Liquidity Disclosures: What Nonprofits Need to Know
Nonprofits are required to include a liquidity disclosure in their financial statements. 1 This liquidity disclosure overviews qualitative and quantitative information about how the nonprofit manages its liquid resources. This information can make it easier for someone reviewing a nonprofit’s financial statements to understand the financial health of the organization.
Currently, there is no required format on how to present the information in the liquidity disclosure, as long as all of the required elements are included in the disclosure.
The Benefits of Liquidity Disclosures
The liquidity disclosure gives someone reviewing a nonprofit financial statement a more in-depth look at the nonprofit’s ability to meet its expenditures in the next fiscal year. The disclosure provides information on how the organization manages it liquid resources, such as any investment strategies or restrictions limiting use. This can allow someone reviewing a financial statement to get a better idea of the nonprofit’s financial health and sustainability. (Here’s three things nonprofit board members should know about financial statements.)
Quantitative Information to Include in Liquidity Disclosures
According to the Financial Accounting Standards Board, the quantitative information that is required in a liquidity disclosure includes “financial assets at the date of the statement of financial position to meet the cash needs for general expenditures within one year of the date of the statement of financial position.”
This means nonprofits must disclose all current assets that are cash or readily convertible to cash, unless there are external or internal limitations on those assets. These limitations could include limits imposed by the board of directors, donors or other external factors.
If items with limits or restrictions are included in a nonprofit’s current assets then the amounts associated with such limits or restrictions shouldn’t be included in the calculation of liquidity. We encourage our clients to list all current cash assets or convertible to cash assets and to show the amounts that limit or restrict the use of these assets as reductions. Nonprofits should deduct the following items from the quantitative information:
- Illiquid investments that cannot be drawn upon within a year (even if there are no limitations on their use)
- Amounts pledged as collateral
- Board designated reserve requirements
- Items with long-term donor restrictions that are included within current assets (like cash restricted for property acquisitions or for a specific purpose outside of typical operating expenditures)
Qualitative Information to Include in Liquidity Disclosures
Nonprofits must disclose qualitative information in their liquidity disclosures, including any “unusual circumstances.” This can include:
- Special borrowing arrangements
- Requirements imposed by resource providers that allow cash to be held in separate accounts
- Known liquidity problems
- Inability to maintain appropriate amounts of cash and cash equivalents to comply with donor imposed restrictions
- Significant limits resulting from agreements with suppliers, creditors and others, including the existence of loan covenants
Some examples of items that should be included under these disclosure requirements include:
- Line of credit agreements, indicating the amounts available
- Grant agreements requiring certain cash to be held in separate accounts
- Loan covenants that were not met which could have an impact on liquidity
- Requirements to keep money in an escrow reserve due to debt
- The ability of the board to remove board designations on donated restricted assets
- Spending rates for general purposes related to endowments
Nonprofits also need to disclose how the organization manages its current liquid resources to meet cash needs for general expenditures. Nonprofits should disclose how they manage liquid resources, including whether they invest excess funds in short term investments in order to maximize returns on general funds. We also encourage you to discuss changes in operations and budgeting that will affect liquidity.
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1 This change came as result of the release of the Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-For Profit Entities, which was released by the Financial Accounting Standards Board.
Published on January 09, 2020