OUR THOUGHTS ON:

Not-for-Profit Reporting Model - Part 6: Measuring and Disclosing Liquidity

Audit|Higher Education|Not-for-Profit

By Nick Lombardo

The Financial Accounting Standards Board (FASB) issued an exposure draft on the financial statement presentation of not-for-profit (NFP) entities this past April, with comments on the exposure draft due in August 2015. As a continuation of our proposed NFP Reporting Model series, this article focuses on the measurement and disclosure of liquidity within the financial statements.

The Proposed Guidance Changes to FASB's ASU on the Presentation of Financial Statements of Not-for-Profit Entities Regarding the Enhancement of the Measurement and Disclosure of Liquidity

One of the main provisions within the proposed guidance is to require all NFPs to enhance the measurement and disclosure of liquidity.  The proposed guidance calls for new disclosures related to the management of liquidity, including certain quantitative and qualitative information about financial assets available to meet near-term demands for cash and demands resulting from near-term financial liabilities.  NFPs would be required to define the time horizon they use to manage liquidity (30, 60, 90 days etc.).  The NFP would also disclose quantitative information as of the reporting date, including the total amount of financial assets, the amount of financial assets that are not available to meet cash needs because of contractual, donor-imposed restrictions, or board-designated items, and the amount of liabilities that are due within that time horizon. 

The proposed guidance also requires an NFP to disclose qualitative information about how the entity manages its liquidity, including the basis for how its time horizon was determined, its policy for establishing liquidity reserves and its strategy for addressing entity-wide risks that affect liquidity.  Enhanced disclosure in the notes to the financial statements would provide useful information about the nature, amounts, and effects of the various types of donor-imposed restrictions, which often include limits on the purposes for which the resources can be used as well as the time frame for their use.  The additional disclosures are also intended to improve the ability for outsiders to assess an NFP’s liquidity and financial flexibility, including its ability to meet obligations and its needs for external financing.

Contact us for more information regarding the FASB’s proposed guidance on the NFP Reporting Model and visit our not-for-profit services page to learn more about our industry group.

Read Part 1 of our NFP Reporting Model series about the proposal's impact on net asset clarification.
Read Part 2 of our NFP Reporting Model series about the treatment of endowments.
Read Part 3 of our NFP Reporting Model series about performance measurement.

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