Renner Nonprofit News January 17, 2018

New disclosures about your liquidity

Joan M. Renner, CPA, CGMA, Shareholder, Renner and Company, CPA, P.C.

Nonprofit execs know that it’s all about cash.  After years of running an organization, experienced managers know their cash flow cycle, and know how much cash to keep on hand to stay afloat.  Up to this point, it’s been an internal process.  But now, under the new nonprofit GAAP, you’ll be writing a more formal financial statement disclosure—your liquidity policy.  Donors, grantors, members and other financial statement users want to know how financially prepared you are to stay afloat, and how you plan to stay that way.

Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements for Not-for-Profit Entities, is changing the way nonprofits report items like restricted funds, board-designated funds, endowments, functional expenses, cash flows, investment income, investment expenses, liquid assets and 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.  Whether your policy is to keep one year’s worth of cash on hand or one month’s worth, whether you have access to designated reserves or a line of credit, you’ll need 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 to 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.

The real challenge with this footnote is not writing it, it’s talking about it, to your finance committee, to your Board and to your financial statement users.

What if this footnote discloses that all of an organization’s assets are earmarked by restrictions and board designations?  What if it discloses that some of the restricted net assets have already been spent?  Finance committees and Boards may have some healthy discussions about what this footnote says about the organization’s financial preparedness, and what impression the organization makes.  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.

Now is a good time to revisit your designated funds, their purpose and documentation.

Now is a good time to consider your options to access a line of credit.

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

If you’re the accountant charged with implementing the new standard, consider joining us for an in-depth 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.

Find out more about Renner and Company’s services to nonprofits.

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