Nonprofit Liquidity

Minimum Requirements of Liquidity Disclosure

To satisfy the minimum disclosure requirement for liquidity, nonprofits must identify their financial assets that are available to meet general expenditures within one year of the balance sheet date. At its simplest, describing availability means listing those assets (e.g., cash, accounts receivable, contributions receivable, short-term investments) that are accessible for basic operations within 12 months.

Flexibility is another factor in determining availability. Assets are less flexible and may not be available for general expenditure if they have certain donor restrictions or carry board designations. Other examples of limitations that could affect availability would be a minimum cash reserve required by a loan covenant or a compensating deposit required by a bank.

To help users of nonprofit financial statements understand more about the availability and flexibility of nonprofit resources, FASB requires both quantitative and qualitative information. Nonprofits often display quantitative information in table form as a list of assets and the amounts available for general expenditure within the next 12 months. Qualitative information in audited statements usually takes the form of an explanation or narrative that accompanies those tables.

Beyond the Minimum

As is often true of FASB accounting standards, the required disclosures set only the minimum threshold for how much and what kind of information the audited statements must include. While it is tempting to satisfy the minimum and move on, nonprofits and their auditors have an opportunity to provide a more in-depth analysis of liquidity. This is an area where auditors can bring value to their clients and nonprofits can display sophistication in their financial practices.

The following excerpt of ASU 2016-14 makes the case for classifying financial statement items both by maturity and by restriction:

Grouping assets and liabilities as current or noncurrent is a straightforward way to aggregate them by their relative maturities. If an asset will be available or a liability will come due within 12 months of the balance sheet date, it is considered current; otherwise, it is considered noncurrent. To be considered available, an asset must generally be classified as current.

While auditors and nonprofits commonly classify the statement of activities using columns to display net assets with and without restrictions, most do not use columns to classify items similarly on the statement of financial position. Using a two-column format for the statement of financial position is one option to display quantitative information that informs liquidity measures and satisfies the basic disclosure requirements.

A statement of financial position can be made even more informative by using separate columns—not just line items—for the “without donor restrictions” and “with donor restrictions” categories, as in Exhibit 1. Showing which assets are available without donor restrictions helps users get a sense of which resources are the most flexible. Using two columns provides immediate transparency regarding which assets are both current and without restriction. To consider an asset available, it must generally be flexible—in this case, classified without donor restriction.

Beyond the Standards

Although the above classified statement of financial position provides excellent information to an experienced user, an audit note disclosure could also provide the necessary quantitative information with a table as simple as the one seen in Exhibit 2. While this table is more concise than the full statement of financial position, it lists only those portions of each line item that are available and flexible within the narrowest FASB definition; that is, current assets without donor restrictions in their net amounts. Another option, shown in Exhibit 3, is to start with gross assets and then subtract those assets that are limited in some way.

Most nonprofits are likely to use additional assets throughout the coming year to accomplish their ongoing program work, even though those assets are not technically available and flexible. To communicate their story better, nonprofits should proactively decide and follow liquidity strategies throughout the year. With thoughtful planning, nonprofits will have a better story to tell about the full range of resources they have available for their work, how flexible those funds are, and how they intend to manage them. It is thus important not to confuse “assets available for general expenditure” with the total assets available to meet program and operating expenses. Better yet, nonprofits should be encouraged, and auditors should do their part to advise them, to report the full range of resources that their organizations will draw upon to support programs and operations in the coming year.

Not Flexible, but Still Spendable

For the most part, FASB’s basic liquidity measure includes only those assets that are both current and without donor restriction. These are certainly the most flexible assets a nonprofit could have, as they are true operating reserves and may be used for any purpose. Contributions with donor restrictions are, however, often a large part of any nonprofit’s revenue stream, and the portion of these funds released from restriction each year can be significant—sometimes even a majority of the total resources available for program and operations expenditure. These funds may not be flexible and could not be included in a table that narrowly defines assets as “available for general expenditure,” but they are certainly spendable.

To give a more complete picture of which funds an organization has available, nonprofits may provide supplemental information beyond ASU 2016-14. Along with assets available for general expenditure, nonprofits should include an estimate of which assets are expected to be released from restriction or for which the board intends to lift this designation in the coming year, as shown in Exhibit 4.

Strategies for Liquidity

To fill out their financial story even further, nonprofits can also use note disclosures to offer insights into their budgeting processes, share how they monitor the release of donor restrictions, and display lines of credit or other off-balance-sheet resources they use to manage liquidity. Whatever information they choose to share, the qualitative portion should give financial statement users insight into how the organization ensures it has ample financial resources and a system to manage those resources.

By expanding their narrative disclosures beyond the minimum FASB requirements, nonprofits can reveal the strategies and goals that guide how they manage liquidity. These might include—

• discussing reserve policies,
• outlining how they handle multiple receivables cycles (contributions or earned revenue),
• describing how and when they use lines of credit, or
• defining their processes for estimating when and how much money will be released from restriction.

All are appropriate topics for the qualitative portion of the liquidity disclosures, and all demand attention and deliberation by nonprofit boards and leadership.

A Stronger Story

One year into the implementation of the new FASB standards on liquidity, auditors and nonprofits alike are learning to tell a more complete and compelling story about how organizations manage funds. Auditors offer value as trusted advisors by suggesting that nonprofits take time to develop a thoughtful, well-crafted set of liquidity measures and management strategies. Nonprofits can use their audited financial statements to display the work done by a financially savvy and engaged management team. Making the process an organization uses to review, monitor, and address liquidity more transparent helps build trust and confidence in the organization.