionals, the CTP designation is the globally recognized industry standard for treasury and a requirement for a changing profession. More than 16,000 professionals have earned AFP's certification since 1986. For more information about AFP, visit www.afponline.org.