New Liquidity and Availability Reporting Standards for Nonprofits

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In August of 2016, the Financial Accounting Standards Board (FASB) released a broad update of accounting standards that will change the way nonprofit organizations report and present their financial data. Formally titled Accounting Standards Update 2016-14, Presentation of Financial Statements of Not-for-Profit Entities (ASU 2016-14), the update addresses multiple aspects of financial reporting. Not-for-profits (NFPs) will make the most significant reporting changes in the areas of functional expenses; treatment of net assets and endowments; liquidity and availability of resources; and intermediate measures of operations.

Meeting the new reporting standards for liquidity and availability may be the biggest challenge for some nonprofit organizations. The FASB states that a lack of transparency in describing restrictions on assets can create confusion and misunderstanding for donors.

An organization may be well-positioned in overall assets but still lack sufficient liquidity to provide appropriate support for immediate needs. This situation arises when a disproportionate share of the organization’s total asset portfolio is unavailable due to the nature of the underlying asset itself; external limits imposed by donors, regulations and contacts; or internal limits imposed by the governing board.

ASU 2016-14 requires two types of information regarding liquidity and availability.

  1. Qualitative: Information provided within notes to the financial statement. This information should assist observers in assessing the organization’s liquidity and describe how the organization manages liquid resources available to meet cash needs that will arise within one year of the statement date.
  2. Quantitative: Information either on the face of the financial statement or within notes to the statement. This information should communicate the availability of the organization’s assets, as of the date of the statement, to meet cash needs that will arise within one year of the statement date.

Under the new rules, NFPs are permitted to combine financial asset availability and liquidity disclosures into a single note or present them in separate notes. The update does not provide specific standards regarding the types of qualitative or quantitative information that must be included. However, FASB’s stated goals for the required disclosures can help NFPs determine how to fulfill their responsibility under the new standards. ASU 2016-14 specifies that enhanced disclosures are intended to help interested parties assess:

“The effects, if any, of the limits on the use of resources imposed by an NFP’s governing board, donors, grantors, laws, and contracts on an NFP’s liquidity, financial flexibility, and allocation of resources” and “How an NFP manages its liquidity to meet short-term demands for cash.”

For example, footnoted qualitative disclosures might include information regarding:

  • The organization’s responsibility to maintain resources to meet donor restrictions, which may make those resources unavailable for general expenditures
  • The organization’s goals for maintaining financial assets
  • The organization’s policies for investing excess cash
  • The organization’s policies for spending from board-designated quasi-endowment funds
  • Contractual agreements that make certain financial assets unavailable to fund general expenditures
  • Lines of credit that would be drawn down if the organization did not have any liquid, available financial assets

Information included on the face of the financial statements can be presented in sequence and by classification (current vs. non-current). In Table 1 and Table 2, we can see what availability and liquidity disclosures might look like, respectively.

Table 1 reflects an NFP’s financial assets (i.e. cash and cash equivalents, receivables, investments, etc.) as of the balance sheet date, reduced by amounts not available for general use because of contractual or donor-imposed restrictions within one year of the balance sheet date.

Table 1: Disclosure of Availability

Financial assets at year end $344,380
Less assets unavailable for general expenditures within one year due to:
Contractual or donor-imposed restrictions:
Restricted by donor with time or purpose restrictions (228,690)
Subject to appropriation and satisfaction of donor restrictions (48,500)
Investments held in annuity trust (27,000)
Board designations:
Quasi-endowment fund for long-term investing (22,420)
Held in liquidity reserve (3,500)
Financial assets available to meet cash needs for general expenditures within one year $14,270

Table 2 shows an NFP’s financial assets available within one year of the balance sheet date for general expenditure.

Table 2: Disclosure of Liquidity

Cash and cash equivalents $13,845
Accounts and interest receivable 5,360
Contributions receivable 8,225
Short-term investments 2,250
Other investments appropriated for current use 4,970

Because this type of reporting was unnecessary in the past, few NFPs have traditionally delineated restrictions on specific assets in their financial statements. What’s more, without a requirement to share data about relative liquidity these organizations often lack a formal strategic plan to address and manage issues surrounding liquidity. Add in the inherent difficulty of determining limits on liquidity created by internal and external factors, and it’s easy to see why meeting the new requirements may prove a high hurdle.

HBP’s nonprofit accounting professionals are leaders in supporting organizations as they adapt to evolving FASB rules and a changing environment. Please contact the firm to learn how we can help you meet this new challenge while maintaining focus on your core mission.