New liquidity disclosure requirements for nonprofits

Under the Financial Accounting Standards Board’s new financial reporting standards for nonprofits released on August 18, 2016, nonprofit organizations are required to provide enhanced disclosures about the liquidity and availability of its resources in the audited financial statements. The disclosures must be both qualitative and quantitative in nature.  Qualitative information communicates how a nonprofit manages its liquid resources available to meet cash needs for general expenditures within one year forward of the balance sheet date. Quantitative information, reported either on the face of the balance sheet or in the notes, communicates the availability of a nonprofit’s financial assets as of the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date. The key words to understand are – Liquidity, Availability, Qualitative, Quantitative and General Expenditures.
 
Liquidity is measured as to how quickly a financial asset can be converted to cash.  Availability of a financial asset may be affected by: its nature; external limits imposed by donors, grantors, laws and contracts with others, and; internal limits imposed by governing board decisions. The objective of the new disclosures is to provide more useful information about an entity’s resources and any changes in those resources that will be helpful to donors, grantors, creditors and others in understanding a nonprofit’s financial viability.

For example let’s consider a nonprofit organization with the following assets as of its balance sheet date:

 
In this example, it is safe to assume cash, receivables and investments can be converted to cash within one year of the balance sheet date and are considered liquid assets under the new disclosure requirements. The next step is to look at the details of each of these assets and identify any type of restrictions on the use. Restrictions could be either internal or external. For example, if investments include donor restricted endowment funds for a particular purpose, such funds are not considered ‘available” for general expenditures of the organization. Another example is board-designated funds for a special purpose such as, for constructing a building or other capital improvements. Such board-designated funds could be liquid, however they may not be “available” for general expenditures within one year. This also highlights the importance of board decisions and its impact on financial reporting. How does an organization make sure it has enough liquidity? The answer could be maintaining a line of credit or bank account balances to cover a certain number of weeks’ expenses.
 
There is a greater level of flexibility as to how organizations report the liquidity and availability information. It could be presented in a tabular format or a management discussion and analysis type format. It’s important for organizations to start thinking about this now, and to evaluate their financial position by looking at the balance sheet on a “classified” basis and considering the “availability” factor.
 
Often times, social service agencies carry mortgage liabilities on their balance sheet for residential programs. Payments for such mortgage liabilities may be funded by the governmental funding sources and included in the rate or budget for the particular residential program. In those situations, nonprofits should consider including in the disclosure requirements that such obligations will be paid down through future reimbursements from the funding source and not from existing assets as of the balance sheet date.
 
Lastly, the disclosure information will be audited by the external auditors so be sure to have verifiable audit evidence to support the information disclosed.
 
Nonprofit organizations should develop sample disclosures internally and assess the impact of the new disclosures on its banking relationships, funders, donors and other stakeholders. The effective date of the new disclosure is calendar year 2018 or fiscal year 2019, as applicable.
 

Sibi Thomas CPA, CFE, CGMA is a Partner at the Nonprofit and Government Group at Marks Paneth LLP. Sibi conducts audits of various large and medium nonprofit organizations in New York. Sibi is also a CPA Practice Advisor 40 under 40 award recipient for leading the accounting profession. Sibi can be reached at sthomas@markspaneth.com, follow him on twitter @SibiThomas_ .