The statement of cash flows must detail changes in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents for the period. The beginning and ending balance of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents shown on the statement of cash flows should agree to the sum of the amounts on the balance sheet.
ASC 230-10-20 Glossary
Cash: Consistent with common usage, cash includes not only currency on hand but demand deposits with banks or other financial institutions. Cash also includes other kinds of accounts that have the general characteristics of demand deposits in that the customer may deposit additional funds at any time and also effectively may withdraw funds at any time without prior notice or penalty. All charges and credits to those accounts are cash receipts or payments to both the entity owning the account and the bank holding it. For example, a bank's granting of a loan by crediting the proceeds to a customer's demand deposit account is a cash payment by the bank and a cash receipt of the customer when the entry is made.
Bank overdrafts occur when a bank honors disbursements in excess of funds on deposit in a reporting entity's account. Such a feature is commonly referred to as overdraft protection. Accordingly, bank overdrafts represent short-term loans from the bank and should be classified as debt on the balance sheet and financing cash flows in the statement of cash flows, as discussed in the non-authoritative guidance included in section 1300.15 of the AICPA Technical Questions and Answers.
Some reporting entities have executed contractual agreements that link numerous bank accounts within the same bank, or a group of banks. For example, multinational entities that maintain cash balances in numerous consolidated subsidiaries, in multiple currencies, in multiple countries sometimes enter into notional pooling arrangements to facilitate their worldwide treasury activities. Under a notional pooling arrangement, the balances of all bank accounts subject to the arrangement are combined into a single unit of account for purposes of determining the balance on deposit under the terms of the agreement. Accordingly, the bank accounts of certain subsidiaries in the notional pooling arrangement are allowed to be in an overdraft position if the bank accounts of other subsidiaries in the notional arrangement have aggregated deposit positions in excess of the aggregated overdraft accounts.
ASC 210, Balance Sheet, indicates that a reporting entity's cash account at a bank is not considered an amount owed to the reporting entity for purposes of determining whether a right of offset exists. Accordingly, the ASC 210 offset model cannot be utilized to offset a bank account in a deposit position against another bank account with the same bank that is in an overdraft position. Notwithstanding the guidance in ASC 210, some reporting entities have concluded that the contractual terms of their notional pooling arrangements preclude individual bank accounts within the arrangement from being considered separate accounts because contractually it functions as one account. In such circumstances, the reporting entity should aggregate all bank accounts that are subject to the notional pooling arrangement into a single balance on its balance sheet and combine these balances when assessing if there is a bank overdraft. However, when a subsidiary that participates in the notional pooling arrangement prepares its financial statements on a standalone basis, the presentation of the subsidiary’s bank accounts should reflect the facts and circumstances of the individual subsidiary without consideration of its parent’s conclusions regarding the notional pooling arrangement at the consolidated level.
Non-authoritative guidance included in section 1100.08 of the AICPA Technical Questions and Answers indicates that outstanding checks should be accounted for as a reduction of cash. Book overdrafts are created when the sum of outstanding checks related to a specific bank account is in excess of funds on deposit (including deposits in transit) for that bank account. Unlike a bank overdraft, there is no cash flow impact from a book overdraft. Book overdrafts related to a specific bank account should not be offset against other cash or cash equivalent accounts (including time deposits, certificates of deposit, money market funds, and similar temporary investments). In practice, most preparers reflect book overdrafts as a liability on the balance sheet.
However, a reporting entity may have a contractual banking arrangement whereby the unit of account is the contractual arrangement, not the individual bank account subject to the arrangement (see FSP 6.5.1.1). In such circumstances, the reporting entity should assess the combined balance on deposit for presentation within its balance sheet.
Question FSP 6-2A book overdraft is not reflected in the statement of cash flows because it only represents the reinstatement of accounts payable and does not result in cash changing hands or credit being extended by a financial institution. Thus, this activity does not represent “proceeds from short-term borrowings” as described in ASC 230-10-45-14 and is not a financing activity.
However, assuming that cash has been reduced for outstanding checks based on the non-authoritative AICPA guidance discussed above, if a zero balance account is linked to a bank overdraft credit facility and checks presented for payment are immediately payable under the credit facility, the “book” overdraft would be, in substance, a “bank” overdraft. This is because the bank can turn presented checks into legal liabilities without further action by the payor. In that case, changes in the overdraft would be classified as financing activities in the statement of cash flows and the overdraft would be presented as debt on the balance sheet.
Checks that have not been released by the end of the accounting period (e.g., not mailed) should not be reflected in the financial statements (i.e., the related balances should still be reflected as cash and the related account payable due).