Restricted Cash

Cash and cash equivalents are reported on the balance sheet of an organization. Cash generally consists of cash on hand (petty cash), available funds at financial institutions, and other items such as negotiable money orders and checks. Cash equivalents consist of highly liquid investments such as certificates of deposit and money market accounts. These accounts are considered to be highly liquid if they have an initial maturity of three months or less.

To be classified as a current asset, cash and cash equivalents must be readily available to pay current obligations and free from any contractual restrictions. Cash that is restricted should be segregated from the general cash and cash equivalents category. Cash is considered to be restricted if it is designated (by donor or the Board of Directors) to be used for a specific purpose. For example, if you have entered into a capital campaign to raise money for a new building, any cash received for that purpose would be restricted. This means that this cash can only be spent on costs incurred for the new building and cannot be spent for any other purpose. 

The restricted cash is classified on the balance sheet either as a current asset or a noncurrent asset – depending on the relationship to the asset for which the funds are restricted. If the cash is restricted for property and equipment, the restricted portion is classified as a long-term asset.

Restrictions on cash must also be disclosed in the notes to the financial statements. You must disclose the amount of restricted cash and the purpose for which it is restricted. The following example shows the balance sheet presentation and the disclosure for cash restricted for current and noncurrent purposes.

At December 31, 2008, the Company has $1,500,000 of restricted cash of which $900,000 is classified as a noncurrent asset. The restricted cash serves as collateral for an irrevocable standby letter of credit that provides financial assurance that the Company will fulfill its obligations with respect to a litigation settlement discussed in Note [X]. The cash is held in custody by the issuing bank, is restricted as to withdrawal or use, and is currently invested in money market funds. Income from these investments is paid to the Company. The current portion of restricted cash of $600,000 represents the amount of current liability for amounts billed to the Company for certain repairs agreed to be made under the settlement agreement.