Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes,. For an investment to qualify as cash equivalent, it must be readily convertible to a known amount of cash and be subject to an insignificant risk of change in value.
Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity. Investments in shares are excluded from cash equivalent unless they are, in substance, cash equivalents; for example, preference shares of a company acquired shortly before their specified redemption date ( provided there is only an insignificant risk of failure of the company to repay the amount at maturity.
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