ASU 2016-14: Liquidity and Availability Disclosures
In an effort to provide more useful information to donors, grantors, creditors and other users of the financial statements, the Financial Accounting Standards Board (FASB) released ASU 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities (the ASU), which is effective for not-for-profit organizations with a calendar year-end of December 31, 2018 or a fiscal year-end in 2019. While the ASU focuses on five main areas that are changing, this article will highlight just one: liquidity and availability disclosure.
Under the ASU, an organization is now required to disclose the following:
- 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; and
- 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.
The “availability” of financial assets may be affected by the nature of the assets, external limits imposed by donors, laws and contracts with others, and internal limits (designations) imposed by board decisions.
Why is FASB requiring this disclosure? In summary, FASB believes the additional disclosure on liquidity and availability will increase transparency and promote a more thorough and accurate understanding of the organization’s ability to fund its operations. By doing so, the disclosure will assist users of the financial statements in evaluating whether the organization has sufficient resources to meet financial obligations as they come due.
The qualitative disclosure may include any of the following information:
- Description of how general expenditures are determined;
- Description of how availability of financial resources are determined;/li>
- he 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 reconciliation, which shows: total financial assets, less reconciling items, equals 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.
Although coming up with a liquidity and availability disclosure may seem daunting, we recommend you consider taking the following steps to make this process a bit easier to accomplish:
- Determine your organization’s stakeholders and the message you want to convey to them.
- Consider this an opportunity to share the organization’s strategy for managing financial resources.
- Decide on the best presentation approach for your organization and how much detail you wish to share.
- Review procedures involving board-designations and revisit all existing designations to determine if they still make sense.
- Determine if any new policies will be required and whether any existing policies need updating or formalizing.
- Evaluate whether any changes to accounting and reporting systems will be necessary to easily capture the information to be disclosed.
- Make sure that the liquidity and availability disclosure is “auditable.”
The AICPA has provided examples of the liquidity and availability disclosure. Please contact any member of your engagement team for a copy of the examples. The examples take many forms depending on the type of organization, the relative liquidity of the organization’s resources, and whether there are any donor-imposed restrictions or internal board designations on financial resources. The examples may help your organization consider how you want to design your liquidity and availability disclosure in order to enhance transparency and best tell your story.
For questions on ASU 2016-14 and to schedule a meeting to discuss its impact on your organization’s financial, please contact Jim Quaid at email@example.com or any member of your engagement team at 312.670.7444. Visit orba.com to learn more about our Not-For-Profit Group.