According to the AICPA, commercial paper is considered a cash equivalent. Corporate treasurers have used CP to increase the yield on their net working capital for as long as I can remember. In the past, I used to look at the total appearing in the “Cash and Cash Equivalents” category on corporate balance sheets and do some liquidity analysis, but that’s about it. I just took the composition of this number for granted. After all, “cash” is supposed to be safe and liquid. Here’s the definition from PriceWaterhouseCoopers:

Cash equivalents are defined as short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value [IAS7.6].

So I got to thinking this morning….We are focusing on the ABCP and related effects on the banks and investment banks and SIVs and lately, pension funds and state investment funds. I haven’t heard anyone talking about how much of this crap is still in the often overlooked category called “Cash and Cash Equivalents” at regular companies.

All too often, bulls hype how much cash is sitting in corporate coffers. It’s a common claim to pump up the idea that buybacks will be a plus for stocks or M&A is easily funded. So if there are record amounts of Cash and Cash Equivalents….then how much of it is in the form of ABCP?

I decided to look a little closer and do some sampling. Where to start? Let’s start with companies beginning with an “A”. Let’s pick some familiar ones. How about Apple and Amazon?

Click here for Apple’s most recent 10-K and see for yourself. Here’s the relevant excerpt:

The Company’s U.S. Corporate securities consist primarily of commercial paper, certificates of deposit, time deposits, and corporate debt securities. Foreign securities consist primarily of foreign commercial paper issued by foreign companies, and certificates of deposit and time deposits with foreign institutions, most of which are denominated in U.S. dollars.

As of September 29, 2007, Apple had $5.6 billion in US Corporate securities and $2.8 billion in Foreign Securities that they accounted for as Cash Equivalents. Additionally, they had $4.7 billion in US Corporate securities and $957 million in Foreign Securities that they accounted for as Short-term Investments. I am not sure how much of this is in CP but I doubt it’s zero.

Click here for Amazon’s most recent 10-K and see for yourself. They had $1.894 billion in Cash and Cash Equivalents as of 12/31/06 - $347 million of that (or 18.3%) was in Asset Backed Securities.

Note that I did not look at all the companies in the S&P 500. All I did was look at two companies, both of which had stuff that caused me to write this post. Maybe they have no problems with the commercial paper or asset backed securities on their balance sheet. Maybe no one else is worried about this because it’s just not a problem. I’ll let you decide. Just pick any stock and look at their financial statement footnote to see how much of their “Cash and Cash Equivalents” are in “Asset Backed” or “Commercial Paper.” Does “Mark-to-Market” apply? What does the company say? Is there a problem?