Question

Shaefer Company prepares its financial statements according to International Financial Reporting Standards (IFRS). Shaefer sometimes has bank overdrafts that are payable on demand and that fluctuate as part of its cash management program. At the most recent financial reporting date, Shaefer had a €500,000 overdraft in one cash account and a positive balance of €3,000,000 in another cash account. Shaefer should report its cash balances as:

a) A cash asset of €3,000,000 and an overdraft liability of €500,000.
b) A cash asset of €2,500,000.
c) An overdraft liability of (€2,500,000).
d) None of the above.

Answer 1

Shaefer Company should report a net cash asset of €2,500,000 on its balance sheet, which is the netting of its bank overdraft against its positive cash balance according to IFRS, assuming the criteria for net presentation are met.

Step-by-step explanation:

The student has asked how Shaefer Company should report its cash balances according to International Financial Reporting Standards (IFRS). When a company has overdrafts that are repayable on demand and these overdrafts are part of the cash management program, it is allowed under IFRS to be offset against positive cash balances in other accounts, provided certain conditions are met.

Given that Shaefer Company has a €500,000 overdraft in one account and a positive balance of €3,000,000 in another account, these balances can typically be netted against each other if the company has the legal right to set off the amounts and intends to do so or to realize the asset and settle the liability simultaneously. Therefore, Shaefer should report a net cash asset of €2,500,000, as option b) A cash asset of €2,500,000 correctly reflects the offset of the bank overdraft against the positive cash balance, assuming that Shaefer's bank overdrafts meet the IFRS criteria for net presentation.