The Financial Accounting Standards Board (FASB) has indicated that diversity exists in the way changes in restricted cash are classified and presented on the statement of cash flows. In response to this finding, FASB’s Emerging Issues Task Force (EITF) has issued an exposure draft proposing changes regarding the treatment of restricted cash on the statement of cash flows.
The EITF claims that current GAAP (General Accepted Accounting Principles) lack specific guidance that addresses how to classify and present changes in restricted cash or restricted cash equivalents that occur when there are transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. There is similarly no guidance to address the classification and presentation of changes in restricted cash and equivalents that occur when there are direct cash receipts into restricted cash or equivalents, or when there are direct cash payments made from restricted cash or equivalents.
This lack of specific guidance has resulted in the diversity in practice. On the statement of cash flows, entities currently classify transfers between cash and restricted cash as operating, investing, or financing activities, or as a combination of the three. Additionally, some entities present direct cash receipts into, and direct cash payments made from, a bank account that holds restricted cash as cash inflows and outflows, while others disclose those cash flows as noncash investing or financing activities.
The amendments in the proposed update would reduce the aforementioned diversity in practice by requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. These amendments would be applied retrospectively to all periods presented.
The exposure draft is open to public comment on the proposed changes until June 27, 2016. The effective date of these amendments will be determined after that date, once the EITF has reviewed the feedback on the proposed update. To view the FASB Exposure Draft, follow this link.
For more information, please contact a member of the Whitley Penn audit team.
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