Big Changes Coming for Financial Reporting of Not-for-Profit Organizations: Part 9: Disclosures about Managing Liquidity and Availability of Financial Assets

Posted on Feb 20, 2017

By Andrew Prather, CPA

Updated on March 7, 2017, to include the latest information on disclosures about the availability of financial assets.

Recap

On August 18, 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-14 “Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities.” ASU 2016-14 requires a number of changes to the financial statements of NFPs. These changes will be effective for fiscal years beginning on or after December 15, 2017.

This article is the ninth in a series discussing the changes required by ASU 2016-14. In this article, we discuss new required disclosures about how a NFP manages its liquidity and the availability of its financial assets. 

Improving Information about Liquidity

One of FASB’s goals with this ASU is to improve information presented in the financial statements and footnotes. The information addresses not-for-profit organizations’ (NFPs’) liquidity, financial performance, and cash flows.

To help accomplish that goal, the FASB has begun requiring that all NFPs provide disclosures regarding how they manage liquidity, and the availability of financial assets. These new required disclosures will likely be one of the most significant changes ASU 2016-14 causes for NFPs.

Disclosures about Liquidity

The first part of the new disclosures addresses how a NFP manages its liquidity. ASU 2016-14 states that NFPs must provide the following:

Qualitative information in the notes to financial statements that is useful in assessing an entity’s liquidity and that communicates how an NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the date of the statement of financial position.

By describing the disclosure as qualitative in nature, the FASB is indicating this disclosure is going to be primarily narrative in nature. Instead of focusing on numbers and balances, the disclosure centers on describing what the NFP does to manage liquidity.

Below is one example of how this disclosure might read for a NFP.

NOTE X – Information about Liquidity

The Organization has an operating reserve that had a balance of $3.01 million and $2.96 million at June 30, 20X2 and 20X1, respectively. The governing board has dedicated this reserve with the objective of setting funds aside to be drawn upon in the event of financial distress or an immediate liquidity need. Distress or a liquidity need could result from events outside the typical life cycle of converting financial assets to cash, or settling financial liabilities. The Organization’s target for this reserve is a total of $3.0 million, which management determined based on judgments about the appropriate amount of funds to have set aside in addition to working capital. The operating reserve funds are held in lower-risk cash and short-term fixed-income securities. The operating reserve balance is included in the cash and cash equivalents line on the statement of financial position.

In the event of an unanticipated liquidity need, the Organization could also draw upon $2.5 million of an available line of credit. See Note Y for further description of the line.

Disclosures about the Availability of Financial Assets

The second part of the new disclosures provides information about the availability of a NFP’s financial assets. ASU 2016-14 states the NFP must provide the following information:

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 an NFP’s financial assets at the date of the statement of financial position to meet cash needs for general expenditures within one year of the date of the statement of financial position. Availability of a financial asset may be affected by:

  • Its nature
  • External limits imposed by donors, laws, and contracts with other
  • Internal limits imposed by governing board decisions

By describing the disclosure as quantitative in nature, the FASB is indicating that this disclosure is going to be primarily about numbers and balances.

This disclosure focuses on financial assets, which are defined by U.S. GAAP as cash, contracts to receive cash (such as receivables and debt securities), and evidence of equity ownership in another entity (such as equity securities).

The disclosure requires that NFPs present information that allows readers to see how much of the NFP’s financial assets are available for spending on general expenditures in the coming year, as of the date of the statement of financial position.

The FASB did not define the term “general expenditures” in the ASU. By not defining that term, the FASB is providing flexibility to management in interpreting and applying it to the NFP. However, in interpreting and applying the term “general expenditure,” management should consider the guidance the FASB gave on what might limit a financial asset’s availability for general expenditures.

As noted in the above disclosure requirement text, the following items may cause a financial asset to be unavailable for general expenditure in the coming year:

  • Nature: A financial asset’s characteristics, or attributes, may prevent it from being available. For example, a receivable balance will not be converted to cash in the coming year if its receipt is scheduled for more than one year after the statement of financial position date. Therefore, it would not be available for general expenditures.
  • External limits: External parties may place limits on a financial asset. These limits may prevent the asset from being available for general expenditure. For example, a NFP’s lender may escrow funds and restrict their use to only repairs and replacements of mortgaged property. Another example might be a donor who restricts a cash contribution’s use to only the purchase of a new building.
  • However, please note that management should use judgement when considering which external limits prevent financial assets from being available for general expenditure in the coming year. For example, a NFP may receive donor-restricted contributions that are for one of the NFP’s budgeted, ongoing programs, which will occur regardless of the contribution’s existence. Management could apply judgement in this situation and decide that this type of donor-restriction should not be considered a limitation on availability for general expenditure. This is because the restricted contributions will clearly be utilized in the coming year, in the normal course of the NFP carrying out its programs.
  • Internal limits: The governing board may choose to designate, and limit, a financial asset’s use to more specific purposes than the NFP’s general activities. For example, a board may establish a capital replacement fund or quasi-endowment fund. Both funds are designated for specific purposes and may not be used for general expenditures.
  • Management should use judgment to determine which, if any, board-designations give rise to limits on availability for general expenditure.

Below is one example of how this disclosure might read for a NFP.

Liquidity and Availability of Financial Assets - Graphic

Flexibility in Preparing the Disclosures

The FASB is providing NFPs with flexibility regarding how they prepare the disclosures to meet these new requirements. The examples we provide in this article should be viewed as illustrative examples only.

While our examples present the disclosures in two separate footnotes, this information could be combined into one footnote. In addition to the examples in this article, the FASB has provided additional examples in ASU 2016-14. The FASB provides full text of the ASU that contains these examples on their website (www.fasb.org) in PDF format.

The ASU includes three examples that are all very different from each other. The significant difference in these examples indicates that the FASB is not mandating specific wording or formatting. As such, NFPs should prepare the disclosures in a manner that best meets the overall disclosure requirements.

We encourage NFPs to work with industry groups, similar NFPs, and their auditors in drafting these new disclosures.

What Do I Do Now?

These disclosure requirements may provide some organizations’ internal and external financial statement users with new information regarding the organization’s financial conditions. We recommend NFPs consider the following actions to prepare for the new ASU 2016-14 disclosure requirements:

  • Continue (or start!) regular discussions with your management team and governing board regarding how the organization’s liquidity is managed, and
  • Calculate the organization’s “available financial assets.” Then determine what story your NFP’s financial statements tell to those who might make conclusions about the organization’s financial condition.

Want to Learn More?

This article focuses on one of the key changes required by ASU 2016-14. In future articles, we will discuss other key changes in more detail, along with practical guidance on implementation issues.

In the meantime, please contact your Clark Nuber service team, or Andrew Prather, if you would like to discuss how these changes will affect your NFPs financial statements.

© 2017 Clark Nuber PS All Rights Reserved

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