Liquidity reporting numbered among the key reasons the Financial Accounting Standard Board (FASB) amended financial statement reporting for not-for-profit organizations in August 2016. The FASB designed Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities to enhance transparency in the reporting of assets not-for-profit organizations can use to cover short-term needs. The changes made will affect reporting on liquidity and could have ramifications on not-for-profit organizations and the users of their financial statements.
Current U.S. generally accepted accounting principles (U.S. GAAP) requires not-for-profits to present their assets based on the presence of donor-imposed restrictions. Assets can be permanently restricted, temporarily restricted or unrestricted.
The unrestricted net asset designation comes with some confusion, because although assets do not specifically have donor restrictions, many are committed to other projects. The current U.S. GAAP definition of unrestricted net assets does not adequately cover limits imposed by donors, grantors, laws, contracts or governing boards that would affect the not-for-profit organization’s ability to use the asset to cover any immediate needs for capital.
Finding the Solution in Disclosures
Unrestricted net assets will continue to be classified as such, but the ASU enhances disclosures surrounding unrestricted net assets. The disclosures are designed to clarify some of the issues noted in current U.S. GAAP.
When the accounting standard begins its rollout in the 2018 calendar year, not-for-profit organizations will be required to disclose information about their governing board restrictions, including amounts and purpose for the appropriation. Other organization-imposed limits will also be disclosed. Additionally, not-for-profit organizations will provide qualitative information about how they manage their liquid resources to meet cash needs for general expenditures within a year of the statement of financial position, or balance sheet date.
Quantitative information that supports the qualitative statement will also need to be disclosed, either in the balance sheet or in the notes, to indicate the financial assets that will be used to meet the cash needs as of the balance sheet date. Assets should be able to cover cash needs within one year of the balance sheet date. Not-for-profit organizations will also need to disclose how the financial assets to be used for cash needs would be affected by the nature of the asset, external limits placed by donors, grantors, laws and contracts with others as well as any internal limits placed on the asset by the governing board.
Taken together, the liquidity disclosures are designed to illustrate an organization’s financial flexibility as well as the internal limits placed on how the organization uses its assets. They should provide users of financial statements an overview of the methods used to meet the demands for short-term cash and the ability of organization to put resources toward its crucial services.
Impact on Reporting
Not-for-profit organizations should carefully review their policies for covering short term cash needs prior to the implementation date of the new standard. Not-for-profit organizations must adopt the standard for fiscal years ending December 31, 2018 and later.
The new requirement may be shedding more light on internal spending policies, and not-for-profit organizations should ensure that the policies allow the organization to cover expenses as needed. It is recommended that governing boards be involved in some of the discussions in case board-designated fund amounts need to be adjusted in order for organizations to demonstrate they can meet their short-term needs for cash.
For More Information
For assistance in understanding the impact of the liquidity standards as well as the other changes brought by ASU 2016-14, please contact us.
- Presenting the New Not-for-Profit Financial Statement
- Net Asset Classes and Governing Board Restrictions
- Presentation of Operating Cash Flows and Investment Returns
- Proposed Technical Updates to Endowment Reporting
Michelle Spriggs is a Shareholder in the Not-For-Profit & Education Practice. She can be reached at 774.206.8336 or MSpriggs@cbiztofias.com.
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