Statement of cash flows Topic 230: Restricted cash

On 1 January 20X1, it purchases a 2-year zero-coupon government bond with a face value of $10 million for $9 million. Although interest on the bond is accrued and presented as interest income in 20X1 and 20X2, no cash flow occurs concerning interest in these years. Upon redemption in 20X3, Entity A receives $10 million, divided between the repayment of originally invested funds ($9 million in investing activities) and interest earned ($1 million in operating activities). Entity A secured an investment loan of $100 million from a bank, allocated to a dedicated account.

To transfer funds from this account, Entity A must obtain bank approval, ensuring the expenditure aligns with the agreed-upon budget and schedule. In this scenario, it is unlikely that the $100 million will be classified as cash and cash equivalents since Entity A requires third-party (bank) approval for use. When actual transfers occur, Entity A should report inflows from financing activities. It is noteworthy that the classification of cash equivalents does not align with the classification of financial assets under IFRS 9.

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By segregating restricted cash from unrestricted cash on the balance sheet, companies can provide transparency and accurately reflect their financial position. Regular monitoring of restricted cash allows companies to maintain control over their financial resources, mitigate risks, and ensure compliance with legal and contractual obligations. It enables businesses to optimize cash utilization, enhance liquidity management, and maintain a solid financial position.

• Or a business may be restricted from accessing a customer’s deposit until the terms of the contract are complete.
• By effectively managing restricted cash, companies can enhance their financial resilience, maintain healthy relationships with stakeholders, and meet their long-term financial objectives.
• From escrow accounts to debt service reserves, restricted cash takes various forms and serves specific purposes.
• Unlike unrestricted cash, which can be freely used for any purpose, restricted cash has limitations on its utilization.
• Supplier finance arrangements present similar challenges in presentation as factoring of trade receivables.
• Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.

The capital expenditure is calculated as the difference between the current assets and the current liabilities. Cash equivalents are short-term, highly liquid investments that are readily convertible to cash without the significant risk of changes in value. IAS 7 specifies that in order to meet this definition, these investments individuals must be convertible within 3 months or less. The simple answer to this particular case is NO, this is NOT the cash and cash equivalents. For instance, a company might have signed a loan agreement to receive a line of credit where the lender has required the borrower to maintain 10% of the total loan amount at all times.

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Cash that is restricted for one year or less is categorized under current assets, while cash restricted for more than a year is categorized as a non-current asset. Restricted cash and cash equivalents must be differentiated from unrestricted amounts in a business’s balance sheet—and the nature of any restrictions on cash needs to be disclosed in the footnotes. Overall, the purpose of restricted cash is to ensure that funds are dedicated to specific needs and obligations, providing financial stability, compliance, and strategic planning. By effectively managing restricted cash, companies can enhance their financial resilience, maintain healthy relationships with stakeholders, and meet their long-term financial objectives. The purpose of holding restricted cash is to ensure that funds are set aside for specific purposes and to comply with legal, contractual, or internal requirements. By restricting the use of cash, companies can better manage their financial resources and allocate them efficiently.

IFRS and GAAP

The restricted cash line item is usually labeled as “Restricted Cash” or “Cash and Cash Equivalents – Restricted”. Alongside the amount of restricted cash, the balance sheet should disclose details of the restrictions imposed on these funds, providing clarity to stakeholders. While it might be argued that the customer’s payment to the financial institution could be treated as a non-cash transaction, resulting in no reported cash flow by the entity, this approach is, in my opinion, the least preferable. This is because it would mean the entity never reports cash flow from its principal activities even after payment by the customer.

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Bank Loan and Restricted Cash Example

Additionally, effective monitoring contributes to reliable and transparent financial reporting, fostering trust and confidence among stakeholders. Whether you are a business owner, investor, or simply interested in finances, grasping the concept of restricted cash is crucial for a comprehensive understanding of a company’s financial health. On the balance sheet, restricted cash is distinguished from unrestricted cash and can have a significant impact on a company’s liquidity and financial reporting. Entity A, a manufacturing company, opts to present interest received under operating activities in the statement of cash flows.

Investing activities involve acquiring and disposing of long-term assets and other investments not classified as cash equivalents. Such cash flows must lead to a recognised asset in the statement of financial position (IAS 7.6,16) – a crucial point to note. Items intrinsically related to investing activities that don’t result in a recognised asset are excluded. For instance, internal development expenditures are classified as operating activities if expensed and as investing activities if capitalised. Transaction costs for business combinations, which must be expensed under IFRS 3, are another pertinent example classified as operating cash payments. The presentation of restricted cash on the balance sheet is crucial to provide transparency and enable stakeholders to understand the availability and restrictions on a company’s cash resources.