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What You Need To Know: New Not-for-Profit Disclosures On Liquidity

On August 18, 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards update (ASU) No. 2016-14 Presentation of Financial Statements of Not-for-Profit (NFP) Entities. This update is meant to simplify and improve how a NFP organization classifies its net assets, as well as the information it presents in the financial statements and notes about its liquidity, financial performance, and cash flows. Surprisingly, one of the most challenging aspects of this change may be the new disclosures for reporting how a NFP manages its liquidity and the availability of financial assets.

The liquidity information required in the financial statement disclosures includes:

  1. Qualitative information in the notes that describes how a NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the statement of financial position date. Liquid resources are resources that are easily converted to cash.
  2. Quantitative information either on the face of the statement of financial position or in the notes, and additional qualitative information in the notes as necessary, that communicates the availability of a NFP’s financial assets at the statement of financial position date to meet cash needs for general expenditures within one year of the statement of financial position date. Availability of a financial asset may be affected by: its nature, limits imposed by donors, laws, and contracts with others, and internal limits imposed by governing board decisions.

To get a better understanding of what the new liquidity disclosure might entail, FASB provided a sample note disclosure in the ASU as follows:

“NFP A has $XXX,XXX of financial assets available within one year of the balance sheet date to meet cash needs for general expenditures consisting of cash of $XX,XXX, contributions receivable of $XX,XXX, and short-term investments of $XX,XXX. 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.

NFP A 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 $XXX,XXX. NFP A 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, NFP A invests cash in excess of daily requirements in various short-term investments, including certificates of deposits and short-term treasury instruments. As more fully described in Note X, NFP A also has committed lines of credit in the amount of $XX,XXX, which it could draw upon in the event of an unanticipated liquidity level.”

Since the liquidity disclosures are new to the financial statements, we suggest you begin having discussions with your management team soon, including giving consideration to the following issues:

  • Defining the organization’s policy for managing liquidity
  • Identification of external limits on the availability of financial assets that may be imposed by donors, laws, and contracts with others
  • Identification of internal limits on the use of liquid resources the governing board may have imposed on the availability of financial assets
  • If your organization has an endowment, the effects of the endowment and the annual draw from the endowment on your financial resources that may be available to meet cash needs for general expenditures
  • Line of credit arrangements available to meet liquidity needs

The amendments in the standard are effective for annual financial statements issued for fiscal years beginning after December 31, 2017, and for interim periods within fiscal years beginning after December 15, 2018.

If you would like to discuss these changes, please contact your Blue & Co. service team member.


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