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The New Nonprofit Liquidity Disclosures

Accounting Standards Update 2016-14

“Liquidity worries haunt nonprofits,” intoned CFO Magazine in a 2009 headline. At that time, not-for-profit organizations were scaling back, and few were sitting on cash.

nonprofit liquidity disclosuresThis lack of liquidity worsened nonprofits’ financial straits during the recession and afterward. Hard times, in turn, made liquidity harder to achieve. Most nonprofits struggled and some closed shop, unable to cover pay-rolls, mortgage payments or light bills. These red flags concerned Washington and Wall Street too. Charitable nonprofits, in particular, become more important in perilous economic times. Meanwhile, nonprofits themselves hold large investments in the U.S. economy.

Financial Reforms

Stakeholders in government and the nonprofit sector initiated reforms to address liquidity and other concerns. The most recent changes are presented in the latest update from the Financial Accounting Standards Board (FASB ASU 2016-14). These changes require additional disclosures about liquidity and available resources.

The information in these disclosures is intended to:

    • Calculate what resources are currently available for next year’s operations
    • Explain how your organization manages its liquidity

The FASB’s update requires “enhanced” information about your organization’s liquidity and timely access to resources. Two kinds of information are required; together, they can indicate the nonprofit’s ability to meet its cash needs for all the next year’s general expenditures.

    1. Quantitative information is included on the statement of financial position and in the footnote disclosures. It calculates the nonprofit’s liquid resources available for next year’s general expenditures.It does so by reducing year-end liquid resources to account for limitations imposed by trusts, donors or subject-to-appropriation rules. (Appropriation, for most nonprofits, translates to board approval.)
    2. Qualitative information is presented in the footnotes to the financial statements. It can explain the nature of the quantitative figures and how the nonprofit expects to meet its cash needs for the next year. The organization describes how it manages its available resources and liquidity risk by explaining its strategy, policies on liquid reserves and basis for estimating liquidity over time.

The FASB standard permits smaller and less-complex nonprofits to provide both kinds of information in paragraph form.

ASU 2016-14 is effective for periods beginning after Dec. 15, 2017, so now is the time to prepare. Review your liquidity risks and your plan and gather ideas for information to present and support your case.

For more information on this topic, please contact our office at 401-331-0500 and ask to speak to one of our not-for-profit specialists.

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