Picked up an interesting tidbit in one of the sessions last week at the National SEC Institute’s National SEC Reporting Conference and FASB Forum – don’t use the word “generally” in your cash and cash equivalents note.
Case in point: The Form 10-K for Waters Corporation for their fiscal year ended December 31, 2009. The cash and cash equivalents note began as follows: ”Cash equivalents primarily represent highly liquid investments, with original maturities of generally 90 days or less…” (emphasis added). Sounds fairly innocuous.
Not to the Securities and Exchange Commission. Waters Corporation received a comment letter on May 20, 2010 (this is all public knowledge) with 13 comments. One of the comments was specifically on the cash and cash equivalents note:
We note that your cash equivalents have original maturities of “generally” 90 days or less. Please explain to us the type and amount of any cash equivalents you hold in which the original maturity is more than 90 days. If these holdings are material, please review your future filings to clarify the extent of your holdings in which the original maturities exceed three months. For reference see the definition of “Cash Equivalents” within the paragraph 305-10-20 of the FASB Accounting Standards Codification.
So let’s take a look at paragraph 305-10-20 of the Codification:
Cash equivalents are short-term, highly liquid investments that have both of the following characteristics:
a. Readily convertible to known amounts of cash
b. So near their maturity that they present insignificant risk of changes in value because of changes in interest rates.
Generally, only investments with original maturities of three months or less qualify under that definition.Original maturity means original maturity to the entity holding the investment. For example, both a three-month U.S. Treasury bill and a three-year U.S. Treasury note purchased three months from maturity qualify as cash equivalents. However, a Treasury note purchased three years ago does not become a cash equivalent when its remaining maturity is three months.Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an entity with banking operations).
Funny how the text referred to by the SEC starts with the word “generally”, because it was Waters Corporation use of the word “generally” that got them in trouble! But facts are facts: the standard is pretty clear in defining what counts, and Waters Corporation made it sound like they were skirting things a little.
Kudos though to Waters Corporation. They provided the right response to this comment:
At December 31, 2009 and 2008, the Company did not have investments classified as cash equivalents with an original maturity that exceeded 90 days. The Company respectfully acknowledges the Staff’s comment and will, in future filings starting with the Form 10K for year ending December 31, 2010, remove the term “generally” from the disclosure in the consolidated financial statement footnotes.
A few final observations:
- Waters Corporation clarified for the SEC staff exactly what they did have.
- The SEC did not ask Waters Corporation to restate their filing. They asked them to “review… future filings” and that is what Waters Corporation has pretty much said they will do.
Overall, Waters wrote an excellent response to the comment letter. The SEC staff responded requesting further information on one of their original 13 comments. Waters responded, and on July 27, 2010 the SEC closed the comment process on this filing.
So a word to the wise: watch every word, even an innocuous word like generally. Especially when that one word makes it sound like you aren’t exactly following the standards.