Liquidity and Availability of Resources Changes
By Jack Murray, CPA, HoganTaylor Lead Nonprofit Partner
On August 18, 2016, the Financial Accounting Standards Board (FASB) completed Phase I of its Presentation of Financial Statements of Not-For-Profit Entities project by issuing ASU No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The amendments in the standard are effective for annual financial statements issued for fiscal years beginning after December 15, 2017. This standard will be applicable for December 31, 2018 or June 30, 2019 year-ends and early application is permitted.
In this issue we will focus on liquidity and availability of resource disclosures. This aspect of the ASU is intended to improve users’ assessments of liquidity, financial performance, availability of resources to meet cash needs for general expenditures, service efforts and ability to continue to provide services, and execution of stewardship responsibilities and other aspects of management performance.
Specifically, the new guidance requires:
- Enhanced disclosures for self-imposed limits on the use of resources without donor-imposed restrictions and the composition of net assets with donor restrictions.
- Qualitative disclosures on how a nonprofit manages its available liquid resources.
- Quantitative disclosures that communicate the availability of financial assets to meet cash needs for general expenditures within one year of the balance sheet date.
Prior to the issuance of this ASU, nonprofits were required to provide information about the organization’s liquidity by any of the following:
- Sequencing assets according to their nearness to conversion to cash, and sequencing liabilities according to their nearness of their maturity and resulting use of cash.
- Classifying assets and liabilities as current and noncurrent as defined by FASB for nonprofit, business oriented health care entities.
- Disclosing in notes to financial statements relevant information about the liquidity or maturity of assets and liabilities, including restrictions on the use of particular assets.
Most nonprofits complied with these requirements by either presenting a classified balance sheet or ordering assets and liabilities according to their nearness to conversion to cash in an unclassified balance sheet, and disclosing in notes the nature and purpose of temporarily or permanently restricted net assets as well as disclosing major development campaigns and the uses of those funds.
The ASU recognizes restrictions on the use of assets placed on management by board designations, an area we have received many questions on under the previous reporting model. Boards, and in some cases management, would set aside funds for operating reserves or capital or program purposes, but because these were not donor-restricted they would still be reported as unrestricted with possibly a separate line for Board designations. The ASU mandated disclosures require a nonprofit to more fully discuss the restrictions on assets to better inform users of policies enacted to ensure an organization has the liquidity to meet its needs.
Accordingly, organizations will need to assess how they manage liquid resources to ensure they can meet their cash needs for general expenditures within the next operating cycle as well as evaluating the nature of the assets, considering external limits imposed by donors, laws and contracts, and account for internal limitations imposed by governing board decisions.
The ASU doesn’t provide examples or guidance as to the types of qualitative or quantitative information to include. However, there are three examples of notes that meet the requirements in Note G of FASB ASC 958-205-51-55-21 and Example 2 in FASB ASC 958-210-55. Those examples include qualitative disclosures about:
- 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 could be drawn down if the organization did not have any liquid, available financial assets.
The ASU also does not define general expenditures. Because the determination of general expenditures affects the determination of whether a financial asset is available to meet cash needs for general expenditures, additional qualitative information may need to include a description of how both general expenditures and availability of financial resources are determined by the entity.
Suffice it to say, we believe this section of the ASU may be the most difficult to implement, but certainly useful information for users of financial statements. These disclosure requirements should encourage each organization to consider liquidity and availability of financial assets to meet the various needs of your organization, not only to meet the disclosure requirements but to ensure you have the policies in place to manage your resources proactively. Every organization has unique circumstances that will require a measured approach to determine whether you have the processes in place to ensure your long-term sustainability.
FASB has indicated that they intend to provide implementation guidance prior to the effective date, but we certainly encourage you to review the examples in the aforementioned ASC sections to get an idea of the direction FASB is moving with these disclosures. Even though the effective date is not until calendar year 2018 or fiscal year 2019, we encourage you to begin the planning process as soon as possible.