The juice is not always worth the squeeze when cash investment managers weigh accounting considerations.
The steady climb in interest rates that began in 2022 opened doors long closed to cash investment managers seeking attractive short-term yields on cash. But as markets look toward rate cuts, the question of whether extending duration is the right call is bringing to the fore an issue that may limit the appeal of an investment: the accounting implications.
- At a recent session, members of NeuGroup for Cash Investments offered examples of where accounting issues come into play, including the assessment of whether the added yield or “juice” offered by an investment, such as time deposits, is worth the “squeeze” of obstacles or extra work introduced by accounting teams and auditors.
- “We keep all deposits under three months just because of accounting, to be frank,” one member said during a discussion of the maturity of deposits. Another responded, “I’ll echo that our accounting team has driven some of our investment policies.”
Accounting 101: cash equivalents. The context of the discussion includes whether or not an investment is accounted for on the balance sheet under cash and cash equivalents, typically assets with maturities of 90 days or less that are highly liquid and don’t directly affect a company’s income statement. “The preference from the accounting side is that we mark it as cash equivalent,” one member said.
- At their company, while accounting is one reason the investing team keeps most deposit maturities at three months or less, there are exceptions, some in overseas markets. In those cases, treasury needs to persuade other functions that the instrument should be treated as a cash equivalent and not a short-term investment.
- “There are discussions we have had to see if a deposit more than three months can be a possibility,” they said. “If there’s a significant yield, then we will have to work with our accounting team and controllership team and make a case for that, understanding the juice is in fact worth the squeeze.”
Not worth the squeeze. That’s not always the case. The accounting team at a different member’s company decided certain investments would be classified on the balance sheet under “other assets,” meaning they would affect the company’s operating cash flow and metrics tied to it.
- “Their interpretation is that if it doesn’t have a CUSIP and it’s longer than 90 days, it’s an other asset. I disagreed but we decided, all right, we’re just going to move on and do something else,” the member said. “It’s not worth it if it’s going to affect our metrics.” A peer agreed: “The juice isn’t worth the squeeze sometimes.”
- The first member later said that the decision not to use deposits longer than 90 days is not part of the company’s investment policy statement (IPS). “We put that restriction on ourselves,” he said. Time deposits are a standard, eligible asset option in corporate IPSs.
ABS and a CECL obstacle. The extra work required to meet accounting team requirements has made investing in certain asset-backed securities (ABS) not worth it for one member. The accounting team at his company imposes a higher threshold for reserves that must be held for current expected credit losses (CECL) for ABS with credit ratings less than triple-A.
- The extra monitoring which would be required to make accounting comfortable with ABS without triple-A ratings isn’t worth the effort, the member said. “Because of all the additional work and the possibility of reserves on the P&L, we just said we’re going to throw that out the window.”
- He explained to a peer that the position of the internal accountants stemmed directly from the company’s outside auditors. “They were the ones that told our accounting team that they would want to see this reserve should we go below triple-A on securitized products.”
- “Wow, that’s wild,” said the peer, who found that stance fairly conservative given that buying a bond with a triple-B rating would not require putting aside reserves. He voiced support for his peer’s decision against investing in ABS below triple-A given the circumstances.
- “It’s something that’s going to come back to you because you’re going to be the one to make estimates of credit losses—accounting is probably not going to be able to do that,” he said. “Do you want to sign up for that extra work—is it worth a couple of basis points, worth the hours and auditors coming in and looking at your workbooks?”
