Reporting Restricted Cash

The Financial Accounting Standards Board (FASB) recently amended U.S. Generally Accepted Accounting Principles (GAAP) to clarify the guidance on reporting restricted cash balances on cash flow statements. Board members hope the amendments will limit inconsistent reporting practices that have emerged because of the lack of specific guidance.

How to handle it

On November 17, 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-18, Statement of Cash Flows (Topic 230) — Restricted Cash, to improve the details companies and other organizations must provide about their cash holdings.

Although its amendments still don’t define restricted cash or restricted cash equivalents, ASU 2016-18 provides specific guidance for reporting restricted cash. Under the updated guidance, transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents aren’t part of the entity’s operating, investing, and financing activities. So, details of those transfers shouldn’t be reported as cash flow activities in the statement of cash flows.

Instead, if the cash flow statement includes a reconciliation of the total cash balances for the beginning and end of the period, the FASB wants the amounts for restricted cash and restricted cash equivalents to be included with cash and cash equivalents. The updated guidance requires cash flow statements to report separate amounts for the changes during a reporting period of the totals for: 1) cash, 2) cash equivalents, 3) restricted cash, and 4) restricted cash equivalents. These amounts are typically found just before the reconciliation of net income to net cash provided by operating activities in the statement of cash flows.

Moreover, a business must provide narrative and/or tabular disclosures about the nature of restrictions on its cash and cash equivalents.

Why target restricted cash?

Until now, Accounting Standards Codification Topic 230, Statement of Cash Flows, hasn’t specified how to classify or present changes in restricted cash. Over the years, the lack of specific instructions has led businesses to classify transfers between cash and restricted cash as operating, investing or financing activities — or a combination of all three. Board members hope the amendments will cut down on some of the inconsistent reporting practices that have been in place because of the lack of clear guidance.

This update is the second revision to cash flow reporting in 2016. When the FASB started work on its project to improve cash flow reporting in 2014, it quickly realized that the project would require more effort than the board expected. The first improvement, ASU No. 2016-15, Statement of Cash Flows (Topic 230) — Classification of Certain Cash Receipts and Cash Payments, was published in August to clarify eight narrow issues in the complex area of cash flow reporting.

Coming soon

ASU 2016-18 goes into effect for public companies in fiscal years that start after December 15, 2017. So, public companies will have to apply the changes in their first-quarter reports in 2018. Private companies and other organizations don’t have to follow the updated guidance until fiscal years that start after December 15, 2018 — and they have an extra year before they have to apply the changes in quarterly, semiannual or monthly reports.

The amendments can be applied ahead of the effective date, but the FASB commented that, if the changes are adopted for a quarterly or other interim reporting period, the balances that are reported should be as of the beginning of the fiscal year that includes the interim period.

© 2017