A company must do which of the following, if a company maintains a material compensating balance of cash?
A) Disclose the compensating account arrangement in financial statements.
B) Close out the balance prior to year-end.
C) Tie balances to debt covenants.
D) Provide a lockbox for appropriate line-of-credit draws.

Question

Quizplus · Accepted Answer

If a company maintains a material compensating balance of cash, it must disclose the compensating account arrangement in financial statements. This is because the compensating balance affects the company's liquidity and financial position, and therefore should be disclosed to stakeholders. Closing out the balance prior to year-end or providing a lockbox for appropriate line-of-credit draws are options a company may choose to manage the compensating balance, but these choices are not required. Tying balances to debt covenants also may be an option, but it is not related to disclosure requirements.

A Company Must Do Which of the Following, If a Company