4.1 Definition of Cash and Cash Equivalents

ASC Master Glossary

Cash

Consistent with common usage, cash includes not only currency on hand but demand deposits with banks or other financial institutions. Cash also includes other kinds of accounts that have the general characteristics of demand deposits in that the customer may deposit additional funds at any time and also effectively may withdraw funds at any time without prior notice or penalty. All charges and credits to those accounts are cash receipts or payments to both the entity owning the account and the bank holding it. For example, a bank’s granting of a loan by crediting the proceeds to a customer’s demand deposit account is a cash payment by the bank and a cash receipt of the customer when the entry is made.

While the definition of cash is fairly straightforward, the determination of cash equivalents may not be as clear. The ASC master glossary defines cash equivalents as follows:

ASC Master Glossary

Cash Equivalents

Cash equivalents are short-term, highly liquid investments that have both of the following characteristics:

Readily convertible to known amounts of cash
So near their maturity that they present insignificant risk of changes in value because of changes in interest rates.

Generally, only investments with original maturities of three months or less qualify under that definition. Original maturity means original maturity to the entity holding the investment. For example, both a three-month U.S. Treasury bill and a three-year U.S. Treasury note purchased three months from maturity qualify as cash equivalents. However, a Treasury note purchased three years ago does not become a cash equivalent when its remaining maturity is three months. Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an entity with banking operations).

Maturity is a critical component in the determination of whether short-term investments, such as certificates of deposit, time deposits, and other temporary investments, can be combined with cash and classified as cash equivalents or presented separately as short-term investments in an entity’s balance sheet and statement of cash flows.

Example 4-1

Entity A invests excess funds in short-term (less than three months) bank repurchase agreements. The underlying securities in the transaction may have maturities greater than three months. Entity A may classify these repurchase agreements as cash equivalents in its balance sheet and statement of cash flows. The investment (the repurchase agreement), in substance, meets the criteria in ASC 230. The critical factor is the maturity of the repurchase agreement itself, not the underlying securities that serve to secure the investment.

ASC 230-10

45-6 Not all investments that qualify are required to be treated as cash equivalents. An entity shall establish a policy concerning which short-term, highly liquid investments that satisfy the definition of cash equivalents are treated as cash equivalents. For example, an entity having banking operations might decide that all investments that qualify except for those purchased for its trading account will be treated as cash equivalents, while an entity whose operations consist largely of investing in short-term, highly liquid investments might decide that all those items will be treated as investments rather than cash equivalents.

In accordance with ASC 230-10-50-1, an entity should disclose its policy for determining which items are treated as cash equivalents. Changes to an entity’s policy represent changes in accounting principle for which preferability must be established in accordance with ASC 250.

4.1.1 Restricted Cash

4.1.1.1 Balance Sheet Presentation of Restricted Cash

Cash available for general operations is distinguishable from cash restricted in accordance with third-party special-purpose agreements. When a cash account is restricted, the ability of the account’s owner to withdraw funds at any time is contractually or legally restricted. Since an entity cannot withdraw restricted cash without prior notice or penalty, the entity should not present such cash in cash and cash equivalents. While the terms “restricted cash” and “restricted cash equivalents” are not defined in U.S. GAAP, SEC Regulation S-X, Rule 5-02(1), requires registrants to separately disclose account balances whose withdrawal or usage is restricted. As a result, registrants typically present restricted cash and restricted cash equivalents separately from cash and cash equivalents on their balance sheet, and many nonpublic entities elect similar balance sheet presentation. However, entities may include restricted cash and restricted cash equivalents in other balance sheet line items. Accordingly, an entity’s definition of restricted cash and restricted cash equivalents is typically an accounting policy matter. Such a policy should be applied consistently and will need to take into account the nature of both the financial instruments and the restrictions.

Paragraph BC9 of ASU 2016-18 indicates that the Board’s clarifications related to presenting restricted cash and restricted cash equivalents in the statement of cash flows were not intended to change an entity’s practice for identifying and reporting restricted cash or restricted cash equivalents. Specifically, paragraph BC9 states:

Although the Master Glossary does not include specific definitions of restricted cash or restricted cash equivalents, some Task Force members believe that only those financial instruments that first meet the definition of cash or cash equivalents before considering the restrictions that exist in a separate provision outside those financial instruments should be included in the beginning-of-period and end-of-period reconciliation of the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents on the statement of cash flows. Other Task Force members believe that the nature of the restrictions on cash or cash equivalents should be considered and that in certain cases the restrictions could be so severe that the financial instrument would not meet the definition of cash or cash equivalents, thereby preventing those balances from being included in the beginning-of-period and end-of-period reconciliation of total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents on the statement of cash flows. The Task Force considered defining restricted cash; however, it ultimately decided that the issue resulting in diversity in practice is the presentation of changes in restricted cash on the statement of cash flows. The Task Force’s intent is not to change practice for what an entity reports as restricted cash or restricted cash equivalents.

Further, paragraph BC19 of ASU 2016-18 notes that (1) an entity should apply the guidance on a change in an accounting principle in ASC 250 “if [the] entity is considering changing its accounting policy for determining restricted cash and restricted cash equivalents” and (2) “[s]uch evaluation would be separate from adoption of the amendments in this Update [ASU 2016-18].”

In addition, in accordance with ASC 230-10-50-7, an entity should “disclose information about the nature of restrictions on its cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.” Further, when cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents are presented in more than one line item in the statement of financial position, an entity should also apply the requirements in ASC 230-10-50-8, as discussed below.

4.1.1.2 Presentation of Restricted Cash in the Statement of Cash Flows

ASC 230-10

45-4 A statement of cash flows shall explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The statement shall use descriptive terms such as cash or cash and cash equivalents rather than ambiguous terms such as funds. When cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position, an entity shall provide the disclosures required in paragraph 230-10-50-8.

45-5 Cash purchases and sales of items commonly considered to be cash equivalents generally are part of the entity’s cash management activities rather than part of its operating, investing, and financing activities, and details of those transactions need not be reported in a statement of cash flows. In addition, 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 details of those transfers are not reported as cash flow activities in the statement of cash flows.

50-8 When cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position, an entity shall, for each period that a statement of financial position is presented, present on the face of the statement of cash flows or disclose in the notes to the financial statements, the line items and amounts of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents reported within the statement of financial position. The amounts, disaggregated by the line item in which they appear within the statement of financial position, shall sum to the total amount of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents at the end of the corresponding period shown in the statement of cash flows. This disclosure may be provided in either a narrative or a tabular format . . . .

In a manner consistent with the guidance in ASC 230-10-45-4, an entity should include in the beginning and ending cash and cash-equivalent balances of the statement of cash flows those amounts that are generally described as restricted cash and restricted cash equivalents, regardless of where such amounts may be included on an entity’s balance sheet (e.g., cash, restricted cash, other assets, collections from servicing). The concept of reconciling “total cash” in the statement of cash flows is discussed in paragraph BC5 of ASU 2016-18, which states:

The Task Force reached a consensus that a statement of cash flows should explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. That is, amounts generally described as restricted cash and restricted cash equivalents should 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 under the amendments in this Update. The Task Force recognizes that some entities present cash and cash equivalents with restrictions in multiple line items on the statement of financial position and that in some cases those line items are titled something other than restricted cash or restricted cash equivalents; therefore, the phrase amounts generally described as restricted cash or restricted cash equivalents is used throughout this Update. This consensus requires that those amounts also be included in the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. [Emphasis added]

Example 4-2

Entity A is a mortgage servicer that collects mortgage payments from debtors and remits the mortgage payments (net of authorized service fees) to a creditor. Before remitting net mortgage payments to the creditor, A classifies cash, which it has control over, under the caption “collections from servicing” on its balance sheet. Because the amounts included in the balance sheet under this caption represent cash, A presents these amounts in the beginning-of-period and end-of-period cash, cash equivalents, and restricted cash in the statement of cash flows rather than as part of the cash flow activities reported for the period.

Changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents, and restricted cash and restricted cash equivalents should not be presented as cash flow activities in an entity’s statement of cash flows. This stipulation is consistent with paragraph BC8 of ASU 2016-18, which states, in part:

The Task Force believes that internal transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents do not represent a cash inflow or outflow of the entity because there is no cash receipt or cash payment with a source outside of the entity that affects the sum of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.

Example 4-3

Company A enters into an agreement with Company B under which A will operate and maintain a desalination plant owned by B. In accordance with the contract:

Company B will transfer a fixed amount of cash into an account in A’s name at the beginning of every month to fund the cost of repairing and maintaining the plant.
The account is segregated from A’s general operating account.
Company A obtains approval from B before performing any repair and maintenance work, and available account funds cannot be withdrawn without B’s approval.
Any funds remaining upon the expiration or termination of the agreement will be returned to B.

Because of the contractual restrictions associated with the use of the cash deposited into A’s account, whenever B funds the account, A immediately recognizes restricted cash and a contract liability (i.e., deferred revenue).

In accordance with ASC 230-10-45-4, A includes the restricted cash balance with cash and cash equivalents in the reconciliation of beginning and ending cash, cash equivalents, restricted cash, and restricted cash equivalents, instead of separate cash flows (for each period for which the cash amounts are restricted).

4.1.1.3 Reconciliation of Cash, Cash Equivalents, and Amounts Generally Described as Restricted Cash or Restricted Cash Equivalents for an Interim Reporting Period

ASC 230 requires the reconciliation of (1) the ending cash, cash equivalents, and amounts generally described as restricted cash or the restricted cash equivalents balance presented in the statement of cash flows to (2) the statement of financial position when such amounts are presented in more than one line item in the statement of financial position. Such information must be provided on the face of the statement of cash flows or disclosed in the notes to the financial statements and can be in narrative or tabular form. However, ASC 230 does not specify how to apply this requirement to comparative periods when interim periods presented in the statement of cash flows do not correspond to the periods presented in the statement of financial position. Specifically, while ASC 230-10-50-8 states, in part, that the reconciliation is required for “each period that a statement of financial position is presented” (e.g., as of March 31, 20X1, and December 31, 20X0), ASC 230-10-50-8 then goes on to indicate that those amounts “shall sum to the total amount of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents at the end of the corresponding period shown in the statement of cash flows” (e.g., March 31, 20X1, and March 31, 20X0). [Emphasis added]

The lack of specific guidance on this matter has led to diversity in how entities have applied this reporting requirement for interim reporting periods. We believe that it is acceptable for an entity to use one of the following alternatives to meet ASC 230’s reconciliation requirement for interim reporting periods (for illustrative purposes, we have assumed that in the interim financial statements, the statements of financial position are as of March 31, 20X1, and December 31, 20X0, and the three months ended March 31, 20X1, and March 31, 20X0, for the statement of cash flows):

Provide the reconciliation for each period presented in the statement of financial position (e.g., March 31, 20X1, and December 31, 20X0).
Provide the reconciliation for each period presented in the statement of cash flows (e.g., March 31, 20X1, and March 31, 20X0).
Provide the reconciliation for each period presented in the statement of financial position as well as each period presented in the statement of cash flows (e.g., March 31, 20X1; December 31, 20X0; and March 31, 20X0).

See Appendix D for other SEC interim reporting considerations related to the statement of cash flows.

4.1.2 Classification of Interest Earned on Restricted Funds

As noted in Section 4.1.1, entities must include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are generally described as restricted cash and restricted cash equivalents. Entities must also provide certain disclosures about the amounts and nature of restricted cash included in their cash and cash-equivalent balances. Under ASC 230, an entity should classify interest earned on restricted funds in the statement of cash flows in a manner consistent with cash and cash equivalents that are not restricted and should also include such amounts in disclosures about restricted cash.

4.1.3 Funds Held for Others

In certain situations, an entity may arrange for the transfer of cash on behalf of others (e.g., an entity that provides payroll tax filing, payment processing services, or escrow-related activities). Questions have arisen regarding when such an entity should report — as its asset on the balance sheet and the associated cash flows in the cash flows statement — the cash and cash equivalents or restricted cash and restricted cash equivalents held with financial institutions for the benefit of its clients (the “Funds”).

We believe that the entity’s determination of whether to report the Funds held on behalf of others as its own cash, or restricted cash in its balance sheet, should be based on whether the entity controls the Funds. This stipulation is consistent with the nonauthoritative guidance in AICPA Technical Q&As Section 1100.08, which states, in part, that “[t]he balance sheet caption ‘cash’ should represent an amount that is within the control of the reporting enterprise.”

The determination of whether the entity controls the Funds held on the behalf of others can be complex. Criteria an entity should consider in making this determination may include, but are not limited to, the following:

Whether the entity has legal ownership over or title to the Funds.
Whether the entity has the right to use the Funds before performing under the terms of the arrangement (e.g., whether the entity has the right to invest the Funds before disbursement).
In the event of bankruptcy, whether the Funds would be considered part of the bankruptcy state of the entity, the client, or both.
What happens if the entity fails to perform (e.g., whether the entity would be obligated to make payments using its own cash if it failed to make payroll-related payments to a client’s employees).

If the entity determines that it controls the Funds held on behalf of others, it should report the Funds as cash or restricted cash in its balance sheet. However, if an entity concludes that it does not control the Funds, it should not present the Funds as assets on the balance sheet or present those transactions in the statement of cash flows. We believe that an operating classification may also be acceptable. See Section 6.2.4 for further discussion of reporting cash flows related to advance payments received from customers or other third parties.

We believe that entities that participate in such arrangements should consider disclosing the criteria and judgments they used when determining whether they control the Funds held on behalf of others.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.