ASU 2016-14 Liquidity Disclosure – Telling your Story!

November 5, 2018 | Article

Many challenges arise when adopting FASB’s new financial reporting standard, and one of the most time-consuming challenges is the required disclosure regarding liquidity and availability of resources. However, this requirement can be turned to your advantage if you use this new disclosure to help tell the story of your operations, your careful stewarding of resources and your plans for the future.

It’s important to gather both qualitative and quantitative information when considering liquidity and available funds. The quantitative information required is fairly standard—the financial assets available at the statement of financial position date to meet cash needs for general expenditures within one year. It’s the qualitative information—how your organization manages its financial resources—that can leave you searching for words as you draft your new disclosure.

The following outlines one way to approach this project that can streamline the process.

Quantitative Analysis
The first step is to identify all financial assets and any limitations on availability of those financial assets for expenditure in the next 12 months. Start with the assets included in your statement of financial position and identify the financial assets—these can include cash, accounts receivable from operations, promises to give, your investment portfolio and ownership interests in other entities.

The next step is to carve out the financial assets available for use. For example, your investment portfolio is available for use, but only the anticipated amount related to the annual spending policy of your endowment portfolio is available for operations. You might consider including as available any board-designated funds, since these funds are only earmarked for specific use and designations can be removed if funds are needed for operations. Finally, take a close look at your donor-restricted funds; if normal operations include the granting of scholarships, then a reasonable amount of donor-restricted funds for this purpose could be included in your financial assets available for the next twelve months.

Qualitative Analysis
Now for the fun part! While not always discussed in this context, nonprofit organizations do have expectations regarding the management of resources and how they expect to meet needs over the next twelve months. These expectations are the basis for the qualitative discussion in your disclosure.

Discussion should include consideration of operational aspects such as the following:

  • Lines of credit that may be borrowed for operations, or the need to fund repayment of debt, if that is a significant factor that readers should know.
  • Availability of board-designated funds and/or the potential for undesignating such funds should they be needed for operations.
  • Operating reserve goals or capital repair and replacement reserves.
  • Standby credit arrangements.
  • Other sources of liquidity not currently included in your statement of financial position.

If you have concerns that your total financial assets available for the next twelve months is larger than expected by your donor base, it’s important to take the time to discuss future plans for these funds. Are you anticipating the need to replace computer hardware or software? Will you be changing your physical location in the near future? Do you have plans to expand into new services or additional geographic areas? These are just a few reasons why a nonprofit might have a substantial amount of financial assets on hand as of the end of the year.

Opportunities for Improvement
Finally, as you evaluate your financial assets and how they might be used to satisfy operations, be aware of the need to update your internal policies. For example, is your policy regarding board-designated funds complete? Does it include how funds are designated as well as the conditions under which the governing body would undesignate or release such funds?

Eide Bailly Can Help!
When you combine both the qualitative and quantitative aspects of liquidity, you can paint a more thorough picture for the readers of your financials regarding financial performance and future plans.

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