The upcoming disclosure requirements should help financial statement readers assess a not-for-profit’s (NFP) financial flexibility and availability of liquid resources for the upcoming year. Beginning in calendar year 2018, an NFP is required to quantify the types of financial assets available within a year of the balance sheet date to meet general expenditures. The disclosure excludes certain financial assets on the statement of financial position not deemed available within the next 12 months from the disclosure, e.g., because of contractual, legal or donor-imposed restrictions limiting the asset’s accessibility within one year of the balance sheet date, or internal limits imposed by governing boards (quasi-endowment fund or reserves).
On a broader scale, the NFP also is required to describe its practices for managing liquid resources. The disclosure should be useful in assessing the NFP’s ability to meet cash needs for general expenditures within one year from the balance sheet date.
The liquidity and availability disclosures can be crafted at management’s discretion, provided the baseline requirements are met. Although the task may seem daunting, an NFP is not expected to provide a comprehensive analysis of liquidity requiring forward-looking information beyond a 12-month period. Instead, it is expected to obtain the required quantitative information from the audited financial statements and supporting records. Likewise, an NFP could approach the required explanatory disclosures as an opportunity to provide insight into its successful strategies for managing financial resources.
Preparation is recommended to avoid surprises and make the most of the disclosures. For example, if the NFP is not expected to have available resources to meet general expenditure 12 months out, senior management and the governing board may determine that liquidity or investment apportionment policies, as well as board designations, require updating.
Accounting Standards Update 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, provides disclosure examples. As noted, the requirements are not prescriptive, allowing for the quantitative and qualitative disclosure to be presented using different approaches. The following is a list of items an NFP may consider when describing available financial assets and its approach to meeting general expenditures within 12 months from the balance sheet date:
- Resources designated or otherwise consumed for capital projects, including an explanation of the board’s policy for funding capital projects
- Liquidity reserves not available for general expenditures, including an explanation of the board’s policy for establishing reserves
- The board’s policy for designating assets as a quasi-endowment and its rate of spending from the fund, including annual appropriations for general expenditures within the next 12 months—also, describing that while the NFP does not plan to use the board-designated endowment assets, the assets are available and may be spent at the board’s discretion
- Prevalence of donor-imposed restrictions and the effect, if any, on the NFP’s exposure to liquidity risk
- Whether some or all investment return is available for spending, e.g., from governing board-designated investments, donor-restricted split-interest agreements or endowment funds, as allowable under applicable law and per the NFP’s spending policy
- Expirations of donor-imposed restrictions by incurring expenses satisfying the restricted purpose, the passage of time or because of another donor-specified event
The quantitative disclosure should correlate to the NFP’s statement of financial position, adjusted for financial assets at year-end not available within one year for general expenditures. Available financial assets generally will include cash, investments, accounts receivable, contributions receivable that will be received in 12 months and appropriations from donor-restricted or quasi-endowments.
Likewise, an NFP’s discussion about liquidity, or having sufficient ability to convert financial assets into cash to meet forthcoming 12-month general expenditures, should make sense in relation to the statement of cash flows— particularly cash flows from operating activities—and the statement of activities without donor restrictions. Similarly, discussions of unavailable financial resources should correlate to the disclosures on restricted net assets, board-designated net assets and liquidity provisions in the investments footnote.
Optimally, an NFP’s liquidity disclosures would make reference to a board-approved liquidity management policy, specifying activities taken or sources of liquidity at its disposal if needed to ensure that financial assets are available throughout the year to meet general expenditure—including liabilities and debt obligations as they become due. For example, the policy may include a line of credit to meet unanticipated liquidity needs, investment of idle cash in liquid, low-risk investments, the availability to spend from the quasi-endowment or commercial paper availability to meet unexpected obligations.
An NFP also may choose to include its balanced-budget policy in the liquidity disclosure. This may include describing the level of discretion given to the governing board or management to designate unrestricted resources for endowment or other purposes. Such policy generally would include elements the NFP includes in its definition of income available to meet cash needs for general purposes and its definition of general expenditures.
Because of the discretion allowed, NFPs may find it beneficial to obtain input from financial statement users when evaluating the utility and transparency of information it plans to disclose and how to best present it. Supporters or lenders, for example, may find that a schedule further disaggregating net assets without donor restrictions is helpful in assessing the NFP’s liquidity and availability of resources.
Finally, an NFP’s disclosure controls will need to address the new requirements, and the capability of its systems to generate information supporting the disclosures may require re-evaluation. Ongoing oversight of an NFP’s projected liquidity will not only help reduce the risk of materially misstated disclosures, but senior management and governing boards will appreciate having readily accessible information about the NFP’s resource availability.
BKD will continue to monitor the new standard’s implementation issues and provide updates. For more information, contact your BKD advisor.