Ms. Susan M. Cosper
File Reference No. 2015-230, FASB
401 Merritt 7, PO Box 5116
Norwalk, CT 06856-5116
Re: File Reference No. EITF-16A
Dear Ms. Cosper:
We appreciate the opportunity to comment on the proposed Accounting Standards Update (“Update”) for the statement of cash flows (Topic 230), Restricted Cash, issued by the Financial Accounting Standards Board (“FASB”).
Baker Tilly is a large public accounting firm, currently ranked number 12 in the United States with approximately 290 partners and 2,500 team members generally operating regionally, from Minneapolis to New York City. Our practice is varied, offering audit and assurance, tax and consulting services across a broad array of clients; including public companies, larger privately held organizations and not-for-profit entities including healthcare and higher education clients.
As noted above, we have a substantial practice with healthcare and higher education entities. It is these entities where we primarily encounter restricted cash on a regular basis and our below comment reflects the issues that these sorts of entities encounter.
As the Emerging Issues Task Force (“EITF”) has noted, there is diversity in practice regarding the classification and presentation of changes in restricted cash in the statement of cash flows. Some entities treat restricted cash as investments, which results in changes in restricted cash reported as investing activities in the statement of cash flows. Other entities treat restricted cash as cash and cash equivalents, which results in no reconciliation of the changes in the statement of cash flows. The primary difference is typically the classification of the restricted cash in the statement of financial position. Depending on the nature of the restricted cash and how it is maintained, entities will report them either as cash and cash equivalents or assets whose use is limited or investments. This diversity in reporting on the statement of financial position ultimately drives the diversity in classification in the statement of cash flows.
As several EITF members also noted in recent meetings, we have concerns over a lack of definition of restricted cash within FASB’s Accounting Standards Codification. The term “restricted” carries a certain distinction for not-for-profit entities, as it relates to a donor’s intentions for the use of cash contributed. However, this term can also apply to cash that has a legal or contractual restriction, whether held by a third party or not. Finally, the term “restricted” can be broadly interpreted to include self-designated cash, as some entities will do for future purposes, such as capital improvements. Regardless of the ultimate outcome, we strongly recommend that the Board bring more clarity to the definition of restricted cash either by providing a definition for the Master Glossary or by providing examples in the ASU of “amounts generally described as restricted cash or restricted cash equivalents.”
We noted in the EITF’s Issue Summary No. 1, dated October 29, 2015, that all stakeholders indicated that self-designated cash should be excluded from the definition of restricted cash. We also noted that the majority of EITF members, in its November 12, 2015 meeting, agreed that restricted cash should not include funds that are self-designated by management. While we understand the rationale behind this opinion, we think it’s important to note that many of our clients, particularly healthcare not-for-profit entities, classify a significant amount of self-designated cash as assets whose use is limited in the statement of financial position. If these cash amounts are excluded from the definition of restricted cash, then the transfers to and from the self-designated amounts may still be noted in the statement of cash flows. Therefore, while the diversity in practice would be reduced, it would still continue to exist.
Overall, we believe the changes proposed within this Update will help create consistency in the comparability of entities’ financial statements. We agree with the spirit of the proposed changes and would be more than happy to elaborate on our comments if needed.
Question 1: Do you agree that the statement of cash flows should explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents? If not, please explain what presentation is more appropriate and why.
We agree with the proposal to include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. However, as noted in our general comment, we are concerned that there is no definition for restricted cash or restricted cash equivalents. This lack of clarity could result in continued diversity in practice.
Question 2: Do you agree that if the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents at the beginning and end of the period shown on the statement of cash flows cannot be reconciled to the amounts of similarly titled line items on the statement of financial position, an entity should disclose on the face of the statement of cash flows or in the notes to the financial statements, the amounts and line items in which such amounts are reported within the statement of financial position? If not, please explain why that information would not be useful.
We agree with the proposal to disclose the amounts and line items on the face of the statement of cash flows or in the notes to the financial statements. In practice, this approach will likely be utilized more often than not, as many entities have restricted cash reported in the same line items as other restricted securities.
Question 3: Do you agree that an entity should be required to disclose information about the nature of restrictions on its cash and cash equivalents? If not, please explain why that information would not be useful.
We agree that such a disclosure is appropriate. This allows the reader to understand why restrictions are in place, as well as an indication of when and how the restriction will be satisfied.
Question 4: Would disclosures of the amounts of gross transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents (excluding transfers, constructive or actual, that result in a concurrent cash receipt from or a concurrent cash payment to an outside source) provide meaningful information to financial statement users? Please explain why.
We believe that these disclosures could provide information to users. However, given the reporting of the restricted cash in the statement of financial position, or on the face of the statement of cash flows or notes to the financial statements, this information could already be collected by the users. This would render the disclosures of gross transfers redundant.
Question 5: Should any other disclosures be provided? If so, please explain what disclosures should be provided and why that information would be useful.
We do not have any suggestions for additional disclosures. The disclosures noted in the proposed Update are considered sufficient.
Question 6: Do you agree that the proposed amendments should be applied using a retrospective transition method? If not, please explain what transition method would be more appropriate and why.
We agree that a retrospective transition method is appropriate in order to maintain consistency in the financial statements.
Question 7: Do you agree that an entity should be required to provide the transition disclosures specified in the proposed Update? Should any other transition disclosures be required? If so, please explain what transition disclosures should be required and why.
We agree that the transition disclosures within paragraphs 250-10-50-1(a) and (b) (1) and 250-10-50-2 would provide sufficient information to financial statement users of the accounting change in the period of adoption.
Question 8: How much time will be necessary to implement the proposed amendments? Do entities other than public business entities need additional time to apply the proposed amendments? Why or why not?
In most cases, if restricted cash is not readily determinable on the face of the statement of financial position, it is distinguished in the notes to the financial statements. Therefore, we don’t believe a significant period of time will be necessary to implement the proposed amendments. Two years would be sufficient time for the preparer to adopt the proposed amendments. To maintain consistency, we believe entities other than public entities should have an additional year for the effective date, with early implementation permitted.
Question 9: Should early adoption be allowed? Why or why not?
We believe early adoption should be permitted. Whether the new guidance is adopted or not, we believe there will be enough information disclosed to allow entities the ability to compare financials statements between fiscal periods, as well as between other entities.
We appreciate the opportunity to provide the above comments and will closely follow developments with respect to this exposure draft.
Baker Tilly Virchow Krause, LLP