Knock! Knock!
Who’s There?
LIQUIDITY Time is Here!
We have all known about it for 2 years now… we knew it was coming... and most procrastinated… until NOW. Accounting Standards Update 2016 - 14 is HERE and it will affect ALL nonprofits.
The new standard is effective for annual financial statements issued for fiscal years beginning after December 15, 2017. Therefore, if you are a calendar year end, then this year 2018 you have to adopt the standard in FULL.
If you are a fiscal year end, then it will be on the fiscal year ended in year 2019. So for example June 30 year ends will be effective as of June 30, 2019. Therefore the TIME IS NOW!!!
Your organization will have to adopt the ASU changes retrospectively and show the changes for both years if you have comparative financial statements.
Let’s turn our focus on the most complicated part of the ASU - New Liquidity Disclosures.
Historically, organizations have not had to disclose liquidity information. This is similar to what we see in the for-profit world in their management discussion and analysis. Adding the new liquidity disclosures allows users to look at the financial statements and determine how organizations manage cash and assets to meet current obligations. It will also help add transparency to the organization’s financial statements.
Over the years when I have talked to clients there has always been a hot topic over reserves and how much should the organization have on hand. Does the organization have too little or too much (nice issue to have) in reserves? The new ASU includes new disclosure requirements for a nonprofit’s liquidity position. In keeping with the aim of making nonprofits’ financial statements more comparable, the FASB is requiring organizations to disclose their liquidity positions and how they manage liquidity.
The FASB has defined
Liquidity and Availability
FOR THE FIRST TIME!
Liquidity - Relates to the type of assets the organization has and the maturity of those assets to meet current obligations.
Availability - Is it accessible for use? Are there donor-imposed or other external restrictions? Or even self-imposed limits? Just because you have the asset does not mean you can use it. For example, an endowment is not available to use. Or a restricted cash contribution to build a new building, or it can even be an internal limit the board placed such as a quasi-endowment to fund scholarships.
Using the asset types noted above, two definitions clarify Liquidity:
Quantitative liquidity
and
Qualitative liquidity
Quantitative liquidity refers to the availability of unrestricted liquid assets as of the date of the financial statement. This is the amount the organization considers necessary to meet the operating demands within one year. This shows that the organization has enough funds to cover the management costs for the coming year.
Qualitative liquidity represents the state of any liabilities and available funds to cover one year of financial management following the date of the financial statement.
With these new definitions, authorities now require organizations to disclose both quantitative and qualitative information used for expressing liquidity and availability in their financial statements. These new disclosures will help the readers of the financial statements understand the organization's exposure to risk, how the organization manages its liquidity risks, and directly tells the reader what assets are available to meet current cash needs.
Quantitative information (what I call the numbers) includes the amount of financial assets at the end of the reporting period. Organizations could also disclose the amount of financial assets not available to meet current cash needs in the near term, as well as the amount of financial liabilities that require cash in the near term.
Qualitative information tells a story about how the organization manages its available liquid resources to meet cash needs for general expenditures within one year of the balance sheet date. The new law now requires organizations to disclose this information. This disclosure includes a discussion about the availability of an organization's financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date.
Required qualitative disclosures would also enhance a user’s understanding of your organization's strategy for addressing entity-wide risks that may affect its liquidity, including its access to lines of credit, its policy for establishing liquidity reserves and its basis for determining the time horizon used for managing its liquidity.
Therefore, your disclosure note should also consider the following qualitative items:
Your strategy for addressing entity-wide risks that may affect liquidity, including its use of lines of credit
Your policy for establishing liquidity reserves
Your basis for determining the time horizon used for managing liquidity
Minimum cash balance goals
Example Footnote: Please note that there are other options on how to present this info, but this is my favorite format and the one that I recommend.
How about an example?
The following reflects Fluffy Puppy Rescue’s assets as of the balance sheet date, reduced by amounts not available for general use because of contractual or donor-imposed restrictions within one year of the balance sheet date. Amounts not available include amounts set aside for long-term investing in the quasi-endowment that could be drawn upon if the governing board approves that action. However, amounts already appropriated from either the donor-restricted endowment or quasi-endowment for general expenditure within one year of the balance sheet date have not been subtracted as unavailable.
Fluffy Puppy is substantially supported by restricted contributions. Because a donor’s restriction requires resources to be used in a particular manner or in a future period, Fluffy Puppy must maintain sufficient resources to meet those responsibilities to its donors. Thus, financial assets may not be available for general expenditure within one year. As part of Fluffy Puppy’s liquidity management, it has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, Fluffy Puppy invests cash in excess of daily requirements in short-term investments. Occasionally, the board designates a portion of any operating surplus to its liquidity reserve, which was $1,300 as of December 31, 2018. The governing board established a fund that the organization may call upon in the event of financial distress or an immediate liquidity need resulting from events outside the typical life cycle of converting financial assets to cash or settling financial liabilities. In the event of an unanticipated liquidity need, Fluffy Puppy also could draw upon $100,000 of available lines of credit or its quasi-endowment fund.
I prefer the above note over the other options that you have as it is clear what is and what is not available. It starts with an intro paragraph as noted above, and describes how the organization came to the total assets available for use. The table starts with total assets (right from the balance sheet) and then reduces that by amounts that were not available. Easy and straightforward, this format is easiest for your readers to understand and ties the numbers to the numbers that are on the balance sheet.
Now that you have all the information on the new Liquidity Disclosures, let it soak in a bit. In the meantime, you can ask questions and get more clarity in the facebook group, “NonProfit Accounting Spot.” My other post on Liquidity is called “Steps to Transparency.” It will guide you through the actions to take as you prepare your organization. CLICK HERE TO VIEW OTHER POSTS ON THE 2018 ASU TOPICS.
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