Liquidity Disclosures in NFP Financial Statements

May 27, 2020

Liquidity disclosures for nonprofits

Not-for-profit (NFP) organizations—charities, private colleges and universities, foundations, cultural institutions, trade associations, religious organizations—are now required by the Financial Accounting Standards Board (FASB) to present (disclose) a quantitative and qualitative picture of liquidity in the financial statements.

The FASB Accounting Standards Update (ASU) 2016-14, Not-for-Profit (Topic 958): Presentation of Financial Statements for Not-for-Profit (NFP) Entities presented NFPs with the most significant changes to its financial reporting ever. The intent is to provide greater clarity, transparency, and consistency across sectors for stakeholders.

For many NFPs, implementation of this new reporting standard has been challenging but there is help for nonprofits that need to improve their asset management practices and policies.

How has FASB ASU 2016-14 impacted your nonprofit financial statements?

In this article, we will take a brief look at how ASU 2016-14 has impacted reporting on liquidity for NFPs.

Nonprofits liquidity matters more now than ever before

The coronavirus has brought into sharp focus the unexpected and drastic change in economic activity that impacts NFPs. How organizations manage assets, ensure cash flow, and troubleshoot to provide essential services for the short and long term is vital to its sustainability. The financial statements provide needed insight into an organization’s ability to fulfill its mission.

Many NFPs provide critical assistance such as food, healthcare, and shelter to vulnerable communities including the elderly, the disabled, and homeless veterans that would be devastated without it. The ability of niche and very large organizations to continue to provide direct services during the coronavirus has been directly related to their ability to fund operations and programs.

For decades NFP’s financial statements have left donors, grantmakers, and financial institutions with questions on their plan to meet operational and programmatic needs during unexpected crises.

The FASB ASU 2016-14 asks nonprofits to utilize their balance sheet in a way that will provide this insight to donors, grantors, and creditors.

How financial statements have changed under ASU 2016-14

If you really want to dig into how the presentation of NFP financials has changed, feel free to download the 270-page ASU 2016-14.

And, if like me, you wondered how such a voluminous update helps to make my organization’s financial statements more transparent and clear with donors, creditors, and grantors?

Thankfully, the FASB has broken down the key provisions of ASU 2016-14 for us. See below.

The very involved explanation of ASU 2016-14 may not seem like it, but the intent is to make financial statements more useful and cost-effective.

A general way to think about these updates to Generally Accepted Accounting Principles (GAAP) for NFPs is that it simplifies the way the data is organized on the Statement of Financial Position (aka Balance Sheet) and allows for greater narrative detail in notes.

How you present qualitative information or disclosures is going to depend on your organization’s unique situation.


Disclosing Liquidity and Availability of Resources

When it comes to detailing your liquidity and availability of resources, as the accounting standard update 2016-14 requires, each organization needs to show the availability of cash and how it will manage liquid assets to meet general expenditures within one year of the balance sheet date.

Your organization may need to assess how it tracks and manages cash flow. Evaluate your organization’s financial assets for those which are accessible in the short-term (within one year of the balance sheet date). Also, it will be important to determine if there are restrictions on your assets which are external to the organization (i.e. donors, laws or contracts) or internal (i.e. imposed by the board) that would preclude them from being used for general expenditures.

As the AICPA pointed out in a recent article, “general expenditures” are not defined as day-to-day expenses by the FASB. This assumption has resulted in NFPs neglecting to consider restricted funds as potential capital under the “availability of resources”.

Restricted funds for programmatic expenditures that are expected to be available within a year of the balance sheet date provide a fuller picture of the NFPs financial position. Additionally, donor funds or grants which are renewed annually and available really ought to be included in liquidity disclosures.

The AICPA suggests that NFPs may also choose to disclose how it makes use of several tools to manage liquidity including:

  • Their use of lines of credit
  • Already-established operating reserve policies
  • How they manage cash-based on major receivables cycles
  • Any other ways they monitor liquidity and maintain financial flexibility

Remember, the intention of this accounting standards update was to help stakeholders gain a clearer understanding of your financial management. If you have a solid plan, the new disclosures for liquidity in your financial statements can be an opportunity to demonstrate sound financial management and the sustainability of your mission.

Similarly, implementation of ASU 2016-14 is an opportunity for senior management and the board to review policies on board designation of funds, handling operating reserves, and make improvements or changes to your accounting and reporting systems to assist with these disclosure updates.

We started out asking how ASU 2016-14 has impacted your financial statements? Let us know in the comments below.

If you want expert accounting advice from CPAs with extensive experience in the not-for-profit sector, get in touch today.