Ok geeks, here’s an accounting debate for you: how should cash be reported on the balance sheet?
At first it seems like a nonsense question. Of all the things you have to adjust for and debate how to report on the balance sheet, cash is the one sure thing: it’s carried at exactly what it’s worth, with no concern over depreciation or market value. Yet once again today I heard a familiar refrain: “Oh, they’re sitting on a tonne of cash. But it’s all overseas, so they can’t bring it back to pay a dividend without paying tax on it.” Well, if it can’t be used without tax being paid on it, then is it really honest to report it at full value on the balance sheet? Shouldn’t there be a corresponding liability for tax payable but not yet incurred to reflect the fact that — should it be needed — the cash isn’t really there? Yet right after saying that, I heard another familiar phrase “so if you back out the cash, it’s only trading at 10 times earnings.”
Well, which way is it to be: is the cash money good that you should “back out” of the valuations, or is it stranded overseas, and only worth some fraction of what it’s reported as on the balance sheet?
Should GAAP/IFRS reporting specify where cash is, or apply some discounting mechanism to reflect the fact that it is not truly available to shareholders at the indicated levels?