How to Disclose Cash Deposits In Excess of FDIC Insurance
What to Disclose
In a Technical Question and Answer (Q&A 2110.06), the American Institute of Certified Public Accountants (AICPA) stated that bank statement balances in excess of FDIC-insured amounts represent a credit risk, and the uninsured cash balances should be disclosed if they represent a significant concentration of credit risk.
The Q&A further states that while a material uninsured cash balance with a single bank should generally be disclosed, numerous immaterial uninsured cash balances on deposit with several banks may not require disclosure. Judgment must be used in determining the threshold for significance, which will vary with individual circumstances. The financial statement preparer should also use judgment to determine the aggregate materiality of numerous immaterial uninsured cash balances on deposit with several banks.
The AICPA Q&A states:
Inquiry—Should the existence of cash on deposit with banks in excess of FDIC-insured limits be disclosed in the financial statements?
Reply—The existence of uninsured cash balances should be disclosed if the uninsured balances represent a significant concentration of credit risk. Credit risk is defined in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) glossary as follows:
For purposes of a hedged item in a fair value hedge, credit risk is the risk of changes in the hedged item’s fair value attributable to both of the following:
a. Changes in the obligor’s creditworthiness
b. Changes in the spread over the benchmark interest rate with respect to the hedged item’s credit sector at inception of the hedge.
For purposes of a hedged item in a cash flow hedge, credit risk is the risk of changes in the hedged item’s cash flows attributable to all of the following:
b. Changes in the obligor’s creditworthiness
c. Changes in the spread over the benchmark interest rate with respect to the hedged item’s credit sector at inception of the hedge.
As a result, bank statement balances in excess of FDIC-insured amounts represent a credit risk.
A concentration of credit risk exists if an entity has exposure with an individual counterparty or groups of counterparties. For example, a material uninsured cash balance with a single bank should be disclosed. In contrast, numerous immaterial uninsured cash balances on deposit with several banks may not require disclosure. The threshold for “significance” is a matter of judgment and will vary with individual circumstances.
An example of disclosure might be:
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash on deposit, and money market accounts. The Organization considers short-term highly liquid investments with an original maturity date of three months or less that are not part of an investment pool to be cash equivalents. The Organization invests its excess cash in various types of short-term investments. The Organization has established guidelines relative to diversification and maturities that maximize safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. At June 30, 2022 and 2021, the Organization’s balances exceeded federally insured limits by approximately $___________ and $__________, respectively.
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Frank serves as Partner and Quality Assurance Director at CapinCrouse and has more than 50 years of public accounting and nonprofit expertise. He has a deep understanding of nonprofit organizational best practice financial functions and operations, and his expertise includes financial reporting and analysis, investments, internal controls, endowments, and grants management. As the firm’s Quality Assurance Director, Frank provides oversight of all functions of internal quality assurance, including continuing professional education, systems and processes, and monitoring and implementing new technical standards. Frank is a Chartered Global Management Accountant (CGMA) and holds an AICPA Not-for-Profit Certificate.