Trapped Excess Cash as a Reporting Challenge

• Date: 01 November 2015
• Author: Louis P. Le Guyader
• Published date: 01 November 2015
• DOI: http://doi.org/10.1002/jcaf.22093

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© 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22093

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Trapped Excess Cash

as a Reporting Challenge

Louis P. Le Guyader

By mid‐2015,

American cor-

porations held

more than $1.7 tril-

lion cash and liquid-

ity equivalents, a

large part of which

represented “trapped

excess cash” earned

abroad that remained

offshore. Now that

cash may be a root

cause of reporting

challenges faced by

these companies.

It has been nearly

a decade since the accumula-

tion of cash offshore first

became evident on public

companies’ balance sheets, and

this accumulation has now

become a standard attribute

of some industries, notably

the high‐tech sector and cer-

tain internet‐based businesses.

Corporate strategies in the tax

and investment arenas have

emerged as the cash balances

grew and attained permanence.

It is the move of the cash

out of simple bank depos-

its that were easy to report

into complex arenas that has

brought with it more complex

accounting; reporting chal-

lenges have become inevitable.

As you read on, remember

that the high concentration

of cash remaining offshore is

being fueled, at least in part,

by taxation and managers’

attempts to avoid taxes. Any

student of reporting and capi-

tal markets will remember that

actions driven by taxation, in

contrast to productive invest-

ment and the culling of profits

from customer sales, are fre-

quently inefficient (meaning,

in the long term, not optimal

for profitability). Those tax‐

based actions are taken on the

slippery slopes of

corporate reporting

and even may lead to

morally hazardous

behavior.

This article docu-

ments reporting chal-

lenges in corpora-

tions with the largest

cash balances and

foreign operations

that have become

prominent.

AN UPDATE

The $1.7 trillion figure has

become the most widely rec-

ognizable dollar amount for

“trapped excess cash.” Actual

cash balances across industry

might differ because of the way

corporations manage them,

transforming cash at least for

a while into securities invest-

ments, and the way the bal-

ances vary from time to time in

the normal course of business.

Exhibit 1 summarizes the cash

balances from recent selected

Securities and Exchange Com-

mission (SEC) filings and

shows that less than 30 com-

panies account for about $1.0

“Trapped excess cash” can give rise to report-

ing issues including the quality of earnings, tax

reporting, foreign currency reporting, representa-

tions about “free cash flow,” and decisions related

to investments in marketable securities and the

allocation of “trapped excess cash” in corporate

split-ups. Increased vigilance is needed because

every new management decision or reporting

choice is an opportunity for a moral-hazard stum-

ble on the slippery slopes of corporate reporting,

and after all, here we are dealing with cash—the

“liquid” asset. © 2015 Wiley Periodicals, Inc.

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