Restricted Cash

In This Article

• What is the definition of restricted cash?
• What are the typical features of restricted cash?
• Is restricted cash considered a current asset or liability?
• Should restricted cash be included within the cash and cash equivalents line item?

Restricted Cash Definition

Restricted cash is cash that belongs to a company yet is neither freely available to be spent nor re-invested to sustain/fund future growth.

By contrast, “unrestricted” cash is free to be used at the company’s discretion.

The cash balance of a company should consist of only unrestricted cash, as opposed to restricted cash, which is not freely available for use by the business and is instead held for a specific purpose.

The balance sheet must differentiate between restricted cash and unrestricted cash, with footnotes in the disclosure section explaining the nature of the restrictions placed on the restricted cash.

Restricted cash cannot be used to fund day-to-day working capital needs or investments for growth.

The restricted cash is instead held by the company for purposes frequently related to:

• Debt Financing – i.e. Loan Agreements, Collateral
• Capital Expenditures (CapEx) – i.e. Future Upgrades and Required Purchases/Maintenance

Accounting Treatment of Restricted Cash

On the balance sheet, restricted cash will be listed separately from the cash and cash equivalents line item – which contains the unrestricted cash amount as well as other qualifying short-term investments.

As mentioned earlier, there’ll be an accompanying disclosure with the reasoning as to why this certain amount of cash cannot be used.

Restricted cash can be classified as either a current or non-current asset:

• Current Asset – If the restricted cash is anticipated to be used within one year of the balance sheet date, the amount should be classified as a current asset.
• Non-Current Asset – If the restricted cash will be unavailable for use for more than one year, the amount should be categorized as a non-current asset.

Liquidity ratios such as the current ratio and quick ratio should also be adjusted to exclude any restricted cash.

Not doing so would cause such ratios to depict a better picture of the company’s liquidity position than in reality.

Restricted Cash Example

One example of restricted cash would be a bank loan requirement, whereby a borrower must maintain a specific percentage of the total loan amount in cash at all times.

For instance, a company might have signed a loan agreement to receive a line of credit where the lender has required the borrower to maintain 10% of the total loan amount at all times.

Throughout the entire term length in which the line of credit is active (i.e. can be drawn from), the 10% minimum must be preserved to avoid breaching the lending terms – so, restricted cash is used as collateral for a loan and is legally binding.

The lender can also request a separate bank account to hold the funds (i.e. placed in escrow) to ensure compliance by the borrower.