FASB ASU 2016-14: Liquidity - Organization Liquidity is More than Cash

The nonprofit financial statement format has a number of major areas affected by the new standard and the Liquidity is one of them.

Nonprofits will now be required to present information about financial assets available to meet the cash needs for general expenditures of the organization within one year of the statement of financial position date. Isn’t this the fundamental question that everyone has been asking all along?

The Financial Accounting Standards Board in ASU 2016-14 has made it clear that information about liquidity is just as important to users of the organization’s financial statements as it is to the organization’s management. 

Requirements

The new standard requires disclosure of qualitative and quantitative liquidity information.

Qualitative Information

This refers to how an organization manages its liquid resources to meet operational cash needs for general expenditures within one year of the statement of financial position date.

Qualitative information should be included in the footnotes and describe the availability of the not-for-profit’s financial assets. Financial assets are defined as cash, ownership interest in an entity, or a contract that allows an organization to receive cash or another financial instrument or to exchange financial instruments on potentially favorable terms. The availability of financial assets can be affected by:

• The nature of the asset
• External limitations on the asset that are imposed by donors, grantors, laws, and contracts
• Limits on the asset that are imposed internally, for example, by governing board decisions

Quantitative Information

This refers to the amount of financial assets available to meet cash needs for general expenditures within one year of the statement of financial position date. Quantitative information can be included on the face of the statement of financial position or in the footnotes.

These new disclosures provide more clarity to readers of financial statements on what resources are available to support ongoing operations. They also make it more apparent when an organization is in a strained financial situation.

Financial Assets

Organizations need to assess what their financial assets are and whether the current assets presented in their statement of financial position equate to the financial assets available to support general expenditures within one year from statement of financial position date.

In some instances, an organization’s current assets may be different from those available to meet cash needs for general expenditures. For example, an organization may classify pledges to be received within one year as current in its statement of financial position, but these pledges may be purpose restricted and unavailable for general expenditures—even when the cash is received.

Common types of financial assets include:

• Cash and cash equivalents
• Short-term investments
• Receivables
• Pledges

Restrictions

Restrictions that could limit the use of assets are:

• Donor restrictions for capital expenditures or other expenses beyond the next year
• Funds designated by the board including assets for self-insurance funding, pension obligations, or debt arrangements

• Assets held as collateral
• Cash balance limits resulting from contractual agreements with vendors or creditors
• Cash required to be held in separate accounts or restricted for a specific purpose
• Loan covenants

Policies for Managing Liquidity

In addition to disclosure about the extent of liquid assets available to cover operations, ASU 2016-14 requires disclosure of the organization’s policies for managing liquidity. This means organizations will need to develop policies for managing liquidity if they don’t have such policies already. These policies should address areas such as cash reserves, available lines of credit, and investment of cash in excess of current operating needs. ASC 958-210-55 provides examples of disclosures that include liquidity policies.