Restricted Cash and the Statement of Cash Flows

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In 2016, the Financial Accounting Standards Board’s (FASB’s) Emerging Issues Task Force (EITF) deliberated nine issues concerning cash flows, including the diverse ways restricted cash is classified and presented in the statement of cash flows.

Generally, restricted cash is available only for a specific purpose. Organizations restrict cash for many reasons, including investment in assets, debt service, and compensating balances. Some restrictions are required by law or contract, such as cash in a bond-sinking fund. Not-for-profit entities often have cash that can be expended only for purposes designated by donors. Other restrictions may be internally driven, as when management designates a certain amount of cash for future investments in property, plant, and equipment.

The EITF found that entities classified and presented transfers between cash and restricted cash as operating, investing, or financing activities, or as combinations of all three. Sometimes transfers between unrestricted and restricted accounts were reported as cash inflows and outflows, and sometimes as noncash activities. Based on EITF’s deliberations, in November 2016 the FASB issued Accounting Standards Update (ASU) 2016-18 for Accounting Standards Codification (ASC) 230. The ASU provides guidance on reporting restricted cash in the statement of cash flows. 

Major Provisions

According to ASC 230-10-10-1, “The primary objective of a statement of cash flows is to provide relevant information about the cash receipts and cash payments of an entity during a period.” These have traditionally included changes in cash equivalents as well as cash. While intentionally not defining “restricted cash,” the ASU specifically adds restricted cash to the presentation: “A statement of cash flows shall explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.”1

Including restricted cash and restricted cash equivalents in the statement of cash flows may complicate the last three lines of that statement, as those lines must reconcile to the statement of financial position. Since restricted cash may be reported in several places in the statement of financial position, for each period presented the financial statements must disclose, either on the face of the statements or in the notes, a reconciliation of total of cash, cash equivalents, restricted cash, and restricted cash equivalents reported on the statement of financial position to the amounts shown on the statement of cash flows. Entities may choose either a narrative or tabular form. Entities shall also disclose “information about the nature of restrictions on its cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.”2

The new standard will also change the way some entities report certain cash flows. The EITF concluded that “internal transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents do not represent a cash inflow or outflow of the entity because there is no cash receipt or cash payment with a source outside of the entity.” Accordingly, entities shall not treat transfers between cash and restricted cash amounts as cash flows. For example, an entity may transfer funds from cash to restricted cash in a bond-sinking fund. Under the new standard, one cannot classify this as a cash flow; when funds are disbursed from the bond-sinking fund to a third party, one would record a cash outflow from financing activities.

Effective Dates and Transition

Public entities are required to adopt the provisions of ASU 2016-18 for fiscal years beginning after Dec. 15, 2017. All other entities are required to adopt the provisions for fiscal years beginning after Dec. 15, 2018, with retrospective application required for all periods presented. Early adoption is permitted. 

1 Pending content: ASC 230-10-45. 
2 ASC 230-10-50-7.

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William G. Engelbret, CPA, PhD, is an associate professor of accounting at Pennsylvania State University Altoona and a member of PICPA’s Accounting and Auditing Procedures Committee. He can be reached at w7e@psu.edu.

Robert E. Williams, CPA, is senior technical manager at Wouch Maloney & Co. LLP in Horsham and a member of PICPA’s Accounting and Auditing Procedures Committee. He can be reached at rwilliams@wm-cpa.com.