Nonprofit Guidance: Discussion on Liquidity Disclosure Options

By Colin M. Hannifin, CPA, Business Assurance & Advisory Services Senior Manager and Amy Rybar Menefee, CPA, CFE, Business Assurance & Advisory Services Partner | Not-for-Profit Team

What Not-for-Profits Need to Know in Implementing Liquidity and Availability of Resources Disclosures

In August 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities. The standard, which has been widely adopted throughout the not-for-profit industry, resulted in the most significant changes in not-for-profit financial reporting in decades. The ASU was intended to enable not-for-profits to better tell their financial stories through their financial statements; organizations are still working to meet that goal.

One component of the ASU was the addition of new required disclosures around the liquidity and availability of resources for an organization, as discussed here. The new disclosures require organizations to disclose qualitative information on how liquid resources are managed and quantitative information regarding what financial assets are readily available for general expenditures within the next fiscal year. The availability of financial assets may be affected by the nature of the assets, external limits imposed by donors, laws, and other contracts, and internal limits imposed by a Board of Directors.

New Disclosure creates Challenges and Opportunities for Nonprofits

Many organizations have struggled with the implementation of this new disclosure. The guidance implies that assets subject to donor restrictions are not available for the general expenditure of the organization. The examples provided in the ASU show the calculation of financial assets available for general expenditure explicitly excluding those with donor restrictions. For organizations that rely heavily on donor support, this can result in disclosures that suggest little to no available liquidity.

The standard fails to provide a definition of what constitutes a “general expenditure,” however. The examples provided in the guidance back out financial assets restricted for purposes that are not general expenditures. However, if the financial assets are restricted for purposes that the organization considers general expenditures, it may be reasonable to include the financial assets in the quantitative disclosure.

Organizations may take the position that certain donor restrictions that relate to regular, ongoing programs and activities of the organization are in support of its general expenditures. This interpretation will vary on an organizational level; it is important for organizations to have a consistent and well-documented policy approved at the appropriate levels of governance. Any such policy should be included in the qualitative disclosures required by the standard.

Ultimately, organizations have significant flexibility within the qualitative disclosures to share how financial assets are managed. It is an opportunity to provide insight into how the organization manages its cash, receivables, and investments that readers may not otherwise understand. This could include the organization’s policies surrounding the availability of assets subject to board designations and lines of credit with liquidity upon which the organization could draw.

While organizations may have already implemented the standard, as understanding and insights continue to grow and evolve, so too will the new required disclosures. While the disclosures can seem a challenge, they also provide opportunities – ones organizations should seek to capitalize.

Questions on this topic? Contact your Keiter Opportunity Advisor or Email | Call: 804.747.0000.

Additional Not-for-Profit Accounting Resources

Access the ‘ASU 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities’ series:

• Financial Statements of Not-For-Profits: Changes to Net Asset Classifications
• Financial Statements of Not-For-Profits: Changes to Net Asset Classifications (Part II)
• Not-for-Profit Financial Statements: New Liquidity and Availability Disclosures Required (Part III)
• Functional Expense Allocation Methods Not-For-Profits Should Know (Part IV)
• Not-For-Profit Functional Expense Reporting: Management and General (Part V)
• Statement of Cash Flows and Investment Return Changes: Impact on Nonprofits (Part VI)