New GAAP Disclosures—your liquidity up close and personal

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

Have you seen that TV commercial where the friendly neighbor delivers a home baked pie to the new family on the block, just to get a peek inside the front door?  Inquiring minds want to know. 

You may be feeling like that new neighbor as you apply the new nonprofit liquidity disclosures.  They’re making you reveal more details about your assets and operations. 

But think of it this way, the new disclosures focus on what inquiring donors and grantors want to know—can your nonprofit stay afloat for the long haul?

Today’s nonprofit sector is powerful–5 percent of the GDP.  Donors contribute more than $350 billion to more than 1.5 million nonprofits every year. *  With strength like that, why are financial statement users interested in financial sustainability? 

If you read our FIT! TIPS, you already know why.  We’ve seen unfortunate stories of nonprofits that closed their doors.  See What you don’t know can hurt you, for more details about Federation Employment Guidance Services that declared bankruptcy after 85 years. 

At our financial leadership seminar last Fall, one participant told us about a nonprofit closure she experienced first-hand.

These troubled nonprofits were often human service agencies that provided government-funded social service programs that didn’t support enough of the overhead costs.  Without sufficient non-grant support, these organizations didn’t have the financial reporting resources to see where they stood. ** Basically, everyone was blindsided.

It’s that “blindsided” part that has driven these new liquidity disclosures.  Donors, members, grantors and other financial statement users want to assess your financial preparedness to stay afloat and your plans for staying that way. 

The new standard requires you to disclose information about your liquidity policy, basically your cash management policy.  You’ll need to be prepared to disclose how you manage your cash and investments to address current needs, as well as how you preserve board designations and donor restrictions.    

There’s another dimension of the new liquidity disclosures.  You’ll need a footnote that lists all your financial assets available within the next year to pay general obligations due within the next year.  Basically, it’s your cash, investments and receivables balances, that are current and not subject to restrictions and board designations.  There can also be other items to consider, but constructing the footnote might be the easy part. 

What if this footnote disclosed that all of an organization’s assets were earmarked by restrictions and board designations?  What if it disclosed that some of the restricted net assets had already been spent?  Finance committees and Boards may have some heated discussions about what this says about the organization’s financial preparedness and how it looks in the footnotes.  Good thing you’re starting early.

What can we learn?

Now is a good time to start thinking about how you’ll describe your liquidity policy.  Discuss it with your accountant, your finance committee and your Board so you’re ready to make the required disclosure.

Now is a good time to preview your assets available disclosure using current numbers.  Ask your accountant to draft the note for you and discuss it with your finance committee and your Board so you’re ready to make the required disclosure.

The new accounting standard for nonprofit financial statements is Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements for Not-for-Profit Entities.  Its accounting and disclosure changes include:  Restricted funds, board-designated funds, endowments, functional expense reporting, statement of cash flows, investment income and expenses, cash management policies and liquidity.

If you’re the accountant charged with implementing the new standard, consider joining us for a detailed look at our live one-day seminar on May 18, 2018 in Alexandria, VA, Financial Intensive Training on the New Financial Reporting GAAP—Remodel Your Financials—an in-depth look.    

If you’re new to nonprofit finances, this is a great time for nonprofit managers and emerging leaders to become familiar with the new nonprofit financial statements right from the beginning.  We’re including the basics in the Remodeling Your Financials session of our live 2-day seminar, Financial Leadership Training for Emerging Nonprofit Professionals.

Read more FIT! TIPS.

Join our 501(c)(fit!) community so you won’t miss another FIT! TIP.

*Yes, it’s true per GuideStar’s Nine Things You Might Not Know about U.S. Nonprofits, November 2015.

**Per the Human Services Council, New York Nonprofits in the Aftermath of FEGS:  A Call to Action, February 2016.

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