Accounting Standards Update (ASU) 2016-14 is effective for fiscal years beginning after December 15, 2017 (i.e., calendar year 2018 or fiscal year 2018/2019). The new ASU impacts many aspects of financial reporting for nonprofit organizations, with updates to the basic financial statements and several new and/or enhanced disclosures required in the notes to the financial statements.
One new disclosure required for nonprofit financial statements includes the disclosure of financial assets available to meet general expenditures for a period of 12 months after the Statement of Financial Position date. This new disclosure will greatly enhance the usefulness of nonprofit financial statements. Here is what you need to know:
Currently, financial reporting standards do not require nonprofit organizations to segregate assets and liabilities into current and non-current categories. This leads to confusion in determining which obligations are maturing in the coming year and more importantly the assets available to pay those obligations.
The most common liquidity measure, the current ratio, cannot be calculated with certainty in this scenario. The current ratio compares current assets to current liabilities with an eye toward predicting the ability of an organization to meet its obligations as they arise. An organization with a current ratio of 2 to 1 (current assets exceed current liabilities by a ratio of 2 to 1) is much more likely to meet its obligations than will an organization with a current ratio of .5 to 1. For those organizations that do not present a classified statement of financial position, it can be very difficult to calculate this ratio.
Compounding this issue are difficulties surrounding the availability and liquidity of the nonprofit’s investments and other financial assets. Many organizations present investments as current assets on the statement of financial position. However, some portion, or perhaps even all, of that investment balance may not be available to meet general operating expenditures. The availability of investments may be dependent on the existence or absence of donor restrictions or board designations.
Donor-imposed restrictions on the use of contributions limits an organization’s ability to tap into its financial resources. The classic endowment is the perfect example of financial assets which cannot be utilized for general operations. In addition, contributions which are restricted as to time or purpose may not be available for operations. Finally, a quasi-endowment created by the board of directors may no be available to meet obligations.
The new liquidity disclosures look to highlight these issues and any number of other unforeseen complications by presenting, in a very straight forward manner, a total for financial assets available to meet recurring expenditures for the coming year. The AICPA recently issued a toolkit which includes an example of financial statements which are compliant with the new standard.
Included in the notes to those financial statements is a tabular disclosure which has been adapted to the example disclosure below:
|Financial assets at year-end|
|Cash and cash equivalents||1,100,000||965,000|
|Total financial assets at year-end||3,613,000||3,353,000|
|Less amounts not available to be used within one year|
|Net assets with donor restrictions||1,250,000||1,093,000|
|Less net assets with donor restrictions to be met within one year||(14,000)||(7,650)|
|Quasi-endowment established by the Board||273,000||273,000|
|Financial assets available to meet general expenditures over the next twelve months||2,104,000||1,994,650|
In the example above, total financial assets at year-end are significantly greater than financial assets available to meet general expenditures over the next 12 months. As demonstrated above, net assets with donor restrictions and a quasi-endowment established by the board are being backed out of total financial assets in arriving at available financial assets. Donor restrictions expected to be met within one year are being added back to available financial assets. The net result of this new disclosure is that transparency is being enhanced for financial statement users.
If you have any questions on this topic or ASU 2016-14, please call your trusted advisor at Rubino & Company at 301-564-3636. You can also reach Patrick at firstname.lastname@example.org or 301-214-4177 direct.