Need to Reset Your Reserve?

Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)

Does your nonprofit have a reserve? * You know, an amount your Board has set aside for special needs. Like many nonprofit leaders, you may be revisiting your reserves right now, and you may be finding that the institutional memory has grown a little foggy.

Why the renewed interest in reserves? The new GAAP for nonprofit financial statements * requires you to describe your Board-designated funds in a footnote, reporting the nature and purpose of the fund, the year-end balance and what you have to do to access it.

Because this disclosure is new, you may not have all these details at your fingertips.  In fact, many nonprofit leaders are finding that they can’t locate the documentation related to the inception of the fund. Others are finding that, while they have always reported a reserve fund balance, the money has been moved over the years, and they’re not sure how much of a reserve they really have. If you’re going through this issue right now, you’re not alone.  At our recent financial leadership seminar, a number of participants joined this discussion.

What can you do to pin down the nature, purpose and amount of your old reserve fund?  If you’ve exhausted all avenues for researching it, then it’s time to reset your reserve.  You may find these points helpful:

  • Figure out how much you really have. A reserve goal is not a funded reserve. You can’t set aside money that’s not there yet. You can’t report a reserve that’s not there anymore. Start with your unrestricted net assets balance and remove the things you can’t spend.
  • Figure out how much you can spare. Identify how much you need to run your day-to-day operations. A monthly cash flow projection can help identify how much you need to keep on hand to make payroll and pay the rent.
  • Consider the double-edged sword. Having a reserve fund highlights your financial sustainability. But the new GAAP also requires an “assets available” disclosure that highlights your liquidity. Your reserve funds don’t count as “assets available”.
  • Figure out where your reserve is. Do you have a special account for your reserve? Is it suitable to meet your needs for liquidity and risk? Are there funds in that account that are not available to be part of the reserve?
  • Reaffirm your purpose. What institutional memory can you find about the purpose of the fund? Does the original purpose need updating?
  • What happens to reserve fund earnings? Will you reinvest them to grow the reserve fund, or will you use earnings for another purpose?
  • What is the process for accessing your reserve? Does it require a vote of the entire Board?

This information will help you develop a proposal for your finance committee and ultimately your Board. Have your Board reaffirm the nature, purpose and amount of your reserve and the process for accessing it. If possible, take action before your year-end and get this all pinned down before your audit.

*Notes for accountants:

The new GAAP for nonprofit financial statements is ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities. Most nonprofits are required to implement this new standard for calendar year 2018 or fiscal years ending in 2019

The term, reserve, has no official meaning in GAAP In fact, some accountants find the term ambiguous and refuse to use it. Among nonprofit leaders, however, it is a very common term used to describe a Board-designated portion of unrestricted net assets. Just substitute designated net assets.

Fall seminar dates—online registration coming soon:

Financial Leadership Training for Emerging Nonprofit Professionals; Alexandria, VA, November 7-8, 2018

Financial Intensive Training on the New Financial Reporting GAAP—Remodel Your Financials—an in-depth look; Alexandria, VA, November 2, 2018

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