FASB issues proposed ASU on cash equivalents

The ASU would introduce new illustrative examples to help entities determine which digital assets can be classified as cash equivalents. The clarification would not change the Master Glossary definition of ‘cash equivalents’ but instead would provide guidance on how the definition should be applied.

The examples focus on stablecoins, digital assets that are designed to maintain a stable value relative to a reference asset, such as a fiat currency. They illustrate the attributes a stablecoin would need to meet the current definition of cash equivalents, including:

• an on-demand contractual cash redemption right;
• a direct redemption right with the issuer for known amounts of cash; and
• segregated reserve assets held by the issuer on at least a one-to-one basis (relative to the issued and outstanding digital assets in circulation) in short-term, highly liquid assets.

The ASU would also introduce a new disclosure requirement for all entities, regardless of whether they hold any digital assets classified as cash equivalents under the proposed ASU’s illustrative examples. Entities would be required to disclose the significant components (e.g. US Treasury bills, commercial paper, stablecoins, and money market funds) and amounts of their cash equivalents, including any digital assets.

This proposed disclosure would better align with a similar disclosure requirement under IFRS® Accounting Standards. It is designed to enhance transparency and give investors better insights into the nature and risks of these assets.

• The effective date will be determined by the FASB after it considers stakeholder feedback on the proposed amendments.
• Early adoption would be permitted.

Illustrative examples for certain digital assets

• Transition would be on a modified prospective basis, as of the beginning of the annual reporting period that includes the period of adoption.
• For each interim and annual reporting period in the year of adoption, entities would be required to present - either in their statement of cash flows or in their transition disclosures - a reconciliation of the opening balance of cash, cash equivalents, restricted cash and restricted cash equivalents, before and after adoption.

Disclosure of significant components of cash equivalents

• Transition would be on a prospective basis, as of the end of the annual reporting period in which entities first apply the proposed amendments.