Restricted Cash
Cash and cash equivalents that are not freely available for general use because they are reserved for a specific purpose.
What is Restricted Cash?
Restricted cash refers to cash or cash equivalents that a company holds but cannot use for ordinary business operations because the funds are legally or contractually set aside for a designated purpose. Common sources of restricted cash include loan covenant requirements (a lender requires the borrower to maintain a minimum cash balance), escrow accounts for pending acquisitions or real estate closings, security deposits with landlords or counterparties, government-mandated reserves for utilities or financial institutions, and customer deposits held in trust. Under US GAAP (ASC 230), restricted cash is disclosed separately from unrestricted cash on the balance sheet and included in the reconciliation of the cash flow statement. Restricted cash is typically classified as current if the restriction lifts within one year, or non-current if it extends beyond one year.
Example
When Boeing entered a deferred prosecution agreement with the DOJ in 2021 related to the 737 MAX crashes, it was required to pay $2.5 billion in criminal charges and establish a $500 million fund for beneficiaries of the crash victims. This $500 million, held in escrow until disbursed, appeared as restricted cash on Boeing's balance sheet — unavailable for capital expenditures, dividends, or debt repayment until released by the court.