New liquidity disclosures required by ASU No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of financial statements of not-for-profit entities

The new accounting standard requires that a not-for-profit entity disclose in the notes to its financial statements relevant information about the liquidity of assets, including restrictions and self-imposed limits on the use of particular items. The disclosures must be presented in two formats:

  1. A narrative explanation about the entity’s policies on managing funds to meet day-to-day cash needs for general expenditures within one year of the date of the statement of financial position, and
  2. Numerical details about actual liquid assets available to meet general expenditures within one year of the date of the statement of financial position. The availability of a financial asset may be affected by (1) the nature of the asset, (2) any external limits imposed by donors, grantors, laws, and contracts with others and (3) any internal limits imposed by governing board decisions.

The Financial Accounting Standards Board (FASB) is allowing flexibility in how entities disclose the numerical details, as long as the methods are applied consistently and reported transparently. Larger organizations (like major research universities) might present the numbers in tables or charts, but smaller organizations might need to provide nothing more than a few simple lines.

This new standard is effective for fiscal years beginning after December 15, 2017, so now is the time to begin working on how your organization will be disclosing this qualitative and quantitative information in your financial statements. The following are two examples of what the new required disclosure will look like:

Example 1

The Theater’s working capital and cash flows have seasonal variations during the year attributable to the annual cash receipts for subscriptions and a concentration of contributions received near calendar year-end. To manage liquidity the Theater maintains a line of credit of $3 million with a bank that is drawn upon as needed during the year to manage cash flow and is then repaid in full by the end of the fiscal year.

The following reflects the Theater’s financial assets as of the statement of financial position date, reduced by amounts not available for general use within one year of the statement of financial position date because of contractual or donor-imposed restrictions or internal designations. Amounts available include the Board-approved appropriation from the endowment fund for the following year as well as donor-restricted amounts that are available for general expenditure in the following year. Amounts not available include amounts set aside for operating and other reserves that could be drawn upon if the board of directors approves that action.

Current assets, excluding nonfinancial assets$3,183,318$2,710,890
Add: endowment fund appropriation for following year    547,700    591,554
Subtract: cash restricted by lessor to specific uses   (942,941)   (823,430)
Subtract: donor restrictions for specific purposes   (250,000) 
Subtract: board-designated operating reserves and other   (225,129)   (299,011)
Financial assets available to meet cash needs for general expenditure within one year$2,312,948$2,180,003

Example 2

Not-for-profit A’s financial assets available within one year of the statement of financial position date for general expenditure are as follows:

Cash and cash equivalents$  4,575
Accounts and interest receivable    2,130
Contributions receivable    1,825
Short-term investments    1,400
Other investments appropriate for current use  10,804

Not-for-profit A’s endowment funds consist of donor-restricted endowments and a quasi-endowment. Income from donor-restricted endowments is restricted for specific purposes and, therefore, is not available for general expenditure.  The quasi-endowment has a spending rate of 5 percent, $1.65 million of appropriations from the quasi-endowment will be available within the next 12 months.

As part of not-for-profit A’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, not-for-profit A invests cash in excess of daily requirements in short-term investments. To help manage unanticipated liquidity needs, not-for-profit A has committed lines of credit in the amount of $20 million, which it could draw upon. Additionally, not-for-profit A has a quasi-endowment of $33 million. Although not-for-profit A does not intend to spend from its quasi-endowment other than amounts appropriated for general expenditure as part of its annual budget approval and appropriation process, amounts from its quasi endowment could be made available if necessary. However, both the quasi-endowment and donor-restricted endowments contain investments with lock-up provisions that would reduce the total investments that could be made available.

For more information on this topic, or to learn how Baker Tilly not-for-profit specialists can help, contact our team.