Definition
Cash equivalents are short-term, highly liquid investments that can be quickly and easily converted into cash. Two key attributes define cash equivalents:
- High Liquidity: They are readily convertible to a known cash amount.
- Low Risk: They are at such a minimal risk from changes in interest rates that their value remains stable as they are so near to maturity.
Examples
Typical cash equivalents include:
- Treasury bills
- Commercial paper
- Market fund shares
- Certificates of deposit (CDs) with original maturities of 90 days or less
Criteria
Under typical financial standards such as accounting standard IAS 7 (International Accounting Standard for Cash and Cash Equivalents), to qualify as cash equivalents, these investments should have original maturities of three months or less from the date of acquisition.
Importance in Insurance and Finance
Cash equivalents are crucial in financial analysis for assessing a company’s liquidity position, facilitating the management of cash flow for operational needs. In insurance, these are vital for maintaining sufficient reserves to cover immediate claim obligations.
For comprehensive guidelines on cash management and regulations, the following resources may prove useful:
