The new liquidity disclosure requirements are upon calendar-year 2018 NFPs. If you haven’t heard, as part of FASB Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit (NFP) Entities, NFPs are required to provide qualitative and quantitative information about how they manage their liquid resources. Liquid resources typically include items like cash and cash equivalents without donor restrictions or board limitations and short-term investments that are readily available for use. However, liquid resources may come in the form of those the NFP expects to receive, such as accounts receivable, contributions receivable in one year or less, and next year’s endowment payout.
The intent of the disclosure requirement is to give financial statement readers a better picture of how the NFP manages its liquid resources, beyond the information they can glean from the statement of financial position. This discussion about the availability of resources is an opportunity for the NFP to convey a message about its strategy, whether it be conserving excess funds for future projects or managing cash flow during lean times. For some NFPs, the analysis of liquidity may even highlight a need to restructure operations to provide greater stability. In crafting the disclosure, an NFP should consider whether the message being conveyed is consistent with any board spending policies, investment policies, and board designations disclosed elsewhere in the footnotes to the financial statements.
As part of the qualitative information, an NFP might include a discussion about what sources of funds are available, such as cash reserves or a line of credit. The availability of resources is sometimes affected by the nature of the resources themselves. For instance, an illiquid investment might not be available in one year or less, even if there are no donor-imposed restrictions on its use. Additionally, care should be taken to identify any external limits on resources, not only by donors, but also by law or contractual agreements. One example of external limits may be cash or investments pledged as collateral for a loan, which would not be available to spend on operating needs. The NFP may also state whether there are any internal limitations on resources that otherwise may seem available, such as investments that have been designated by the NFP’s governing board for a specific purpose or a capital project.
There’s no prescribed format for presenting the quantitative information, so NFPs have flexibility in determining how to comply with the disclosure requirements. For example, they may choose to provide a table showing the types and amounts of liquid resources available to meet operating needs over the next 12 months. Some NFPs may wish to start with all liquid resources and subtract those that are not available for use in general operations due to external or internal limitations. Other NFPs may decide to only display liquid resources that are free of limitations. Regardless of the approach taken, the information provided in the quantitative analysis should relate back to the corresponding items in the financial statements.
The AICPA Not-for-Profit Section offers a full set of illustrative financial statements that include an example of the required liquidity disclosures. In addition, the article Tell Your Story Through the New Liquidity Disclosures, provides a number of examples for a variety of NFP types. And for practical implementation tips, check out the Steps You Can Take Now to Create Exceptional Liquidity Disclosures.