Reporting entities are required to present the change in the cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents balances during the period in the statement of cash flows.
ASC 230 does not define restricted cash or restricted cash equivalents; instead, it refers to “amounts generally described as” restricted cash or restricted cash equivalents. By referring to restricted cash more broadly, the FASB intended it to encompass all amounts generally described as restricted cash or restricted cash equivalent accounts, regardless of their classification on the balance sheet.
In other words, amounts generally described as restricted cash or restricted cash equivalents are included on the statement of cash flows along with cash and cash equivalents. As a result, a transfer between restricted and unrestricted cash or cash equivalent accounts is not reported as a cash flow. All cash receipts/payments with third parties directly to/from restricted cash or restricted cash equivalent accounts are classified as an operating, investing, or financing cash flow based on the nature of the transaction.
In its deliberations of
ASU 2016-18, the EITF considered concerns raised by some comment letter respondents that including restricted and unrestricted cash or cash equivalent balances together in the statement of cash flows could mislead financial statement users about how much cash is available for an entity’s operations. The respondents noted that restricted cash or cash equivalents are fundamentally different from unrestricted cash or cash equivalents and may not be available to satisfy general obligations. However, the EITF thought that information about the liquidity of the amounts included in the statement of cash flows is best obtained from the balance sheet, and that the additional required disclosures about the nature of restrictions on cash should mitigate those concerns.
Example FSP 6-2 illustrates how a reporting entity should reflect the proceeds of a debt offering held in escrow by a bank in the statement of cash flows.
EXAMPLE FSP 6-2
Restricted use financing
FSP Corp issues debt in a $100 million bond offering, and, per the bond agreement, the proceeds are distributed to an escrow account that FSP Corp records as restricted cash. The proceeds from the offering are directly transferred from the investor to the trustee-controlled escrow account and FSP Corp never receives the cash from the bond offering in its general cash account. Per the bond agreement, the trustee is instructed to use $40 million of the proceeds to repay FSP Corp’s existing debt, while the remaining $60 million will be held in the restricted escrow account until FSP Corp incurs qualifying construction expenditures. At that time, the trustee will make distributions to FSP Corp’s general cash account for reimbursement of these incurred costs.
How should this arrangement be reflected in FSP Corp’s statement of cash flows?
Analysis
The cash flow statement should reflect a financing inflow of $100 million. Although it is restricted cash, it is part of the change in cash, cash equivalents, and restricted cash. Repayment of the $40 million existing debt is a $40 million financing outflow. When the $60 million is used for construction expenditures, it will be reflected as an investing outflow if it is for the payment of infrastructure, such as PP&E. When the $100 million bond is ultimately repaid, it will be reflected as a financing outflow.