Liquidity Disclosures - Implementing the New Standards

Balance sheets with assets on one page. Liquidity disclosures new standards.


The Financial Accounting Standards Board (FASB) determines generally accepted accounting principles (GAAP) in the United States. The FASB recently issued a new accounting standard update (ASU) that will affect Nonprofit organizations for financial statements beginning after December 15, 2017. These standards are expected to provide more useful financial statements for donors and grantors.

Some of the immediate improvements are expected to address:

  • Complexity in net asset classification
  • Clarity of information regarding liquidity and availability of cash
  • Transparency in reporting of financial measures
  • Consistency in reporting expenses by function and nature
  • Improvements in the statement of cash flows

In getting ready to consider implementation, a good place to begin is with the new liquidity and availability disclosure. It will require information that may not be currently tracked. More importantly, organizations that rely on restricted contributions and grants may find that the quantitative disclosures paint a stark picture of the organization's financial position. The current financial reporting model doesn't always draw attention to circumstances in which a nonprofit organization fails to maintain an appropriate composition of assets in amounts needed to comply with all donor restrictions.

If your organization uses restricted resources to pay for expenditures that didn't meet the underlying restriction (in essence, borrowing the resources, sometimes without the ability to restore those resources promptly), the liquidity disclosure will make that situation apparent. 

By starting to consider the disclosure early, the board and management can begin to discuss ways to improve the disclosure.  If the organization prepares the disclosure and finds that it is in a deficit financial asset position, it may want to delay implementation of ASU 2016-14 and focus on actions that will repair its liquidity and availability.

The next step is to attempt to recast the organization's prior year financial statements. Doing so will identify what information isn't currently gathered, so that new procedures can be put into place. The organization may find that it needs better systems for allocating costs or for identifying direct internal investment expenses. Recasting the financial statements will also identify whether the organization's governing board needs to formalize its policies for board-designated net assets and spending from underwater endowment funds.

If a board has strict policies on the use of board designated assets, this could result in an organization having a difficult liquidity position.  Changing a board policy to indicate that board designated assets could be used if the financial need arose, with board approval, the liquidity disclosure could be much more favorable.

Once the financial statements are recast, the organization should check the effect of the new standards on its important ratios. Foundations and other donors, banks and other lenders, and watchdog agencies often use ratios to qualify and evaluate organizations. If ratios will no longer be met, it is necessary to decide whether to ask for a change in the required ratio. Additionally, it is possible that some amounts that are used in ratios will no longer be reported in financial statements (e.g., permanently restricted net assets), and the organization may want to approach the donor or lender to see how the ratio should be computed in the future.

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