Starting in 2018, not-for-profit entities will be required to disclose information about their liquidity, liquidity risk, and availability of resources.

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, in August 2016. We cover the new requirements for assessing liquidity, liquidity risk, and availability of resources in this Insight, part of our series about the new standard.

Requirements

The new standard requires disclosure of qualitative and quantitative liquidity information.

Qualitative Information

This refers to how an organization manages its liquid resources to meet operational cash needs within one year of the statement of financial position date.

Qualitative information should be included in the footnotes and describe the availability of the not-for-profit’s financial assets. Financial assets are defined as cash, ownership interest in an entity, or a contract that allows an organization to receive cash or another financial instrument or to exchange financial instruments on potentially favorable terms. The availability of financial assets can be affected by:

• The nature of the asset
• External limitations on the asset that are imposed by donors, grantors, laws, and contracts
• Limits on the asset that are imposed internally, for example, by governing board decisions

Quantitative Information

This refers to the amount of financial assets available to meet cash needs within one year of the statement of financial position date. Quantitative information can be included on the face of the statement of financial position or in the footnotes.

Impact on Not-for-Profits

These new disclosures will provide more clarity to readers of financial statements on what resources are available to support ongoing operations. They could also make it more apparent when an organization is in a strained financial situation.

Organizations that already present their statement of financial position in a classified format that shows current and noncurrent assets and liabilities may discover the transition to the new standard is easier than expected. These entities may have already determined the assets expected to be realized in cash or available for use within one year of the financial statement date, bringing them closer in line with the new standard’s required disclosures.

Financial Assets

Organizations will need to assess what their financial assets are and whether the current assets presented in their statement of financial position equate to the financial assets available to support general expenditures within one year from statement of financial position date.

In some instances, an organization’s current assets may be different from those available to meet cash needs for general expenditures. For example, an organization may classify pledges to be received within one year as current in its statement of financial position, but these pledges may be purpose restricted and unavailable for general expenditures—even when the cash is received.

Common types of financial assets include:

• Cash and cash equivalents
• Short-term investments
• Receivables
• Pledges
• Inventory

Restrictions

Restrictions that could limit the use of assets are:

• Donor restrictions for capital expenditures or other expenses beyond the next year
• Funds designated by the board including assets for self-insurance funding, pension obligations, or debt arrangements
• Assets held as collateral
• Cash balance limits resulting from contractual agreements with vendors or creditors
• Cash required to be held in separate accounts or restricted for a specific purpose
• Loan covenants

Next Steps

Qualitative Disclosure

Not-for-profits will need to have a policy in place to comply with qualitative information disclosure requirements for managing liquidity and liquidity risk. If such a policy doesn’t currently exist, an organization might consider working with its management team and governing board to put one in place.

As with all significant policies, it’s best practice to document policies in writing and review them on an ongoing basis.

Quantitative Disclosure

Not-for-profits will want to consider creating a draft of the new quantitative disclosure. If an entity is financially strained or has limited available resources, the new quantitative disclosure requirements may result in a very small or even negative amount of financial assets available for use within a year.

This signifies a liquidity risk and may also cause management to doubt the entity’s ability to continue as a going concern, per ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40), which was released in August 2014. ASU 2014-15 provides guidance about management’s responsibility to evaluate whether there’s substantial doubt about an entity’s ability to continue as a going concern and requires the provision of related footnote disclosures. This standard was effective for annual periods ending after December 15, 2016, and interim periods thereafter.

Organizations with High Liquidity Risk

Consider what steps to take before the new standard is required to be implemented if an organization is concerned it has a high liquidity risk and will disclose a minimal amount of liquid available assets. For instance, management might consider discussing the liquidity risk with users of the financial statements—such as grantors, donors, and the bank—or obtaining a line of credit to help with operating needs if liquid resources are unavailable.

Further Preparation

Here are some other items for not-for-profits to consider when preparing to implement the new requirements:

• Identify financial assets
• Review the general ledger setup and consider whether any changes can be made to enable easier tracking of financial assets
• Perform analysis to determine what limits are imposed on financial assets
• Calculate financial assets available to meet cash needs within one year
• Consider whether a classified statement of financial position may improve the organization’s display of liquidity

Effective Dates

The standard is effective for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted.

The amendments should be applied retrospectively to all periods presented. An organization that presents comparative financial statements has the option to omit the following information for any periods presented before the year it adopts the standard:

• Analysis of expenses by both functional and natural classifications
• Disclosures about liquidity and availability of resources

In the year of adoption, not-for-profits will need to disclose the nature of any reclassifications or restatements as well as any effects on the changes in their net asset classes for each year that’s presented.

We're Here to Help

Moss Adams will continue to provide insight through this series of articles on the new standard. To learn more about the standard, or to gain a better understanding of the specific changes to disclosures about liquidity, liquidity risk, and the availability of resources, contact your Moss Adams not-for-profit professional.