Editing Openai/683dc86b-01f0-800f-aaec-51b6e46877e8


{{DISPLAYTITLE:Restricted Cash in CF}}

''This conversation was exported from ChatGPT''<ref>{{cite web|title=Restricted Cash in CF|url=https://chatgpt.com/share/683dc86b-01f0-800f-aaec-51b6e46877e8|publisher=ChatGPT|access-date=2025-12-20}}</ref>

== o3 ==
=== User: A company is including " cash-restricted" as part of Operational cashflow. ===
A company is including " cash-restricted" as part of Operational cashflow. The company is visibly, since many quartters, plundering the segregated account of its lcients to fund its operations. Are restricted cash accounts usually part of operationakl cashlflow statement, or is this displayed only to reconcile the fact they use it as a source of money& Company would display a negative 9M in operational cashflow instead of positive 5M.

=== Assistant: Where “restricted cash” normally sits in a statement of cash flows ===
===== Where “restricted cash” normally sits in a statement of cash flows =====

| Accounting framework | Normal presentation                                                                                                                                                                                                                                            | Why                                                                                                                                                                                   | Typical line-item placement                                                                                                                      |
| -------------------- | ------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------ |
| IFRS (IAS 7)         | Restricted amounts are excluded from “cash & cash equivalents”. Movements are shown either (a) in investing or financing sections (if the restriction is lifted or new cash is set aside) or (b) only in the reconciliation of opening-to-closing cash totals. | IAS 7 defines cash & cash equivalents as funds “available for use”; restricted balances are, by definition, not freely available.                                                     | Separate line in investing / financing or a non-cash “transfer between cash categories” disclosed outside the three activity sections. 
ifrs.org |
| US GAAP (ASC 230)    | The statement must reconcile the change in the total of cash, cash equivalents and restricted cash, but transfers between those buckets are not an operating, investing or financing cash-flow.                                                                | ASC 230-10-45-4/-5 treat the shift as a re-label of the same dollars, not a source or use of cash, so it should be shown separately from the three activity blocks. 
EY
PwC Viewpoint |                                                                                                                                                  |

===== What the company is doing in your excerpt =====
* They include “Cash – restricted $14.2 m” inside the “Changes in non-cash working capital” section of Operating activities.
* That single line swings operating cash flow from what would otherwise be roughly -$9 m (negative) to +$5 m (positive).
* The same schedule also shows a $9.6 m outflow on “Program deposits”, suggesting the restricted balance is supposed to back customer deposits that are, at least on paper, still outstanding.

===== Is that standard practice? Generally, no. =====
# Misclassification risk – Because the cash cannot be freely used, showing the release of a restricted balance as an operating inflow over-states the cash generated by the core business. IFRS and US GAAP view the release as either (a) a financing inflow (if the cash was legally pledged) or (b) a non-cash reclassification that never belongs in the three activity sections.
# Transfers ≠ cash flow – Under both IAS 7 and ASC 230 the mere relabelling of cash from “restricted” to “unrestricted” is not itself a cash flow; it should appear only in the reconciliation from opening to closing cash totals, outside the subtotals for operating, investing and financing activities.
# Regulatory commentary – Securities regulators have issued comment-letters in the past requiring issuers to remove such reclassifications from operating cash flow and present them separately because they distort liquidity analysis.

===== When could a change in restricted cash be shown in operations? =====
* Short-cycle customer funds. If the cash is restricted only temporarily (e.g., escrow that routinely clears within the operating cycle and is paired with an equal current liability), some preparers treat the net change (receipts minus releases) as an operating flow.
* Even then, good practice is to separate the gross change in a note, so users can see how much of operating cash flow actually remains available to the entity.

===== What this means for your analysis =====
* If the $14.2 m represents customer or program funds that the entity has used to cover its own expenses, operating cash flow is arguably over-stated by that amount.
* Re-casting operating cash flow without that line (-$9.0 m) gives a truer picture of the business’s ability to generate cash on its own.
* Persistent use of client-segregated funds to plug an operating deficit is a red flag for liquidity and governance; it can trigger covenant breaches and, for regulated industries, lead to supervisory action.

===== Recommended next steps =====
# Read the footnote referenced next to “Cash – restricted” to confirm the legal nature of the restriction and the offsetting liability.
# Ask management why they believe the movement belongs in operating activities and whether the presentation has been discussed with their auditor.
# Model cash flows both ways (with and without the restricted-cash reclassification) when you assess burn rate and runway; lenders and rating agencies typically back it out.

: Bottom line: Under both IFRS and US GAAP, simply freeing up restricted cash does not create operating cash flow. The fact that the company shows it there strongly suggests they are funding day-to-day operations with client-segregated money and masking an underlying cash burn.

== References ==
<references />


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