In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-14 (ASU 2016-14) to make improvements to the communication of information on nonprofit financial statements. ASU 2016-14 is effective for nonprofit organizations with annual reporting periods beginning after December 15, 2017 (calendar year 2018 or fiscal year 2019). ASU 2016-14 focuses on the five main areas listed below, but this blog will provide information and implementation examples solely related to liquidity and availability of resources. The enhanced disclosures required by ASU 2016-14 regarding liquidity and availability of resources provide organizations the opportunity to share with their grantors, creditors, and other stakeholders the organization’s strategy for managing financial resources.

Five main areas of focus in ASU 2016-14:

1. Net asset classes
2. Investment return
3. Functional expense reporting
4. Liquidity and availability of resources
5. Presentation of operating cash flows

Under ASU 2016-14, organizations are now required to disclose the following qualitative and quantitative information:

1. Qualitative information on how the organization manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date. An organization’s liquidity management plan or process will depend on its sophistication and size, the type and complexity of its activities, and its specific liquidity risks, among other factors.
2. Quantitative information (and additional qualitative information as needed) that communicates the availability of financial assets to meet cash needs for general expenditures within one year of the balance sheet date. Availability of resources may be affected by 1) their nature, 2) external limits imposed by donors, contracts, and laws, or 3) internal limits imposed by the organization’s governing body.

The qualitative disclosure may include any of the following information:

• Description of how general expenditures are determined;
• Description of how availability of financial resources is determined;
• The organization’s goals for maintaining financial assets such as “to be available as general expenditures, liabilities, and other obligations come due”;
• The organization’s policies for investing excess cash;
• Description of contractual agreements that make certain financial assets unavailable to fund general expenditures;
• The organization’s responsibility to maintain resources to meet donor restrictions (which may make those resources unavailable to fund general expenditures);
• Description of board designations and any operating or liquidity reserves;
• The organization’s policies for spending from donor-restricted and board-designated endowment funds; and
• The organization’s policies for drawing down on available lines of credit and/or board-designated endowment funds or reserves, if needed.

The quantitative disclosure must at least report the detail of financial assets available to meet cash needs for general expenditures within one year. The disclosure may also be in the form of a table or a reconciliation of total financial assets to financial assets available to meet cash needs for general expenditures within one year. Reconciling items may include financial assets that are not available for general use because of: contractual restrictions (such as assets required to be held as collateral for a security deposit), donor-imposed restrictions, board designations, or long-term investments.

The following are two examples of liquidity and availability disclosures:

1. The organization has $395,000 of financial assets available within one year of the balance sheet date to meet cash needs for general expenditures consisting of cash of $75,000, contributions receivable of $20,000, and short-term investments of $300,000. None of the financial assets are subject to donor or other contractual restrictions that make them unavailable for general expenditure within one year of the balance sheet date. The contributions receivable are subject to implied time restrictions but are expected to be collected within one year. The organization has a goal to maintain financial assets, which consist of cash and short-term investments, on hand to meet 60 days of normal operating expenses, which are, on average, approximately $275,000. The organization has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, as part of its liquidity management, the organization invests cash in excess of daily requirements in various short-term investments, including certificates of deposit and short-term treasury instruments. As more fully described in Note X, the organization also has committed lines of credit in the amount of $20,000, which it could draw upon in the event of an unanticipated liquidity need.
2. The following reflects the organization’s financial assets as of the balance sheet date, reduced by amounts not available for general use because of contractual or donor-imposed restrictions within one year of the balance sheet date. Amounts not available include amounts set aside for long-term investing in the quasi-endowment that could be drawn upon if the governing board approves that action. However, amounts already appropriated from either the donor-restricted endowment or quasi-endowment for general expenditure within one year of the balance sheet date have not been subtracted as unavailable.

The organization is substantially supported by restricted contributions. Because a donor’s restriction requires resources to be used in a particular manner or in a future period, the organization must maintain sufficient resources to meet those responsibilities to its donors. Thus, financial assets may not be available for general expenditure within one year. As part of the organization’s liquidity management, it has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, the Organization invests cash in excess of daily requirements in short-term investments. Occasionally, the board designates a portion of any operating surplus to its liquidity reserve, which was $1,300 as of June 30, 20XX. There is a fund established by the governing board that may be drawn upon in the event of financial distress or an immediate liquidity need resulting from events outside the typical life cycle of converting financial assets to cash or settling financial liabilities. In the event of an unanticipated liquidity need, the organization also could draw upon $10,000 of available lines of credit (as further discussed in Note X) or it’s quasi-endowment fund.

Please contact your CPA or BLS Professional at 302.225.0600 with any questions or to request additional guidance regarding ASU 2016-14.

Photo by Masakazu Matsumoto (License)