By Michael Troped, CPA
If your organization’s operations include carrying restricted cash on your balance sheet or statement of position, be ready for new accounting guidance.
In November, 2016 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18 Statement of Cash Flows (Topic 230). The intent of this update was to address the diversity which previously existed in the presentation of transactions involving restricted cash in the statement of cash flows. The amendments in the update are effective for public companies for years beginning after December 31, 2017 and for all other entities in years beginning after December 31, 2018. Early adoption is permitted.
The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. Entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows.
When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance also requires a reconciliation of the totals in the statement of cash flows to the related captions on the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements.
Although the ASU’s amendments do not affect how entities determine what restricted cash or restricted cash equivalents are, the changes could significantly alter the way some entities classify and present restricted cash.
Balance Sheet Presentation
The most common types of restricted cash are amounts on deposit that will be used to pay expenses and agency accounts.
A common example of the first type is the portion of debt service accumulated for payment of real estate taxes and insurance. Typically, companies have no control over those accounts and cannot convert them into cash. They should be excluded from cash and included with prepaid expenses or charged to expense if not material.
A common example of the second type is often found in real estate entities where an account is maintained by realtors for deposits on real estate contracts or for rent payments on property managed for an owner. Realtors may write checks on those accounts, but state laws normally prohibit them from using the cash for their own business (or personal) purposes even as a temporary loan.
The realtors have custody of the funds, but do not have the legal right to them. Preferably such funds should be excluded from the company’s balance sheet, but if the accounts are material, the amount and nature of the company’s agency obligation under the arrangement should be disclosed. To avoid cluttering the balance sheet, the disclosure may be in a note.
If your financial statements include restricted cash balances – ask us about how the new accounting guidance may affect your financial statement presentation.