Beginning with all fiscal year ends that begin after December 15, 2018 (calendar year 2019), the statement of cash flows must account for a recent change in Topic 230 regarding the disclosure of entities’ cash and cash equivalents. In general, all organizations that must report a schedule of cash flows for the period must change the footnote and account groupings to include restricted cash in addition to cash and cash equivalents.

Why The Change?

The Financial Accounting Standards Board (FASB) received feedback that companies included various methods of calculating and disclosing cash flow amounts under cash and cash equivalents. Some entities classify transfers between cash and restricted cash as operating, investing, or financing activities, or as a combination of those activities. Additionally, some include direct cash receipts into (and payments made from) bank accounts that hold restricted cash as cash inflows and outflows, while others classify them as noncash investing or financing activities.

All this to say that with Accounting Standards Update 2016-18, the FASB is fine-tuning its required presentation of cash flows to unify organization’s reporting and provide greater transparency for users of financial statements.

What Does The Change Require?

ASU 2016-18 requires all entities that present a statement of cash flows to explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. In addition, the standard has added a footnote to reconcile the total cash to the line items that comprise it.

Specifically, these changes are:

  1. Lines on the statement of cash flows will be changed from “Cash and cash equivalents, beginning/end of year” to “Cash, cash equivalents and restricted cash, beginning/end of year.”
  2. A footnote detailing the line items contributing to the total cash, equivalents, and restricted cash amounts will be added in the notes to the financial statements, supplementing any current disclosures about cash and cash equivalents. These amounts can be written in a table or paragraph form. See ASU 2016-18 for examples.

Not-For-Profit Entities

The changes mentioned above only apply to non-profit organizations that segregate restricted assets on the statement of financial position. Due to the various other restrictions on not-for-profit entities’ cash accounts, the footnote is worded differently than for-profit organizations’. See the update for specific not-for-profit footnote language.

Affordable Housing Entities

Typically, changes in restricted accounts such as residual receipts and replacement reserves are recorded under the investing section of the statement of cash flows. However, with this FASB update, these amounts will be removed from investing and placed under the newly created line, “Cash, cash equivalents and restricted cash” as mentioned above.

Accounts that are affected by the upcoming requirements include the following:

  • Tenant security deposits
  • Mortgage escrows (insurance, real estate taxes, and mortgage insurance premiums (MIP))
  • Replacement reserves
  • Residual receipts
  • Operating reserves
  • General operating reserves (GOR)
  • Any other reserve accounts

Cash inflow and outflow from any of these types of accounts during the period will be removed from their current grouping under Investments and instead be reported with the new line total.

Guidance Adopting ASU 2016-18

As auditors, we know this shift in cash flow reporting can be confusing to implement and stay in compliance with generally accepted accounting principles. If you need help or want clarification on this standards update, please contact our team of CPAs for guidance. We are always here to serve!

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