Interestingly, ASU 2016-18 does not provide a definition of restricted cash or restricted cash equivalents
Definition of Cash
As originally conceived, the statement of cash flows was intended to explain the change in the amounts at the beginning and end of the period titled “cash” or “cash and cash equivalents” in the statements. Cash equivalents were “generally” (the word used by FASB) defined as short-term, highly liquid investments meeting certain maturity, risk, and convertibility criteria; however, not all investments with similar characteristics are required to be considered cash https://paydayloansohio.net/cities/zanesville/ equivalents. Accordingly, entities must establish and disclose as a policy a definition concerning which short-term, highly liquid investments are treated as cash equivalents.
Entities often have amounts of cash and cash equivalents that are restricted and reported elsewhere in the statement of financial position. Over time, questions and diversity in practice developed in the classification and reporting of changes in restricted cash and transfers between restricted and unrestricted cash amounts.
To improve the reporting of cash flows and eliminate the inconsistences in reporting restricted cash flows, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). The ASU added the requirement to explain the change during the reporting period in the entity’s total cash, which is defined as the aggregation of cash, cash equivalents, and amounts of restricted cash and restricted cash equivalents. When the amounts representing total cash are reported in more than one line item on the statement of financial position, the ASU added the requirement to either report on the face of the statement or disclose in the notes to the financial statements the line items and amounts of cash, cash equivalents, restricted cash, and restricted cash equivalents that sum to the total amount of cash shown in the statement of cash flows at the beginning and end of the corresponding period (Exhibit 1).
Reconciliation of Cash, Cash Equivalents, and Restricted Cash within the Statement of Financial Position and Total Cash Shown in the Statement of Cash Flows
FASB concluded its intent was not to change existing practices for what entities report as restricted cash or restricted cash equivalents, but to provide relevant information about the sources and uses of an entity’s total cash flows.
The new requirements are effective for public business entities for fiscal years beginning after , and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after , and interim periods within fiscal years beginning after endments should be applied using a retrospective transition method to each period presented.
It is worth noting that FASB has questioned the concept of cash equivalents. In its 2010 draft of an ASU on financial statement presentation, the board proposed eliminating the concept, concluding at that time that cash equivalents neither possess the same characteristics as cash nor have the same risk. FASB acknowledged that cash equivalents can be critical in an entity’s cash management, but their use did not justify the grouping of dissimilar assets. Accordingly, a future change by FASB excluding cash equivalents as part of cash may be forthcoming.
For nongovernment entities, a statement of cash flows should report the net cash provided or used in operating, investing, and financing activities and the net effect of those flows in such a manner that reconciles the total beginning and ending cash and cash equivalents. The presentation of cash flows from operating activities, however, has been controversial since the statement was first developed. FASB, and certain users, have always preferred reporting operating activities using the direct method, in which the major classes of operating cash receipts and payments are reported. Some users believe the direct method provides little or no useful information, and many preparers have noted the difficulties and prohibitive costs in capturing the information.
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