As defined in the textbook and by the SEC, compensating balances are the minimum balances that banks or lenders require customers to maintain in their checking or savings accounts. It’s important that this type of restricted cash be reported separately so that investors have a true view at the actual amount of available cash. If the compensating balance are held for short-term arrangements, then it should be reported in current assets as “cash and cash equivalents”. However, if it is for long-term borrowing arrangements, it should be reported under investments or other assets as “cash on deposit maintained as compensating balance”.