Restricted cash: test which entity can actually spend it
The cash balance on a consolidated statement is not automatically available to pay the parent’s next bond maturity. Test both the nature of the deposit and the legal or contractual ability to use it. A cash-access matrix makes those two questions visible without rewriting the issuer’s accounting classification.
Separate classification from usability
IAS 7 addresses cash flow reporting and includes application material on demand deposits with restrictions. Under IFRS, a contractual use restriction does not automatically change every demand deposit’s classification. The terms and nature of the balance matter. US GAAP presentation of restricted cash has separate requirements, so start from the framework actually used.
For research purposes, ask a second question even after accounting classification is established: who can spend this amount, for what obligation, and when? Escrow, customer safeguarding, project finance reserves, pledged deposits and subsidiary remittance restrictions can have different effects. Avoid treating every restriction as identical or permanent.
Hypothetical parent liquidity test
A group reports 300 million of cash and cash equivalents. The parent holds 80, an operating subsidiary holds 120, a project company holds 70 in a debt-service reserve, and 30 is a customer-related deposit subject to specified use restrictions. The parent has a 100 bond payment in two months.
Suppose only 40 of the operating subsidiary’s balance can be distributed before the payment under documented conditions. The immediately supported funding pool is 120: the parent’s 80 plus 40. It is neither the full 300 nor simply 180 after subtracting the two obviously restricted categories. Other subsidiary cash may remain operationally necessary or legally unavailable.
If the distribution needs an approval that is still pending, present 80 as supported now and 40 as conditional. Do not treat the expected approval as completed. These hypothetical figures illustrate entity-level access, not a legal opinion on any actual distribution.
Build the access matrix
For each material account or disclosed category, record holder entity, currency, balance, deposit terms, restriction, beneficiary, release event and earliest supported availability. Add the obligation it can satisfy and evidence for upstream distribution. Distinguish a contractual prohibition from management’s voluntary earmarking.
Reconcile the matrix to reported cash, restricted balances and cash-flow reconciliation. Explain overlaps: a deposit may be included in cash equivalents and separately discussed as pledged. Subtracting it once is enough. If the note does not specify whether categories overlap, keep a range rather than silently assuming additive totals.
Test releases and transfers
An expired pledge does not prove money reached the parent. Follow release documentation and any subsequent transfer. Conversely, a restriction tied to a project milestone may lift without a loan repayment. Identify the actual condition rather than using the contract’s final maturity as a default availability date.
Useful review triggers include reserve release, dividend approval, covenant changes and new capital controls. Bank statements are rarely public, so current access may remain partly unverified. State the financial statement date and distinguish subsequent management commentary from balance evidence. The worksheet supports a bounded liquidity assessment, not a claim that reported cash is fictitious.
FAQ
Should all restricted deposits be removed from cash equivalents?
No universal adjustment is appropriate. Accounting classification depends on the framework and deposit terms. Keep the reported classification intact and show a separately labeled liquidity-access adjustment where necessary.
Can consolidated net debt use all group cash?
It can be reported that way if clearly defined, but the ratio may not answer a particular entity’s funding question. Show the definition and an access-sensitive view when restrictions materially affect the obligation being studied.