As the Securities and Exchange Commission prepares to propose some structural reforms for mutual funds, accounting experts are pondering the possible implications for the cash flow statement for companies that classify mutual funds as cash.

According to recent press reports, the SEC may issue a proposal later this month to require money funds to allow their net asset values to float instead of holding fixed at $1 per share, or to set aside capital to protect losses as a portion of shareholder cash held for 30 days when shareholders move to withdraw all their money. 

SEC Chairman Mary Schapiro has said she wants to institute reforms that would prevent a run on a single fund—like the one that occurred in 2008 and was backstopped by the U.S. Treasury—from destabilizing the entire system. The floating net asset value would cause investors to grow accustomed to fluctuations in net asset values and treat all investors more fairly in times of stress, she said in testimony to the Senate Banking Committee, while the capital buffer and redemption limitations would make explicit the minimum capital available to a fund.

Charles Mulford, accounting professor at Georgia Institute of Technology who studies cash flow issues among public companies, says the reforms the SEC is pondering could affect how companies would be required to classify mutual funds. “One could raise the question as to whether a money market fund with a fluctuating price is a cash equivalent,” he said. “Companies who carry them as such may need to consider reclassifying them as short-term investments.”

Kenneth Miller, a partner in the national office of PwC, agrees the accounting debate will roll if the SEC makes such reforms, especially allowing net asset values to float or even more importantly setting limitations on redemption. “If they push the money market off the dollar, I don't think that in itself would be determinative,” he says. “If they limit the availability of funds, maybe having a waiting period before you can take your money, that would lead to more serious discussions about cash flow classifications.”

That could have a big impact on how much available cash companies would be able to report in financial statements. He says many companies have a significant concentration of money market funds classified as cash or cash equivalents in their cash flow statement. "I don't have any experience or data to tell me how bit it is, but I'd think it would have a big impact if we summarily concluded that money market funds were no longer cash equivalents."

Miller said it's difficult to speculate until a rule is proposed and adopted, but he points out that existing accounting rules specify that money market funds qualify as cash equivalents for accounting purposes. “I would think if there were some changes around money market funds, there might be some standard setting in on the accounting side to clarify this. It seems to me if the definition of a money market fund changes, that would cause the whole manner in which we evaluate cash equivalents to change.”