Restricted Cash vs Cash Equivalents: Can the Company Actually Use the Money?
Cash can still be cash even when use is restricted, but availability changes classification and disclosure.
Cash equivalents
Cash equivalents are highly liquid short-term investments that are readily convertible to known amounts of cash and carry insignificant risk of value changes. The applicable original-maturity requirement matters.
Restricted cash
Restricted cash remains cash, but legal or contractual limits prevent ordinary use. Restrictions can relate to debt repayment, construction, escrow arrangements, or other commitments.
Compensating balances
A lender may require a minimum deposit balance. Whether that balance is separately presented or disclosed depends on the legal restriction and the facts.
Exam strategy
Ask whether the item is cash, highly liquid, freely available, and subject to a short-term or long-term restriction.
The takeaway
Classify the item by liquidity, maturity, and whether the company can freely use the funds.
Related Summit guides
FAQ
Is restricted cash automatically an investment?
No.
Can restricted cash be current or noncurrent?
Yes, depending on the restriction.
Is every money market investment a cash equivalent?
No. Apply the cash-equivalent criteria.