Armanino Blog

FASB Update Part 4: Liquid Assets and Management

by Stacie Kowalczyk
March 28, 2017

Part 4: Disclosing Your Liquid Assets and Liquidity Management

Accounting Standards Update 2016-14, Presentation of Financial Statements of Not-for-Profit Entities focuses on improvements to nonprofit financial reporting aimed at providing better information to donors, creditors and other users of financial statements.

Effective for fiscal years beginning after December 15, 2017, this update primarily focuses on improvements to net asset classification, functional expense allocation, and presentation of information about cash flows and liquidity. In this final article of our series on this new standard, we look at changes to presentation of liquidity information. 

New Liquidity Disclosures
One of the key concerns that prompted the Financial Accounting Standards Board (FASB) project to reform the nonprofit financial reporting model was the lack of helpful information for assessing a nonprofit’s liquidity. Thus, the new standard requires both quantitative and qualitative disclosures to help financial statement users better assess a nonprofit’s available financial resources and how those resources are being managed. 

Quantitative disclosures must show the nonprofit’s financial assets that will be available to meet cash needs for general expenses within one year of the balance sheet date. For those assets, the disclosure must also include factors that may affect their availability, such as their nature, internal limits imposed by board decisions, and external limits imposed by laws, donors or contracts.

Qualitative disclosures must describe how a nonprofit manages its available liquid resources to meet cash needs within one year of the balance sheet date. This description includes four key items:
  • Unusual circumstances that tie up liquidity (such as special borrowing arrangements under which cash is held in separate accounts)
  • Known liquidity problems (for example, knowledge that the organization will be losing a particular stream of funding)
  • Any problems maintaining appropriate amounts of cash to comply with donor-imposed restrictions (such as use of restricted funds to cover general expenses due to a current deficit in unrestricted net assets)
  • Contractual limitations (for example, pledged collateral)

Quantitative disclosures can appear either on the face of the financial statements or in the footnotes; qualitative disclosures will appear in the footnotes. Also, if you present comparative financials in the year of adoption, you have the option to present liquidity disclosures only for the adoption year.

Be Aware of Liquidity-Related Issues
As you think through the impact of the new requirements on your financial reporting process and liquidity, keep these issues in mind:

Distinction between internal and external restrictions – Within the requirements of the new standard, it will be important for nonprofits to distinguish between internal and external limitations on available resources, because internal or board-imposed limitations can often be lifted to free up liquid assets when they are needed.

Shift in focus – A key challenge associated with the new liquidity disclosures is their focus on financial management issues. This information differs from the data-related analysis and disclosures many financial statement users are accustomed to making decisions with.

Chart of accounts changes – You may need to make some structural adjustments to your chart of accounts to track financial assets separately and thereby facilitate the required liquidity presentation and disclosure. 

No “old GAAP” to refer to – These liquidity disclosures are new. Thus it is important to look closely at the requirements now, not only to understand what you must present, but also to identify any necessary changes to your financial accounting and reporting processes, so you can comply with the new standard in the most efficient manner.

Our Recommendations
Presenting a classified balance sheet allows for clearer presentation and less cumbersome disclosures. An appropriately classified balance sheet generally is easier for users to understand because it groups accounts in a way that is more logical and clearly aligns with footnote disclosures. However, we realize that not all nonprofits have historically presented a classified balance sheet, and there is no need to change to implement this standard. Your nonprofit organization’s story of liquidity and how your organization manages assets can be told through the footnote disclosures.

We also recommend presenting all required liquidity disclosures in the footnotes, rather than showing the quantitative disclosures on the face of the financial statements. Again, this will keep the face of the financial statements as simple as possible, which is typically best for most users.

Ultimately, you must determine the best method for meeting the requirements of the new standard. It is important to have conversations early with management, your board and your external auditor, so that you can make the best decisions for your organization and financial statement users. Contact Armanino’s nonprofit team for guidance as you consider how to implement this standard in a way that provides the most useful information to your key stakeholders.

March 28, 2017

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