FINRA's BrokerCheck

Liquidity and Availability of Resources

One of the primary objectives of Accounting Standards Update (ASU) 2016-14, “Not-for-Profit Entities: Presentation of Financial Statements of Not-for-Profit Entities” is to provide more useful information to donors, grantors and other users of not-for-profit financial statements. An organization’s financial sustainability is not always transparent with the current financial statement presentation.

Historically, there has been confusion on the limits imposed by donors, grantors or governing boards on the liquidity and availability of an organization’s assets. The nearness of an asset to cash (liquidity) and the constraints on the use of the asset (availability) need to be illustrated in the financial statements. The new quantitative and qualitative content required in ASU 2016-14 assists the reader in understanding the value of financial assets available to cover general cash expenditures during the one year period after the date of the statement of financial position.

Quantitative content

The total financial assets of the organization as of the statement of financial position date is the starting point to quantify the liquid resources available to meet cash flow needs. Total financial assets are then reduced by assets that are limited by external or internal limitations.

External limitations which are imposed by contractual elements or outside donors are one category of total financial assets that are excluded. External limitations include time and purpose restrictions of donor contributions or the annual investment earnings of the organization’s investment portfolio.

Some organizations also have internal limitations established by their governing board which prohibits certain assets from being used for operating purposes. Internal limits include designations of net assets earmarked for specific initiatives of the organization.

Qualitative content

An organization is required to convey how it manages its liquid assets to meet its cash needs. An organization should highlight the internal policies it has established to manage its assets, adhere to donor restrictions and meet its operating cash flow needs. These disclosures may include describing the investment methodology or time period used for investing on a short-term basis to achieve liquidity. Perhaps an operating surplus reserve was established by the board for use by management when there is an immediate liquidity need caused by an unforeseen event(s) or the days cash on hand threshold established to meet a certain number of days of normal operating expenses. Alternatively, there may be a line of credit available at a financial institution that may provide temporary funding which can also be disclosed.

The form of this disclosure can vary by organization. The key components are both quantitative and qualitative content to be included on either the face of the statement of financial position or in the notes. A classified statement of financial position aids in the understandability of this disclosure and might provide sufficient quantitative information when supplemented with a footnote containing the qualitative component.

An organization can begin molding the additional disclosure necessary to illustrate the availability of resources using information available through the current statement of financial position. Consider providing explanations to the reader about the obvious financial assets that may be assumed to be used for operating purposes but are not. Assumptions could include, but are not limited to:

  • A contribution receivable (without a purpose restriction) with a time restriction that is expected to be collected within the next year would be included as a financial asset.
  • The investment earnings from an endowment fund with a specified spending rate that does not restrict the use of such assets is also a financial asset.

Here are two possible examples.

Example quantitative disclosure:

 Liquidity example

Example qualitative disclosure:

The Organization has $3,979,181 of financial assets available within one year of the statement of financial position date to meet cash needs for general expenditures. Contributions receivable are subject to implied time restrictions but are expected to be collected within one year. The Organization manages its liquidity required to meet its operating needs while also trying to maximize the investment of its available funds. The cash balance in excess of the daily requirements is invested in short-term investments. The endowment funds consist of donor-restricted endowments with donor restrictions on the use of the related income and, therefore, it is not available for general expenditure.

The Organization also has a line of credit with an available balance of $1 million which it could draw upon. Additionally, the Board has previously designated amounts to an operating reserve with a balance of $4,300,000 as of June 30, 20XX.

 

Stay tuned for more information and resources on the not-for-profit reporting model. If you have any questions regarding the standard or would like assistance navigating these changes, contact your Rehmann advisor today.

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