Beginning with audits of financial statements for calendar year 2019, the statement of cash flows will be presented differently in your annual financial statements. This results from implementation of Accounting Standards Update (ASU) 2016-18, which modifies the treatment of restricted cash and restricted cash equivalents. In the past, beginning and ending cash and cash equivalents balances were reconciled in the statement of cash flows. Now, under the ASU, restricted cash and restricted cash equivalents are included in this reconciliation. What items are included in restricted cash and restricted cash equivalents? These will most likely include tenant security deposits and self-restricted reserves, such as operating reserves and reserves for painting and repairs. Remember, since the ASU makes no change in the definition of what constitutes restricted cash, auditing firms may interpret this differently, particularly for properties regulated by the Department of Housing and Urban Development and state regulators. In other words, certain auditing firms may recommend also including escrow deposits and replacement reserves in cash, cash equivalents, and restricted cash and restricted cash equivalents on the statement of cash flows. Please discuss this with your external auditors in preparing your annual financial statements.

The impact of the change will be to increase both beginning and ending balances in the statement of cash flows because restricted cash and restricted cash equivalents are now included in these balances. Keep in mind that the ASU will have no impact on the balance sheet. In fact, a disclosure is now required in financial statements that reconcile the total of the line items in the balance sheet comprising cash, cash equivalents, and restricted cash and cash equivalents to the ending balance in the statement of cash flows. Users of the financial statements should not confuse the increase in the beginning and ending balances with the availability of funds. Specifically, restricted funds remain “restricted” for specific purposes and generally cannot be tapped for the general operations of the property.

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