Bluffer
Blogger
Share this content
0
4
1088

Definition of an investment

Definition of an investment

A small company (adopting the FRSSE) has placed an amount with a Building Society in what is described as a "Business Savings 2 Year Fixed Rate Bond". Part withdrawals are not permitted and closure before maturity leads to loss of gross interest.

The accounts show this as an investment (a fixed rate savings bond) but I am suggesting that it is nothing more than "cash at bank".

Any opinions please?

Replies

Please login or register to join the discussion.

avatar
01st May 2012 19:01

Problem is semantics; answer is

cash.

The term "bond" is often used by banks and building societies as a marketing differentiator to suggest there is something possibly more secure, certainly more sophisticated, about a financial arrangement. Its use to describe some savings products is not completely unjustified insofar as they share common characteristics with bonds - capital is repaid on/by a specified date and the interest rate is defined.  However, the bank/building society "bonds" tend not to share one, seemingly unimportant but conspicuous trait of, what the investment world would consider, bonds - they are not certificated.

Therefore if all the company essentially holds as evidence of its "investment" is a certificate or some certificate-like proxy documentation) it may justifiably be considered to be a bond in the investment world sense.  However, as is more likely, if the company's "investment" is evidenced by an "account" and "statements" then this is more like a bank account (cash at bank).

If this is not convincing then perhaps another way of considering this situation may be to consider:

If the building society went into liquidation which group would the company belong to?:

1) Shareholder

2) Bondholder

3) Depositor

...I hope this is helpful.

tladirect

Thanks (0)
By Hansa
01st May 2012 22:34

Is it immediately realisable?

My training (many, many moons ago) taught me that "cash" is funds in hand (obviously), current and deposit accounts and other deposits where the capital - in full - can be realised in 7 days or less. (By implication, without breaking a contract) 

Tladirect has provided a comprehensive answer but even though he debunks (correctly) the term "bond", nevertheless I have my doubts as to whether these are "cash equivalent" .  These "certificates" have a two year life (hardly instantly realisable without breaching the investment contract) and, I suspect are not pari passu with a normal deposit.

. . .  I, like the original accountant, would be inclined to class this as an investment rather than cash.

 

Thanks (0)
avatar
By Bluffer
02nd May 2012 09:03

Thank you

Many thanks to both (and future?) respondents. Very useful.

Thanks (0)
avatar
02nd May 2012 13:22

On balance...

Bluffer,

Hansa's response has necessitated my return from investment management nirvana to the brutal world of accountancy.

On balance I think Hansa and the former accountant are probably closer to the mark even though I believe the "bond" you describe is no more than a deposit account with conditional access.

Nevertheless, should there be any technical issue with liquidity, and assuming your client's business is viable, an investment management view may be the basis for an alternative presentation.

tladirect

Thanks (0)