Remodeling Your Financials – the fire pit

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

Last week, I mentioned how much I enjoy those home remodeling TV shows.  They transform house after house from an outdated property into the latest style.  Sometimes they knock down a wall, sometimes they add a fire pit or even pop out an addition.  It can be messy for a while and even frustrating, but with the right effort and resources, the remodelers arrive at the homeowners’ perfect property.

As we discussed, the new accounting standards for nonprofit financial statements have given you your own remodeling project–not on your home, but on your nonprofit’s financial statements. Last week we discussed the effect of the new standard on restricted net assets.  This week, let’s discuss the liquidity disclosures.  This remodel will be like adding a fire pit.

Why a fire pit?  Because you will be adding something you don’t already have, disclosures that are not currently in your financial statements.  In addition, what’s in the disclosures might lead to some heated discussion.  Good thing you’re starting early on this area.

While your new fire pit will be bringing you more warmth and comfort when it’s cold outside, your new liquidity disclosures will be bringing the same kind of warm comfort to your financial statement readers.  They’ve been feeling a little out in the cold with the current presentation of a nonprofit’s liquid assets, and wanted more comfort about an organization’s policies for ensuring they’re prepared to meet their financial obligations. 

The new standard requires you to disclose information about your liquidity policy.  If you’re saying “what liquidity policy” you’re not alone.  It hasn’t been required disclosure before, so you may not have specifically defined it or named it as your liquidity policy, but you do know what it is, it’s 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 will 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 easy compared to the subsequent discussion of what the footnote reveals.

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.  That’s why I called this part the fire pit.  Again, 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.

With the right effort in these two areas, you’ll arrive at liquidity disclosures that meet the new standard and give the right presentation of your financial preparedness. 

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 November 3, 2017 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.

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