New Presentation of Liquidity Information in Financial Statements of Not-for-Profit Entities

In August of 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update: ASU 2016-14 Presentation of Financial Statements of Non-for-Profit Entities. This is effective for fiscal years beginning after December 15, 2017. Nonprofits should start working now with their internal and external accounting teams to prepare for the changes related to liquidity disclosures outlined in this new standard.​

Per FASB, the goal of ASU 2016-14 with respect to liquidity is to improve deficiencies in the transparency and utility of information that is useful when assessing an entity’s liquidity, which can be caused by confusion about the term unrestricted net assets; and, how restrictions or limits imposed by donors, grantors, laws, contracts, and governing boards affect an entity’s liquidity, classes of net assets, and financial performance. For the full ASU update, visit here.

As has always been required, the Statement of Financial Position shall sequence assets and liabilities based on their relative liquidity. However, unlike in the past, cash and cash equivalents and contributions receivables restricted by donors to investments in land, buildings, and equipment will be sequenced closer to those items. Cash and cash equivalents of donor-restricted contributions held temporarily until suitable long-term investments are identified, are included in the classification long-term investments.

In addition, for the first time nonprofits must include a footnote in their financial reporting that shows how much of their financial assets are truly available to meet cash needs for general expenditures within one-year. They must also provide qualitative information communicating how they manage their liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date.

This will necessitate a hard look at an organization’s financial assets to determine how much is truly free to pay general obligations. Amounts generally not available to meet general obligations that would be excluded from the calculation are:

• purpose restricted by the donor for specific projects,
• part of the endowment,
• supporting annuity obligations,
• designated by the Board for specific purposes, and
• limited to use by laws and contracts or some other form of restriction.

Keep in mind that certain nonprofits, who on the surface appear to have a large amount of financial assets might actually have little accessible liquidity because their assets are restricted, designated, or set-aside for specific purposes as noted above. The now required disclosure may force nonprofits to allocate assets to a liquidity reserve to show donors and stakeholders a positive liquidity position. Additionally, having to describe qualitatively how your organization manages liquidity should foster positive changes for internal and external stakeholders, as groups are forced to address the amount of financial assets they have available.

Organizations should pay close attention to ASC 958-210-50-1, which provides information about disclosures required around liquidity, and ASC 958-210-55-5 through 55-8, and 958–205-55-21, which provide examples of the disclosure requirements.