Are Money Market Funds Considered Cash Equivalents?

Yes, money market funds are generally considered cash equivalents under U.S. GAAP, and the FASB Accounting Standards Codification lists them by name as a common example of the category.¹ Whether a specific fund earns that classification on your balance sheet depends on the fund’s structure, the type of net asset value it uses, and the accounting policy your company has adopted and disclosed. The SEC’s 2023 reforms, phased in through October 2024, tightened the redemption rules for certain fund types and changed how treasurers should think about the classification during periods of market stress.

The Two Tests a Fund Has to Meet

The definition sits in the ASC Master Glossary and is applied through ASC 230-10, the standard governing the statement of cash flows. An investment qualifies as a cash equivalent only if it satisfies both prongs of the test: it must be readily convertible to a known amount of cash, and it must be so near maturity that changes in interest rates present insignificant risk of value changes.¹

Money market funds meet both prongs by design. The SEC regulates them under Rule 2a-7 of the Investment Company Act, which imposes portfolio constraints on weighted average maturity and weighted average life that keep the funds liquid and their interest rate sensitivity minimal.² Because the portfolio continuously rolls short, the fund does not have a single original maturity the way a bond does; the 2a-7 rules substitute for that concept and hold the fund inside the “insignificant risk” zone the GAAP definition requires.

One thing to keep in mind: eligibility is not the same as required treatment. A qualifying investment can be classified as a cash equivalent, but the company has to decide, as a matter of accounting policy, which eligible investments it actually treats that way, and disclose that choice.¹

Government Funds, Prime Funds, and the Floating NAV

Not every money market fund behaves the same way. Government money market funds invest at least 99.5% of their assets in cash, government securities, or repurchase agreements backed by government securities. They maintain a stable net asset value of $1.00 per share and face fewer regulatory restrictions on redemptions.³ For classification, government funds are the easy case. The stable NAV satisfies the “known amount of cash” prong cleanly, and the portfolio handles interest rate risk with room to spare.

Institutional prime money market funds hold a broader mix, including corporate commercial paper and bank obligations. Since 2016, these funds have been required to use a floating NAV, so the share price can move slightly above or below $1.00.³ Retail prime funds can still use a stable NAV.

Many treasurers assumed the floating NAV alone would knock institutional prime funds out of the cash equivalent bucket. It doesn’t. Under current accounting guidance, the floating NAV requirement by itself does not prevent an investment in a money market fund from being classified as a cash equivalent.⁴ Day-to-day fluctuations are typically fractions of a cent, and the fund still satisfies both prongs under normal conditions. The pressure on classification comes from stress events, not from the floating NAV.

What the 2023 SEC Reforms Changed

The SEC’s 2023 money market fund reforms, phased in through October 2024, reshape the classification analysis in two ways.

First, the SEC removed the ability for fund boards to impose redemption gates, the temporary suspensions that had let funds block withdrawals entirely.⁵ Gates had been the sharpest threat to cash equivalent status, because a fund that could freeze redemptions was not, in any real sense, readily convertible to cash. With gates gone, that risk is off the table.

Second, the SEC introduced a mandatory liquidity fee framework for institutional prime and institutional tax-exempt funds. When daily net redemptions exceed 5% of a fund’s net assets, the fund must impose a liquidity fee based on the estimated cost of selling portfolio securities to meet those redemptions.⁶ If the fund can’t reliably estimate that cost, a default fee of 1% applies.⁵ The fee does not apply when the estimated cost is de minimis, meaning less than 0.01% of the value of shares redeemed.

For accounting purposes, the principle is clean. The mere possibility that a fund could impose a liquidity fee does not prevent classification as a cash equivalent. But if events actually trigger fees or other redemption restrictions, it is generally no longer appropriate to keep the investment in the cash equivalents line.⁴ A fund that qualifies in January may need reclassification in March if a stress event triggers a mandatory fee. If you hold institutional prime funds, this is what to watch during volatile periods.

The Policy Choice and the Disclosure

ASC 230-10-50-1 requires every entity to disclose its policy for determining which items it treats as cash equivalents.¹ The disclosure typically sits in the summary of significant accounting policies footnote. In practice, large companies specify which types of money market funds they include, whether they require a stable NAV, and any minimum credit quality or liquidity thresholds the fund has to meet.

A company can be more restrictive than the standard allows. It cannot be more permissive. And once a policy is set, changing it is treated as a change in accounting principle under ASC 250, so the company has to demonstrate that the new policy is preferable and restate comparative periods.¹ That is not a small hurdle if you decide, for example, to move all institutional prime funds out of cash equivalents and into short-term investments.

Why the Classification Matters on the Cash Flow Statement

When a money market fund is classified as a cash equivalent, it folds into the single “Cash and Cash Equivalents” line, and the opening and closing balances on the statement of cash flows include those fund balances alongside bank deposits. Movements between a checking account and a qualifying money market fund do not appear as cash flow activities at all. Shifting $10 million from a bank account into a government money market fund is a transfer within the same pool of liquid resources, not an investing activity.

Classify the same fund as a short-term investment and the picture changes. Every purchase and redemption becomes an investing activity, and the cash flow statement starts to look more volatile than the underlying treasury operation actually is. The cash ratio also drops, because short-term investments sit outside its numerator even though they remain current assets for the current ratio.

Money Market Funds Are Not Money Market Deposit Accounts

The names are close enough to cause trouble. A money market deposit account is a bank product, an interest-bearing savings account with FDIC insurance, and it is treated as cash on the balance sheet because it is a bank deposit. A money market fund is a mutual fund regulated by the SEC under Rule 2a-7, carries no FDIC insurance, and can have a floating principal in the case of institutional prime funds. Both may land on the same balance sheet line in the end, but the routes are different and so are the risks. If your company holds both, the footnote should make clear which is which.

1
Deloitte Accounting Research Tool. Definition of Cash and Cash Equivalents
2
eCFR. 17 CFR 270.2a-7 – Money Market Funds
3
Investor.gov. Money Market Funds Investor Bulletin
4
Deloitte Accounting Research Tool. Money Market Funds
5
Securities and Exchange Commission. Money Market Fund Reforms – Form PF Reporting Requirements for Large Liquidity Fund Advisers
6
Securities and Exchange Commission. Money Market Fund Reforms Fact Sheet