This is a Thought Leadership article from PrimeGlobal firm SingerLewak LLP, looking at steps you can take to create exceptional liquidity disclosures.

Although FASB Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit (NFP) Entities is not effective for many not-for-profits until 2018 for calendar year ends and 2019 for fiscal year ends, it’s not too early to start planning for its implementation. The new requirement to provide qualitative and quantitative information about how the entity manages its liquid resources will likely require considerable thought and planning. And while the disclosure requirements may seem a bit daunting, they present an opportunity to share the NFP’s financial management strategy with donors, board members, creditors and other stakeholders.

The ASU requires NFPs to provide both qualitative and quantitative information about liquidity and availability of resources as follows:

• Qualitative information that communicates how the NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date.
• Quantitative information that communicates the availability of the NFP’s financial assets to meet cash needs for general expenditures within one year of the balance sheet date. The availability of a financial asset may be affected by its nature; external limits imposed by donors, laws, and contracts with others; and internal limits imposed by governing boards.

When contemplating these disclosure requirements, NFPs should consider the following:

1. Determine the message you want to convey to your stakeholders.
Does your organization have ample resources to fund activities over the next 12 months? If so, you may want to make that clear in the disclosure. You may also want to discuss your policy for dealing with excess revenues (e.g., the board designates a certain percent of excess budgeted funds to be added to the organization’s operating reserves).
On the other hand, perhaps your organization struggles to maintain sufficient resources to cover general expenditures. In that situation, you may want to disclose your action plan for covering those expenditures. Perhaps you have lines of credit that could be drawn upon if needed or maybe you are expecting a large grant that will fund a significant portion of your expenditures.

Finally, some NFPs have significant capital projects and may have resources set aside to fund them. In those cases, consider adding a discussion of those resources and when you anticipate they will be used.

2. Determine if any new policies will be required.

If your organization does not currently have a board designation policy, consider whether such a policy is necessary. Some organizations require their boards to directly approve all designations. If that is not the case, the organization should consider creating and implementing a board designation policy or a formal delegation of authority allowing senior management to designate funds on behalf of the board.

Also consider the need for an operating reserve policy, if your organization doesn’t already have one. This policy would document (a) what the organization considers an appropriate level of reserves, (b) how the reserves will be built and (c) the steps to follow if the reserves fall below the set level.

3. Decide whether any existing policies need updating or formalizing.
If your organization has a policy that addresses board designation, consider whether that policy needs to be updated. Or perhaps your organization has procedures that it follows for board designations, but those have never been documented. Consider the need for a written policy to support the new liquidity disclosures. With the ASU’s emphasis on board-designated net assets, organizations may wish to ensure their procedures are formally documented.

4. Decide on the best presentation approach for your organization.
The guidance requires organizations to provide information about the availability of financial assets at the balance sheet date to meet cash needs for general expenditures within one year; however, there is no prescribed presentation for that information. The ASU provides a few example disclosures, but they may not resonate with every NFP. The AICPA Not-for-Profit Section offers example disclosures for a variety of NFP types. Independent auditors may also be able to provide examples you can use as a starting point. The format of the new liquidity disclosures will depend on the type of NFP, the relative liquidity of the organization’s resources, donor-imposed restrictions on those resources, internal board designations on resources, and so on.

5. Evaluate whether any changes to accounting and reporting systems will be necessary to easily capture the information to be disclosed. Once you have determined how you want to present the required information, you’ll need to assess your supporting systems and technology to determine whether any changes or additions will be required to easily capture the information you wish to disclose. In many cases, evaluating your existing chart of accounts will be a good place to start.

Regardless of your organization’s size or complexity, consider starting the discussion now to prepare for implementation of the new liquidity and availability disclosures. Being proactive will boost efficiency and help to ensure your disclosures provide meaningful information to your financial statement users.

Content by:

SingerLewak LLP

SingerLewak is a leading accounting firm in the west region with offices in Los Angeles, Orange County, San Francisco, Silicon Valley, Monterey Park, Woodland Hills and Denver, CO. Serving clients since 1959, SingerLewak has established a reputation for excellence by providing expertise in Accounting, Tax and Advisory services. Providing the breadth of services of a national firm in key business sectors and industry specializations, SingerLewak has been blending expertise and a personal approach for Public Companies, Entrepreneur & Family-Owned Businesses, High Net Worth Individuals and Nonprofits for more than 50 years.  SingerLewak is a nationally recognized accounting and consulting firm throughout our practice areas. 

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