What is Restricted Cash?

Q:

What is restricted cash?

A:

Restricted cash is money that is not available to freely spend by a business because it is intended to be used for a particular purpose. It is money set aside for a specific purpose that cannot be used for things like everyday operating expenses or investments. Some examples of restricted cash are money set aside to pay off a long-term debt or cash saved for the purpose of building additional plant space.

Balance Sheet Reporting

A company will separately report restricted cash on the balance sheet if it is a material amount. Restricted cash can either be a current assets or a long-term (non-current) asset based on how long the cash is restricted. Cash that is going to be used within a year is considered a current asset and cash held beyond a year is long-term.

There are instances where the restricted cash amount is not material. If this is the case, a company may keep the restricted cash lumped in with the normal cash for reporting purposes. For example, if a$10 billion dollar company has only $500 in restricted cash, it likely  unnecessary for them to disclose this restricted cash because it it immaterial. However, a tiny company with the same $500 restricted cash may need to disclose the restriction.

Compensating Balances

A company may also be subject to a compensating balance within a bank account or demand deposit. This means that the business must maintain a minimum deposit balance as a requirement of a lender. For example, XYZ Corporation might be required to keep $25,000 in the company bank account as a requirement for a $400,000 loan. A company may need to disclose that they have compensating balances in order to be transparent with investors or financial statement users. When a material compensating balance is disclosed, it is disclosed separate from the regular cash balance on the financial statements.