Of all the changes in the new nonprofit financial reporting standard (ASU 2016-14), the Nonprofit Liquidity Disclosure has drawn the most attention and questions. The new standard requires that your nonprofit highlight its liquid assets and add a narrative angle on how it manages liquidity. Specifically, you will need to demonstrate that your organizations’ available liquid assets will meet your organization’s cash needs within one year of the date of the statement of financial position. Availability of a financial asset's liquidity could be affected by (a) its nature; (b) external limits imposed by donors, laws, or contracts; and (c) internal limits imposed by its governing board. In light of the coming significant required changes, many are left wondering how to ensure their financial statements will be compliant, while making sure the right message is conveyed. We’ll highlight the changes that you should contemplate, steps you can take, other considerations and resources to help you get started.
With the effective date of these changes for fiscal years beginning after December 31, 2017, the time to act is now.
The new guidance requires financial statement disclosures to include qualitative and quantitative information that communicates how an organization manages its liquid resources and their availability to meet cash needs for general expenditures within one year of the date of the statement of financial position.
Tips on How to Prepare the Disclosure
Start by identifying and summarizing your organizations’ financial assets available to meet cash needs for general expenditures within one year. Take into account how liquid your assets are and whether there are any restrictions, internal or external. Restricted assets must be deducted from your financial assets to determine what is available.
Write a description of how your organization manages its liquid resources and cash needs. This narrative should include how the organization determines the level of cash to maintain in operating accounts and reserve accounts and whether any of these accounts are subject to donor or board limitations on spending. This narrative should also describe what financing options are available to the organization, such as term loans or a line of credit. This document should be maintained as a liquidity policy and reviewed on a regular basis by management.
Now that you have identified your nonprofit’s current liquid assets and summarized the current policies to manage these assets, the next step is to determine if the organization has adequate liquid assets to meet the organization’s cash needs within one year. The organization should consider the following: Do the currently available cash resources adequately meet the current cash needs? If there are shortfalls, how will they be remedied? Is a line of credit or short-term financing needed? Are there any changes anticipated that would alter the current situation? These questions form a good foundation for helping to prepare the newly required financial statement footnote disclosure.
If you find that your nonprofit does not have adequate liquid assets, the organization should draft an action plan to remedy the liquidity shortfall. For example, some nonprofits that are engaged in significant capital projects may have resources available, such as major donor commitments or financing. These assets are not available to assist with operating cash needs. If there are board-designated net assets, now is a good time to ask the board to revisit the designated uses and the spending policy. Perhaps the organization should consider establishing a board-designated or donor-designated reserve to fund future operations.
Every organization is going to have different cash needs. Some organizations may have long-term capital projects to fund, some might provide services that are fully funded in the short-term, and others might receive cash advances and have little need for financing. One of the reasons for this required financial statement disclosure is to trigger the dialogue at the organization and board level on managing cash flows and the short-and long-term viability of organizations’ cash needs.
In conclusion, we recommend that organizations revisit their liquidity management policy, or adopt a written policy if one does not exist, and give yourself time to implement it. This initial process could take a while and may need the collaborative efforts of management, the finance committee, board of directors, investment and banking professionals as well as your outside accounting firm. In addition, we recommend looking at sample financial statements for organizations that have early adopted the changes to assist in drafting your liquidity disclosure as well as the other changes in ASU 2016-14. Sample disclosures and financial statement presentations are available on the Friedman LLP website within our Webinar on the New Financial Reporting Standards or available upon request. Now is the time to begin to implement all of the changes in ASU 2016-14 within your internal financial statements.
Please contact a Friedman professional for more assistance in implementing these new standards.