What is this new Liquidity Disclosure for Not-for-Profits?
By Victor Blackburn, CPA, Partner
Over the next two years, not-for-profit organizations will have to adopt a new financial reporting standard (Accounting Standards Update No. 2016-14, Not-for-Profit Entities). The purpose of this accounting standard is to help improve the financial reporting for not-for-profits to allow their readers to compare different organizations because they will all use the same reporting method. One new disclosure required by this accounting standard is an organization’s liquidity at year end and available resources for the next year.
Why does the new standard require such a disclosure? Well, according to the Financial Accounting Standards Board, based on feedback from the users of not-for-profit financial statements, potential donors, grantors or creditors wanted to know that the organization had sufficient resources to meet their financial obligations over the next year. The hope of this new disclosure is to increase the transparency in the financial statements and allow the reader to understand the organization’s ability to fund operations. Also, the not-for-profit organizations must develop, adopt and disclose a liquidity management policy that will inform the readers of the financial statements on how they will manage resources to pay for obligations due and how they would fund a negative liquidity position, if one occurred.
In short, the not-for-profit will determine its financial assets at year end (those assets that can be converted to cash during the year) and subtract unavailable resources for expenditures during the year. Unavailable resources could relate to donor imposed or contractual restrictions and also might include board designations, such as long term investing quasi-endowment funds.
Developing a method to calculate the organization’s liquidity and its related management policy can be challenging to many small not-for-profits. If you need assistance, please reach out to your accounting advisor to discuss the calculation and development of a policy.
Victor Blackburn Assurance Partner, CPA
Victor is a partner in our firm, serving clients in the firm’s assurance practice. Auditing and consulting for companies and organizations in a broad range of industries since 1990, Victor’s clients include companies in the government, nonprofit, manufacturing, wholesale, retail and service industries and organizations requiring Uniform Guidance and Yellow Book Audits. Victor’s experience […]