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LIQUIDITY REPORTING UNDER FASB ASU 2016-14 – A DEEPER DIVE

April 16, 2018

LIQUIDITY REPORTING UNDER FASB ASU 2016-14 – A DEEPER DIVE

As part of the sweeping changes facing nonprofit organizations implemented by FASB ASU 2016-14, the new accounting standards will also include requirements for additional disclosures of information to help users of nonprofit financial statements in assessing the liquidity of a nonprofit organization. Liquidity is a measure of an organization’s ability to meet its obligations when they become due. The new disclosures are intended to improve the transparency and usefulness of nonprofit financial statements to the users of those financial statements. Under the prior accounting standards, a nonprofit’s assets may have appeared to be liquid by their classification on the statement of financial position, but restrictions from donors, contracts and other circumstances causing the assets to be unavailable to meet near-term cash demands was not required to be disclosed.

The new disclosures will be effective for organizations with a 2018 calendar year-end. Organizations on a fiscal year-end have until their fiscal year ends in 2019. It is important to make sure you are ready, so let’s take a closer look at this new requirement and what to do now.

AVAILABILITY OF RESOURCES
The objective of ASU 2016-14 is to emphasize the availability of resources. Net assets are now simply defined as “with and without” donor restrictions. Adding financial statement disclosures that identify which assets and resources are available for operations further enhances transparency. Prior to the implementation of ASU 2016-14, there was no requirement to disclose amounts that are not available for operational use because of grantor, contractual or legal restrictions. Identifying the resources that are available for near term operational use goes hand in hand with the other changes in ASU 2016-14.

QUALITATIVE AND QUANTITATIVE INFORMATION
Under the new ASU there are qualitative and quantitative types of information relating to the liquidity of assets that are required to be disclosed.

Qualitative information disclosures will be required in the financial statement footnotes and contain information that is useful in assessing an entity’s liquidity, and how the entity plans to manage its liquid resources to meet its operating expenditures within one year.

Disclosures of qualitative aspects of liquidity might include the following items:

  • Requirements to restrict cash under borrowing arrangements.
  • Limitations under loan covenants.

Quantitative information could be on the face of the financial statements or in the financial statement footnotes. Nonprofits might assess the quantitative aspects of liquidity by considering the external and internal limits imposed on the asset, any unusual circumstances such as special borrowing arrangements, any known significant liquidity problems, and whether the nonprofit has maintained appropriate amounts of assets to comply with donor imposed restrictions.

Disclosures of qualitative aspects of liquidity might include the following items:

  • Description of the type of asset whose use is limited.
  • Information about the nature and amount of any limitation on the use of cash.
  • Contractual limitations.
  • Information about additional limitations placed on net assets such as board restrictions.

What to do now:

  • Consider implementing a policy on liquidity, if you have not already done so.
  • Consider how your organization manages its liquid resources to meet its operating needs.
  • Identify all financial assets and any limitations on availability in the next 12 months.
  • Consider presenting the statement of financial position on a classified basis to enhance the quantitative disclosure requirements.
  • Determine format of the financial statement footnote quantitative numbers:
    • Gross amounts of financial assets less any adjustments to arrive at the assets available for expenditure, or
    • disclose only the net amounts available for expenditure.
  • Draft financial statement footnotes to include a description of the management of liquid assets and liquidity needs, the conditions under which board designated net assets could be undesignated, access to lines of credit or other financing and other relevant information useful in understanding the entity’s liquidity.

Prepare now for the upcoming changes, so you are ready when your year-end comes around. Of course, we are always here to help!

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