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The Bottom Line is where Klatzkin’s advisors provide analysis and insight into key developments in taxation, accounting, and other issues and how they affect businesses and individual taxpayers.

New Liquidity Disclosure Requirements for Nonprofits

The nonprofit world has been abuzz ever since the issuance of Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958) – Presentation of Financial Statements of Not-for-Profit Entities. The Financial Accounting Standards Board (FASB) undertook this project in order to improve the usefulness, clarity, consistency, and transparency of information presented to the users of financial statements, be it donors, grantors, creditors, or any other user. As the New Year is upon us, implementation is now mandatory for the calendar year 2018 financial statements.

As part of this update, there are extensive new disclosure requirements regarding a not-for-profit (NFP) entity’s liquidity and the availability of its resources. As I have received many inquiries specific to this section of the ASU, I want to offer some details on the requirements and specifics of this section.

To start off, let’s begin with some good news for those slow to implement new standards. While the update is to be applied on a retrospective basis, you will have the option of omitting these disclosures about liquidity and availability of resources for the prior year information in a comparative financial statement. Going forward, however, you will be required to disclose the information for both years presented. This should at least save you some time and energy in the year of adoption.

Liquidity

The first major component of the disclosure requirements is liquidity. The NFP must qualitatively communicate how it manages its liquid resources available to meet cash needs for general expenditures within one year of the date of the statement of financial position. While a formalized plan is not required, the NFP will still need to clearly convey to the reader its processes and procedures currently in place. Both the size and complexity of the entity will impact how much is involved in this disclosure. Some examples of resources an entity could use to manage its liquidity include cash reserves, short-term investing, quasi-endowments, or even lines of credit.

Availability

The second major component of the disclosure requirements is availability. The NFP must quantitatively and qualitatively communicate the availability of its financial assets to meet its cash needs for general expenditures within one year of the date of the statement of financial position. These quantitative and qualitative disclosures should openly present and explain to readers the amount and breakdown of the entity’s liquid assets that are available for general expenditures. The quantitative portion may be presented on the face of the statement of financial position or in the notes. The qualitative portion may be presented as a separate note or combined with the liquidity disclosures.

The availability of an entity’s financial assets to meet its cash needs may be affected by nature, external limits, or internal limits of resources. Even though an entity may have significant assets at the statement of financial position date, it does not necessarily mean those assets are available for general expenditures. A portion, or even a majority, of those assets, may be reserved, restricted, or illiquid due to special borrowing arrangements, contractual agreements and covenants, donor restrictions, or even board designations.

While the NFP may need to wait until the end of its fiscal year to do an analysis of its available liquid resources for general expenditures, the NFP will want to make sure it has the tools in place to do such an analysis. The NFP can also start working on the verbiage that will ultimately be used in these new disclosures.

This is only one small section of ASU 2016-14. This standard brings about a lot of changes in the nonprofit world, so I recommend that NFPs fully analyze how their organization will be impacted and form a plan for implementation.

If you have any questions on the new liquidity disclosure requirements, please contact me at (609) 890-9189 or cmaynard@klatzkin.com.

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