Hopefully by now, most of us who work with and for nonprofits in the financial accounting arena are at least somewhat familiar with the new nonprofit financial reporting requirements put forth by the Financial Accounting Standards Board (FASB). These changes are addressed in ASU 2016-14, and organizations will have only the rest of this year to learn and implement these new standards.
Of them all, the liquidity and availability of financial assets and resources is the most interesting and compelling. And it very well could be the most valuable, or the most detrimental, of all the changes. Organizations will, for the first time, have to spell out qualitatively how they assess and manage their liquid resources. The footnotes will need to address management’s cash flow policies and answer various common liquidity questions. These can include such things as:
- What is the organization’s goal for the amount of operating cash on hand to be maintained?
- What is the short term excess cash on hand investment policy?
- Does the organization designate as Board reserves stipulated amounts of operating surpluses?
These are but a few of the numerous possibilities of describing clearly how an organization handles its financial assets that are available over the ensuing 12 months from the year-end financial reporting period.
Next, we get to the meat of the disclosure! Numerically identifying the actual and available liquid assets that can be spent over the next 12 months for “general expenditures”. I call this the “Number”.
How does one arrive at this “Number”? You start with the financial assets on hand at year-end. Such items would include cash, receivables from grants, pledges and contributions, investments, and other liquid resources. Then you whittle these down based on internal or external restrictions which may be placed upon these components, either in whole or in part.
The result is the liquidity amount available to the organization that can be used in its day-to-day operations. What a story this will tell! Very quickly the users of the statements will be able to clearly see the financial strength, or potential weakness, of an organization. A large gap in that number and expected general expenditures could raise questions about the organization’s financial viability.
How well capitalized is the entity? What is its history of attracting unrestricted (now termed “without donor restriction”) monies that will be needed to sustain its operations based upon the historically presented financial statements? Can Board reserves and quasi-endowed funds be made available for general expenditures, in the event of any disclosed deficit in financial assets? Or are they locked up by Board policies which have been placed on these reserves? With the calculation done correctly and within the guidelines of this FASB standard, there will be no hiding from reality.
I believe this new reporting model will significantly shape the future and direction of many nonprofits. Management and the Board will be required to assess the existing health of the organization, and implement immediate plans, policies, and strategies that will address the future of the organization. Over time, we may see organizations merge with similar types of nonprofits, be acquired, or dramatically alter their mission. Governing Boards will have to be keenly aware of the true strength, viability, and sustainability of the organization for which they have a fiduciary responsibility.
The next few years will be very exciting, interesting and challenging for all in the nonprofit space as we deal with the bottom line reality of our organizations. Donors, governments, benefactors of your mission – all will now have a much clearer picture of the lifeblood that runs through each nonprofit organization.
Please reach out to our Nonprofit Group if you have any questions regarding the new nonprofit financial reporting requirements.