Restricted Cash

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Restricted Cash
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Restricted Cash is identified by the entity as the cash that is held for a specific purpose and is not available for the company to freely use. Often the restriction of the cash is part of a collateral or other type of agreement with a third party. For all restricted cash, the entity must disclose the nature of the restriction. Frequently, restricted cash is reported on separate line item on the statement of financial position[1].

Cash restricted in use should be reported separately on the balance sheet as restricted cash. If the company expects to use the restricted cash within the next year, it reports the amount as a current asset. When this is not the case, it reports the restricted funds as a noncurrent asset.

A company may have restricted cash, cash that is not available for general use but rather is restricted for a special purpose. For example, landfill companies are often required to maintain a fund of restricted cash to ensure they will have adequate resources to cover closing and clean-up costs at the end of a landfill site's useful life[2].

Types of reporting cash

There are three types of reporting cash[3] :

  • Cash equivalents are short-term, highly liquid investments that can be converted into a specific amount of cash. At the time of purchase, they typically have maturities of three months or less. They include money market funds, bank certificates of deposit, and US treasury bills and notes.
  • Restricted cash a company may have cash that is restricted for a special purpose. An example is a payroll bank account for paying salaries and wages. Another would be a plant expansion cash fund for financing new construction. If company expects to use the restricted cash within the next year, the amount should be reported as a current asset.
  • Compensating balances is the minimum balances, provide the bank with support for the loans. When making loans to depositors, banks commonly require borrowers to maintain minimum cash balances. They are a restriction on the use of cash that may affect a company's liquidity. Thus, companies should disclose compensating balances in the notes to the financial statements.

Restricted cash or equivalents cash

Company with restricted cash or restricted cash equivalents or both would include those amounts in cash and cash equivalents for reconciliation purposes. For public and private companies, the consensus opinion concluded the following[4]:

  • transfer between restricted cash and cash or cash equivalents are not part of operating, investing or financing activities
  • the required reconciliation in the statement of cash flows should be for cash, cash equivalents and restricted cash, and restricted cash equivalents
  • FASB chose not to define restricted cash with the ASU and left it up to the firms to determine when there were significant cash or cash equivalent restrictions

Footnotes

  1. C.Bain, Ch.J. Davis 2018, p.241
  2. P.D. Kimmel, J.J. Weygandt, D.E. Kieso 2009, p.350
  3. P.D. Kimmel, J.J. Weygandt, D.E. Kieso 2010, p.298-324
  4. T. Klammer 2018, p.122

References

Author: Małgorzata Oleksińska