Is Your Organization Prepared for the New Liquidity Disclosure Requirements? ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities Changes Things for 2018

This article is the third in a series of articles discussing ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities.

Topics covered in this article are:
Liquidity and Availability Disclosure

• Qualitative
• Quantitative

New Requirements: Article 3/3 – Liquidity and Availability Disclosures

• New liquidity disclosures will be required for not-for-profit entities (NFPs) to communicate both qualitative information on the organization’s policies for the management of its liquid financial assets in order to satisfy short term cash requirements (Section I) and to provide quantitative information about the availability of financial assets to meet short-term operating cash needs. (Section II).
  
  These additional disclosures may be presented separately as a qualitative, liquidity note and a separate quantitative, availability note. Alternatively, the qualitative and quantitative disclosures may be combined into a single liquidity and availability note that covers both the qualitative and quantitative requirements.

Here’s How:
Section I – Liquidity – Qualitative Disclosure
This disclosure provides readers with information that allows them to assess how an NFP manages its liquid assets and meet cash needs for general expenditures within one year of the statement of financial position date.

Some items to consider when preparing the qualitative disclosure include how cash in excess of daily requirements is managed, the sources and seasonality of the organizations revenue, the availability of lines of credit, and the amount of board designated operating reserves – how those are held and the intended purpose of those reserves.

This disclosure should tell the organization’s own liquidity story while increasing transparency. This also serves to provide information to potential donors, grantors, creditors and other NFP stakeholders who want to know that the NFP has adequate liquidity to operate and meet its obligations in a timely manner.

This disclosure is made in the notes to the financial statements.

Development of a liquidity policy is a recommended best practice, but is not required by the standard.

Section II – Availability – Quantitative (and additional qualitative information as needed)

This disclosure provides readers with additional information that communicates the availability of the NFP’s financial assets to meet the cash needs for general expenditures within one year of the statement of financial position date.

The availability of a financial asset may be effected by:

• The nature of the asset – For example, cash is more readily available than receivables that need to be collected or investments which might need to be sold.
• External limits imposed – For example by donors, grantors, laws, and contracts with others.
• Internal limits imposed by an NFP’s board.

This disclosure should present the assets of the organization reduced by amounts that will not be available for general expenditures in the upcoming year in numeric format.

This may be shown in various ways including starting with the detail of (or one combined total of) assets, then deducting assets not available to arrive at assets available in the upcoming year. Additional qualitative disclosures may be needed to clarify and explain the reasons those assets are or are not available. Another alternative is to simply show the net amounts, by asset type, that will be available for the upcoming year, listing in the introduction of the note the types of items that were included and excluded.

Excluded amounts might include assets such as:

• Accounts and contributions receivable due in greater than one year
• Long term investments
• Contractual donor imposed restrictions
• Board designated net assets

When the changes take effect
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities guidance is effective for annual financial statements issued for fiscal years beginning after December 15, 2017 and for interim periods beginning after December 15, 2018.

• For calendar year ends this is effective for the December 31, 2018 statements.
• For fiscal year-ends, the first year-end statements after the fiscal year that begins after December 15, 2017. For example for a fiscal year ending June 30, this is effective for the June 30, 2019 statements.

Application to interim financial statements is permitted but not required in the initial year of application.
For financial statements with comparative information presented, all provisions are required to be applied, except for:

• The qualitative and quantitative liquidity disclosures.
• The presentation of expenses by both nature and function, (Unless this is already required by prior existing Generally Accepted Accounting Principles [GAAP]. For example, Voluntary Health and Welfare Organizations are already required to present this way under current GAAP).
• Note that comparative financial statements are not required by GAAP, and so an NFP may elect to present single year financial statements in the year of adoption.

Are You Ready?
ASU 2016-14 early adoption requires that organizations implement all of the changes included in the new standards. Please refer to ASU 2016-14 articles in November and December newsletters for other required changes.

If your organization is considering early adoption, the budget process may need to be revised. If you’d like assistance in revising your budgeting process to meet the requirements of the new ASU, assistance in developing a liquidity policy, or just need to talk through your plans, we can help.