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New Liquidity Disclosures for Not-for Profits: Are You Ready?

NFP Liquidity DisclosuresUnder current financial reporting standards, not-for-profits are not required to illuminate clearly restrictions that affect the availability of liquid resources in their financial statements. But this is all about to change with the Financial Accounting Standards Board’s (FASB) new financial reporting standard (Accounting Standards Update (ASU) 2016-14), effective for fiscal years beginning after December 15, 2017.

In this update, FASB clarifies that the nature of an asset isn’t the only quality that affects its availability. Specifically, liquid resources are quickly converted to cash and available to fund general expenditures within one year following the balance sheet date. Internal (board-designated) and external (donor-imposed) restrictions could mean certain sums of cash and cash equivalents may not be used for general expenditures. If a board designates an amount of cash to be set aside for a building renovation, for example, it cannot be used to buy office supplies.

What’s changing?

The new guidance requires enhanced financial statement disclosures regarding an organization’s liquidity and availability of resources. Both qualitative and quantitative information are required. The qualitative component describes the organization’s liquidity management plan, or how liquid assets are managed to meet cash needs for general expenditures within one year following the balance sheet date. Quantitative information regarding those assets and their availability to meet current-year needs may be presented either on the face of the statement of financial position or in the notes to the financial statements.

And why?

Potential donors, grantors, creditors and other not-for-profit constituents want to know that the organizations they are evaluating have sufficient resources to meet financial obligations as they come due. By making sure that restricted cash and cash equivalents are clearly presented, FASB’s new guidance increases transparency in the financial statements and promotes a more thorough and accurate understanding of the organization’s ability to fund operations.

How do we implement these changes?

While the new requirements make sense in theory, their practical implications can be confusing. This blog post addresses several questions we have encountered thus far in our conversations with AICPA Not-for-Profit Section members regarding the implementation of ASU No. 2016-14.

Question 1: My not-for-profit organization doesn’t currently have a “liquidity management plan.” Do we have to create one to comply with the new standards?

Answer:

Having a liquidity management plan is a best practice, but not a requirement per the standards. FASB says that qualitative disclosures should describe how a not-for-profit entity “manages its liquid resources available to meet cash needs for general expenditures within one year of the date of the statement of financial position” (“Pending Content” in ASC 958-210-50-1A (a)). This leaves room for interpretation, although sample liquidity note disclosures are provided in ASC 958-210-55-5 through 55-8 and 958-205-55-21.

An organization’s liquidity management plan or process will depend on its sophistication and size, the type and complexity of its activities, and its specific liquidity risks, among other factors.

Question 2: Does my not-for-profit need to set up a liquidity reserve?

Answer:

Liquidity reserves are not required under GAAP. The decision to set up a liquidity reserve is made at the discretion of management and the board. However, it is important to note that if a liquidity reserve is approved by the board, specific disclosure is required under the new standards.

Question 3: An example provided in the new standard states, “The $1,300 liquidity reserve, created in a prior year when the governing board designated net assets without donor restrictions, was included as a reconciling item in Not-for-Profit Entity A’s note on liquidity risk and the availability of resources because the intention of the designation was to support unanticipated liquidity needs and not general expenditures.” Wouldn’t liquidity reserves be considered assets available for use within one year, given the nature of the reserve?

Answer:

We understand the confusion here, but the answer to the question is that the classification of a liquidity reserve in the context of the newly required liquidity disclosures would depend on the nature of the assets comprising the reserve and the ability of management to access them.

Question 4: Can a not-for-profit entity early-adopt just the liquidity disclosures?

Answer:

Yes, this is an option. Liquidity disclosures are an addition to current requirements, rather than a change in existing disclosure requirements. Therefore, the new liquidity disclosures can be added at any point.

Question 5: In the year of adoption, must a not-for-profit present liquidity disclosures for the prior year as well?

Answer:

The entity may choose not to present the prior-year liquidity disclosures in the year of adoption. In all subsequent years, prior-year disclosures should be presented.

We anticipate many more questions in the months to come, as not-for-profit organizations begin preparing to implement the new financial reporting standard. The ensuing changes are significant, so it is critical to begin preparing now for implementation. If you are in that process or have questions we haven’t covered in this article, you may be interested in the upcoming webcast being hosted by the AICPA’s Not-for-Profit Section on June 28th: Implementing the Financial Statement Presentation Standard – Mastering the Most Difficult Challenges.

Cathy J. Clarke, CPA, Chief Assurance Officer – National Audit and Assurance Quality Group, CliftonLarsonAllen LLP. Cathy’s primary responsibilities include overseeing the audit quality with the firm, being a technical resource for her firm's audit and assurance practice and quality review of assurance and accounting engagements. She is the immediate past chair of the AICPA's Not-for-Profit Industry Expert Panel. Throughout her career, Cathy has served a variety of clients in numerous industries, with an emphasis on not-for-profits and healthcare entities. 

Tim McCutcheon, CPA, Partner – National Not-for-Profit Practice, Eide Bailly LLP. As a CPA for over thirty-five years, Tim has served not-for-profits as CFO, independent auditor, tax advisor, business consultant, volunteer and board member. His experiences from both inside and outside a wide variety of organizations gives him a practical and balanced view of industry issues and the concerns of the industry's varied stakeholders, constituents and other interested parties.

Not-for-profits courtesy of Shutterstock.

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