In-Depth Discussion on the Implementation of ASU 2016-18 – Restricted Cash/ Cash Flow for Multifamily Audits

In-Depth Discussion on the Implementation of ASU 2016-18 – Restricted Cash/Cash Flow For Multifamily Audits

After consultation with multiple CPA firms as to how ASU 2016-18 affects HUD project audits, REAC will not adopt these changes in the HUD chart of accounts. Therefore, for purposes of the REAC Financial Data Template, cash flow data will continue to present changes in escrows and reserve for replacements in the investment section of the cash flow statement. 

The decision, based on lengthy discussions with many firms regarding the ASU requirements and their opinions on implementation, is the simplest approach REAC can take. Conversations indicate a wide variety of interpretations on the nature of restricted cash. Some believe all HUD accounts representing tenant security deposits, restricted deposits, and funded reserves should be included on the statement of cash flows as cash. Others believe only tenant security deposits and self-restricted reserves, such as operating reserves, should be included in cash, cash equivalents and restricted cash. Still others believe that mortgage escrows are the only accounts that should be excluded from the aforementioned cash accounts.

The lack of consensus presents a barrier to implementation since there is only one template for supplemental cash flow data. Such numbers of firms unwilling to make the change in the basic financial statements prevents the implementation of the supplemental cash flow data as envisioned by the ASU.  More importantly, HUD has no particular need for the information as proposed in the ASU. In fact, inclusion of the ASU in the template would require manual review procedures that are currently being performed automatically. REAC believes making the change inhibits its mission of evaluating multifamily submissions.  By leaving the HUD chart of accounts as is, individual CPA firms can make decisions with respect to the presentation of restricted cash in their basic statements of cash flows and maintain the data currently used by REAC in their reviews.


In November 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2016-18 on Restricted Cash. The ASU is effective for audits ending on December 31, 2019.  The update requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period totals on the cash flow statement. The amendments are designed to reduce the diversity in practice that exists when these amounts are presented in the statement of cash flows. Unfortunately, the update does not provide any additional clarification of the term “restrictions.”

In concept, the ASU has an impact on multifamily engagement as the statements of financial position contain numerous accounts that could be classified as restricted.  As a result, changes in these accounts would now be presented in cash flows statement as “Cash from Operations” as opposed to “Cash provided by Investing Activities.”

Our Position

Although AHACPA supports REAC’s decision to not change the template, we do so for very specific reasons.  First, the diversity of opinion regarding implementation in the basic financial statements made it impossible to get consensus on the supplemental data template. Additionally, our general position is to limit the amount of changes to the template unless required. AHACPA believes that differences between the basic financial statements and the supplemental data are in the best interests of the CPAs who audit these entities. The differences between the requirements of GAAP financial statements and supplemental data derived from GAAP-based financial statements is an important distinction to maintain.

There are several dilemmas surrounding this decision.

  1. The cash flow statements will be different. This is a primary concern among firms as they develop templates for FY 2019 audits.  One cash flow is simpler.

  2. The auditor could be confused about their ability to give an AU-C 725 opinion on the supplemental data.  We have been asked this multiple times.

There is not much that can be done to remedy the differences in the two statements.  In our opinion, this difference should have existed from the beginning.  The current cash flow presented in the basic statements is not GAAP because escrows and reserve for replacements were presented “net.” They should have been presented with specific increases and decreases separately.  Further, we are quite certain that neither mortgage escrows or reserve for replacements are not really investments.  Finally, the actual investment accounts contained in the REAC chart of accounts are not included as investments but are included in cash in the cash flow. The pending change is allowing each client to revise their financial statements to be more in-line with their own interpretations of GAAP.  Nevertheless, in the last twenty years, no one has ever reported a specific problem with this presentation or required any report modification due to following HUD’s requirements.

Implementation Options

Everyone should now understand that the adoption of the ASU will now result in a difference in the total amount of cash, cash equivalents and restricted cash in the basic statement of cash flows and the HUD supplementary data schedule. Since there are multiple interpretations of the requirements for implementation, this difference would exist under any scenario. As mentioned above, there may still be instances where the basic statements of cash flows do not match the HUD version.

Here is what we believe to be the implementation options. Each option recognizes that there will be no change for the HUD financial data template.

Option 1 – Adopt the ASU for the basic financial statements and maintain the difference between the two statements.  This option gives credence to the new ASU and attempts to establish a more correct GAAP presentation.  Remember that the HUD Financial Data Templates (FDT) are GAAP-based but are not required to be completely aligned with GAAP.  The templates are not required to match the basic financial statements themselves.  Remember, the opinion given on supplemental data is not based on the basic financial statements themselves.  Such data is derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. the GAAP-related financial data used to prepare the basic financial statements.  Accordingly, differences have existed and will continue to exist between a pure GAAP presentation and the supplementary data. In this case, we do not believe the difference between the basic financial statements and the supplemental data is material enough to warrant any modification to the AU-C 725 opinion referred to in the auditor’s report.

Option 2 – Do not adopt the ASU for the basic financial statements.  This approach may appear more radical as it clearly deviates from the stated goals of the ASU.  However, this position is backed up by more than 20 years of non-GAAP cash flows which were presented in accordance with HUD rules.  The support for this position is as follows:

  1. To begin with there is no consensus on the nature of the restrictions.  The ASU did not make any changes to the definition of “restricted” cash.

  2. There may be questions regarding mortgage escrows, security deposits and reserve for replacements (R4R) and whether they are truly restricted cash.  Of those, only one account (R4R) seems to meet that definition and that is only restriction related to approval.

  3. Confusion could also arise from staying consistent with the HUD data schedule and if it is any more of a GAAP departure than netting the same accounts.

  4. The main users of the financial statements have indicated that they do not need or want the change.

I confess–the more I think about this, the more I find myself drawn to the second option.   It stays consistent with the past approach, users do not need or want the change, and it removes any differences between the two statements.  Given the circumstances, each firm will have to decide for themselves how this standard is to be implemented.

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