Liquidity And Availability Disclosure: Show How Your Nonprofit Will Pay the Bills

ASU 2016-14 “Financial Statement Presentation of Not-for-Profit Entities” introduces a new requirement: the liquidity and availability disclosure. This requires qualitative and quantitative information on how a nonprofit manages liquid resources and communicates availability of financial assets.

In simpler terms – how do you plan to pay your bills? Donors, creditors, grantors and other outside parties take this information seriously when considering where their own money will go. Demonstrating your organization’s ability to properly access and use its money goes a long way in securing much-needed funding.

The first step in developing the new note disclosure is to identify the quantitative information—all financial assets (generally cash, CDs and accounts receivable) and any limitations on their availability for expenditure within the next year. All of the following liquidity factors should be considered when determining if the financial assets will be available for expenditures:

• The nature of the asset (e.g., property and equipment is not considered liquid);
• External restrictions imposed by donors, laws, contracts and agreements; and
• Internal designations imposed by the governing board (e.g. cash reserves).

Next, determine the format to present the quantitative disclosure. There is flexibility in how this information can be disclosed in the footnote. Generally a table is the easiest format in which to present the quantitative information and for your readers to understand.

Once the quantitative information has been completed, you’ll need to focus on qualitative information. This means examining your organization’s policies in place for managing liquidity needs. For instance, let’s say your organization has a policy to hold three months of operating expenses in reserves (or perhaps a reserve for capital replacement). This policy would be disclosed in the qualitative portion of the disclosure.

Qualitative information also includes conditions under which board-designated net assets may be undesignated, the nonprofit’s access to lines of credit or other emergency financing sources, and any other information deemed helpful in understanding your organization’s liquidity.

Managing liquidity is essential to the financial health of your nonprofit, which makes this disclosure invaluable. And with ASU 2016-14 taking effect for fiscal years beginning after December 15, 2017, it’s important to make sure you’re reporting correctly.

Management should work closely with the board and the organization’s CPA when preparing this disclosure. Don’t forget to contact your nonprofit CPAs at James Moore if you need assistance in implementing this liquidity disclosure.

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