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Need-to-Know for 2017: Nonprofit Liquidity Information


calculator-and-stats-381x254.jpgIt is hard to believe we've closed the door on 2016.
With the commotion of holidays and end-of-year requirements, some—particularly smaller nonprofits—may have forgotten about the latest Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities (Topic 958), issued August 18, 2016, by the Financial Accounting Standards Board (FASB). Several changes to nonprofit financial reporting include:

  1. Improvements to the presentation and disclosures for net assets classes from the previous three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) to two classes (without donor restrictions and with donor restrictions).
  2. Allowing free choice between the direct method and indirect method in presenting cash flows.
  3. Providing better information about functional expenses and disclosures about how expenses are allocated to management and general.
  4. Augmenting disclosures on underwater endowment funds.
  5. Unifying the reporting of investment returns.
  6. Enhancements to information provided about the liquidity and availability of financial resources.

The new standard aims to improve reporting the liquidity and availability of resources. Qualitative information will be required to be disclosed on how the organization manages its liquid available resources and its liquidity risk to meet cash needs for general expenditures within one year of the year-end date. Information should communicate the organization’s strategy for addressing risks, its policy for establishing liquidity reserves, and its basis for determining the time horizon used for managing liquidity.

Quantitative information will be required to report the availability of the organization’s financial assets at the year-end date to meet cash needs for general expenditures within one year. The quantitative disclosures could be provided in a chart form in the footnotes starting with all liquid financial assets available at year end and then reduce that total for claims on those resources including, amounts restricted by donors with time or purpose, amounts subject to appropriation, investments held in trust, and other claims, to arrive at the remaining financial assets available within one year to meet cash needs for general expenditures within one year. Below is an example:

liquidity-example.png

Alternatively, the organization could disclose both the qualitative and quantitative liquidity information in a paragraph form, as illustrated in the following FASB example and pulled from RIA Checkpoint:

The Organization has $395,000 of financial assets available within one year of the balance sheet date to meet cash needs for general expenditures consisting of cash of $75,000, contributions receivable of $20,000, and short-term investments of $300,000. None of the financial assets are subject to donor or other contractual restrictions that make them unavailable for general expenditure within one year of the balance sheet date. The contributions receivable are subject to implied time restrictions but are expected to be collected within one year. The Organization has a goal to maintain financial assets, which consist of cash and short-term investments, on hand to meet 60 days of normal operating expenses, which are, on average, approximately $275,000. The Organization has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, as part of its liquidity management, the Organization invests cash in excess of daily requirements in various short-term investments, including certificate deposits and short-term treasury instruments. As more fully described in Note XX, the Organization also has committed lines of credit in the amount of $20,000, which it could draw upon in the event of an unanticipated liquidity need."

The goal of this new ASU is to provide more useful information to the users of nonprofit financial statements to understand how the organization manages its liquidity. The ASU is effective for periods beginning after December 15, 2017. Nonprofits should prepare now for the new requirements of this standard. Review your cash management policies and quantify the available resources on hand to meet cash needs for expenditures within one year. Consider how your organization can communicate qualitative and quantitative information regarding liquidity.

Ed_Yoder_-_PBMares-1.jpgEd Yoder, CPA, MSA, is an Assurance Manger at PBMares, LLP and is co-leader of the firm’s Not-for-Profit Team. PBMares is an accounting and business consulting firm serving U.S. and international clients with offices in the Mid-Atlantic. For more information, please contact the author at eyoder@pbmares.com or visit our website, www.pbmares.com.

Topics: Finance assets information reporting