Meaning
Cash and cash equivalents that are held by a company for a specific purpose and are not available for its daily operational needs. Restricted cash is often required by lenders as a reserve for debt service or as a guarantee for a large purchase contract. It appears separately on the balance sheet to distinguish it from the flexible funds the company can spend.
This money is locked away until the condition for its release is met.
Balance Sheet Disclosure
Separation of these funds provides a clearer picture of a firm’s true liquidity to investors and creditors. It shows that although the company has cash, that cash cannot be used to pay dividends or fund new projects.
Reserve Requirement
Maintenance of a minimum balance in a specific account is a common requirement in project finance and construction deals. This ensures that there is always money available to cover critical payments even if the business has a bad month.
Release Timing
Transfer of the money back to the general accounts happens only after a specific event, like the completion of a building or the repayment of a loan. Until then, the company must manage its operations using only its unrestricted funds. The cost of calling this capital early is usually a technical default on the underlying agreement.
Audit procedures must verify that the restrictions are being followed correctly.
