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FASB Issues New Standards on Liquidity and Availability of Resources

October 25, 2016

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FASB reached out to various not-for-profit stakeholders in 2011, and after countless comment letters, meetings and workshops, addressed the issues raised through Accounting Standards Update 2016-14 (ASU). This is phase 1 of the overall project where FASB is hoping to have not-for-profits provide more relevant information by updating the current model of financial reporting, which has been around for over 20 years. One issue that was raised concerned deficiencies in information about liquidity and availabiity of resources. While everyone can agree on the importance and usefulness of this information, there is much debate about the manner in which this information is provided. The ASU addresses liquidity risk by requiring the following*:

  • Qualitative information that communicates how a not-for-profit manages its liquid available resources to meet cash needs for general expenditures within one year of the balance sheet date.
  • Quantitative information that communicates the availability of a not-for-profit’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date. Availability of a financial asset may be affected by:
  1. Its nature
  2. External limits imposed by donors, grantors, laws, and contracts with others, and
  3. Internal limits imposed by governing board decisions.
  • New disclosures aimed at improving financial reporting transparency should enable users of the financial statements to gain a better understanding of an organization’s liquidity risks, as well as the resources that are available to the not-for-profit to help manage these risks. Not-for-profit organizations must look past the classified balance sheet and provide additional disclosures to show how restrictions imposed by donors, grantors, laws, contracts or board decisions could impact the availability of financial assets. These disclosures could be problematic as they may add additional time and cost to the preparation of GAAP financial statements under audit. In addition, the reporting entity must be able to substantiate the completeness and accuracy of the forward looking information. The example disclosure below will take time for users and preparers of GAAP financial statements to fully understand and utilize. Reporting entities should be prepared for the potential challenges in collecting the information that must be conveyed to financial statement users by this ASU.

An example footnote derived from the examples in the ASU follows:

Financial Assets as reported in statement of financial position at 12/31/15:

Cash                                                                                                                  $                  500,000

Receivables                                                                                                                         200,000

Investments                                                                                                                         50,000

Total financial assets                                                                                                        750,000

Less those unavailable for general expenditures within one year , due to:

Contractual or donor-imposed restrictions:

Restricted by donor with time or purpose restrictions                                 (45,000)

Subject to appropriation and satisifcation of donor restrictions              (100,000)

Investments held in annuity trust                                                                      (10,000)

Board designations

Quasi-endowment fund, primarily for long-term investing                         (50,000)

Amounts set aside for liquidity reserve                                                               (2,500)

Financial assets available to meet cash needs for general expenditures

within one year                                                                                           $                  542,500

As part of the organization’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. Excess cash is invested in short-term, highly liquid accounts during the year. If additional financial assets are needed unexpectedly, the not-for-profit has an availabile line of credit of $500,000 as of December 31, 2015.  Certain amounts from its quasi-endowment could also be available if necessary.

*Obtained online at http://www.fasb.org/home.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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