What is restricted cash and how to present it?

March 7, 2010

1. Nature of restricted cash

Restricted cash is cash not available for immediate use. Such cash cannot be used by a company until a certain point or event in the future. Let’s take a look at a few examples.

Example 1: A large equipment manufacturing company received an advance payment (deposit) from its customer for a piece of equipment to be finished and shipped within the next six months. According to the customer contract, the manufacturer must transfer this deposit in a separate bank account and cannot use it until the equipment is shipped. This advance payment received from the customer represents restricted cash on the manufacturer’s books because it cannot be used until a future event (the shipment of equipment). Once the equipment is shipped, the manufacturer will be able to use the cash in their operations.

Example 2: A company sets aside an equal amount of cash each month for liquidation (payment) of a long-term debt. The debt is to be paid off in two years. The amount of cash set aside is restricted for future use only, and thus, it represents restricted cash. When the time of debt settlement comes, the company will use the accumulated funds to pay off the debt.

2. Presentation of restricted cash on balance sheet

If the restricted cash balance is material, then this balance is shown separately from cash and cash equivalents on the balance sheet. Depending on when cash is expected to be used, restricted cash can be classified as a current (short-term) or non-current (long-term) asset.

In cases when restricted cash is expected to be used within one year after the balance sheet date, it should be classified as a current asset (Example 1). However, if restricted cash is not expected to be used within one year after the balance sheet date, it should be classified as a non-current asset (Example 2).

It is good practice to account for restricted cash in a separate ledger account.

Restricted cash can be combined with cash and cash equivalents if the restricted cash balance is not material.

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