Restricted Cash and Cash Equivalents in Nonprofit Statements of Cash Flows
How should not-for-profit entities classify and present restricted cash in the statement of cash flows? Should they present transfers between cash and restricted cash as operating, investing, or financing activities, or not? Should they present receipts and payments of restricted cash as cash inflows and outflows, or disclose such transactions as non-cash investing or financing activities? FASB has addressed these issues—and the current diversity in practice—with an Accounting Standards Update (ASU). ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash requires presentation of the total change in cash, cash equivalents, restricted cash, and restricted cash equivalents for the period in the statement of cash flows. The ASU applies to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows.
What are restricted cash and restricted cash equivalents? The ASU does not define these terms because ultimately, FASB’s goal for this ASU was to address the diversity in practice of how changes in restricted cash are presented on the statement of cash flows, which can be addressed without changing entities’ current practice for what is reported as restricted cash or restricted cash equivalents. Many nonprofits present cash and cash equivalents with restrictions in multiple line items on the statement of financial position, and in some cases, those line items are titled something other than “restricted cash” or “restricted cash equivalents.”
FASB decided that amounts generally described as restricted cash and restricted cash equivalents, including but not limited to the amounts listed above, should be included with cash and cash equivalents when reconciling beginning- and end-of-period totals shown on the statement of cash flows. With this new requirement, cash flows that directly affect restricted cash will be presented in the body of the statement of cash flows regardless of whether an entity chooses to segregate or comingle restricted cash and restricted cash equivalents with unrestricted cash and cash equivalents and regardless of the timing of the establishment and release of restrictions.
Under ASU No. 2016-18, a not-for-profit entity should report 1) net cash provided or used by operating, investing, and financing activities and 2) the net effect of those flows on the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents during the period. The ASU clarifies that internal transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents are not part of the entity’s operating, investing, and financing activities, and therefore, the details of those transfers should not be presented in the statement of cash flows.
When cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in separate lines of the statement of financial position, those amounts should reconcile to the statement of cash flows. The ASU says this reconciliation may be presented on the face of the statement of cash flows or in the notes to the financial statements, either in narrative or tabular format. This requirement allows financial statement users to identify 1) which line items on the statement of financial position include restricted cash or restricted cash equivalents and 2) the amounts of restricted cash or restricted cash equivalents included in those line items.
Not-for-profit entities also must disclose information about the nature of restrictions on their cash and cash equivalents. This will provide insight into the availability and uses of amounts generally described as restricted cash and restricted cash equivalents on the statement of financial position.
For nonprofits that are considered public business entities, ASU No. 2016-18 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted.
Source: IRS
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