Our Organization Has To Do A Liquidity Analysis – “SAY WHAT?”

In the August 20, 2018 edition of our Tax-Exempt Times, my Partner, Mario Urso, served you all an appetizer of Accounting Standards Update (ASU) 2016-14 – Presentation of Financial Statements of Not-for-Profit Entities. If you refer to your copy of that article that you either saved on your hard drive for easy reference or are using to soak up coffee spills, you may or may not, depending on your use of that article, see a nice summary of the significant elements of this new standard that will first become effective for tax-exempt organizations with a fiscal year ending December 31, 2018.

If that August article can be considered an appetizer, I would like to take the opportunity to serve you a main course of liquidity analysis and the related disclosures.  For those of you who I have been fortunate to have worked with during my public accounting career, you may remember me often saying, “Less is more”, as it applies to the footnotes accompanying your financial statements, with appropriate consideration given to disclosures that are required under generally accepted accounting principles.  However, you may also remember me saying recently that, in my opinion, the new liquidity disclosure requirements provide valuable information for the users of not-for-profit financial statements.  I actually like this disclosure.

First, let me refresh you on what I am referring to as the “liquidity disclosures” that will be required under this new standard:

  • Qualitative information that communicates how a not-for-profit organization manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date, and
  • Quantitative information, either on the face of the balance sheet or in the notes to the financial statements and additional qualitative information in the notes, as necessary, that communicates the availability of a not-for-profit organization’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.

So, why do the Financial Accounting Standards Board (FASB) and I think that these new reporting requirements are good disclosures? The FASB has believed from the beginning of this project that financial statement users didn’t have enough information about the liquidity of an organization from the current presentation of financial statements and the related footnotes.  This belief is due to both internal and external limitations that may have been placed on certain unrestricted assets.

Organizations are currently required to provide some information about liquidity, but there is not a consistent approach followed by all organizations.  Typical financial statements do provide information on limitations on cash and other assets and the balance sheet does sequence assets according to their liquidity.  However, these disclosures don’t really give a financial statement user the full picture of an organization’s liquidity.

With that background, what will the new qualitative disclosure include and look like. The organization will be required to disclose its policy for establishing reserves and, more importantly, its strategy for addressing its risks affecting liquidity, including access to funds under line of credit agreements.


The quantitative disclosure will be lengthier and will disclose the following:

  • Total financial assets which will be calculated as total assets, less any nonfinancial assets.  Nonfinancial assets would include property and equipment, inventory, prepaid expenses, and intangible assets.
  • Amounts unavailable within one year of the balance sheet date due to external limits.  Examples of these amounts would include reserves or escrow accounts established under debt agreements or other contractual arrangements.
  • Amounts unavailable within one year of the balance sheet date due to Board actions.  It is not uncommon for Boards to designate portions of an organization’s investment portfolio for endowment purposes or to designate amounts for specific capital or programmatic purposes.

There are a number of ways in which these disclosures can be made in the financial statements, too lengthy for inclusion in this article.  However, we can discuss some general thoughts and methods to satisfy these qualitative and quantitative requirements.  The method selected will most likely depend on the complexity of the organization’s balance sheet and its liquidity position.

A small organization with a relatively simple balance sheet may satisfy the disclosure requirements in a few paragraphs.  The organization may describe and quantify its financial assets and that these assets have not been restricted by its donors, Board designations, or any contractual requirements.  The disclosure may also include specific information with respect to its policy of maintaining a short-term investment portfolio to support its operations, as well as the availability of cash under a line of credit agreement.

However, in my opinion, most tax-exempt organizations will have a much more substantial disclosure. This disclosure could take the form of a tabular presentation beginning with the organization’s total financial assets, as defined, less any amounts that have been restricted by donors or other contractual arrangements and Board designations.  Similar to the previous example, the disclosure will discuss the organization’s policy as to the maintenance of funds to support operations, as well as the availability of cash under financing or other arrangements.

These disclosures can all be developed by an organization to meet its reporting requirements.  What is the effect of these disclosures and how will they be interpreted by the users of the financial statements?  First and foremost, many organizations may actually have negative financial assets due to either donor restrictions, contractual restrictions, or Board designations.  I have talked to many clients who will be faced with this situation based on their current balance sheet.  As a result, they may feel that it is in their organization’s best interest that their Board act to remove these designations.  

Regardless of whether Board designations are removed or maintained, it will be critically important for all tax-exempt organizations to develop the disclosures that will provide its financial statement users the information that describes how the organization will fund its general expenditures for one year from its balance sheet date.  The nature of this disclosure is very different from previous footnote disclosures in that it is prospective versus historical in nature.  However, the times are changing and this information related to the organization’s liquidity may become one of the most important and most read disclosures in your organization’s financial statements.  Proper planning is key to deciding on your approach to the new required disclosures.

Craig Stevens is a partner based out of our Rochester, NY office.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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