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2.3 Presentation of assets and liabilities
Publication date: 27 May 2020
us NFP guide
When displaying assets and liabilities, NFPs are required to aggregate items that possess similar characteristics into reasonably homogeneous groups, and sequence or classify them in ways that provide relevant information about their interrelationships, liquidity, and financial flexibility. ASC 958-210-45-8 permits either sequencing according to nearness of conversion to or use of cash (in an unclassified balance sheet) or grouping into current and noncurrent categories (in a classified balance sheet).
[I]nformation about liquidity shall be provided by any of the following:
- Sequencing assets according to their nearness of conversion to cash and sequencing liabilities according to the nearness of their maturity and resulting use of cash
- Classifying assets and liabilities as current and noncurrent, as defined by Subtopic 210-10 (required by paragraph 954-210-45-1 for statements of financial position prepared by not-for-profit, business-oriented health care entities)
- Disclosing in notes to financial statements any additional relevant information about the liquidity or maturity of assets and liabilities, including restrictions on the use of particular assets.
An unclassified balance sheet lists all assets in their order of liquidity, so that cash available for operations is presented first and long-lived assets used in the entity’s operations (for example, fixed assets) are generally presented last. The sequencing should incorporate the effects of restrictions on liquidity due to donor-imposed and other contractual restrictions, which is discussed in NP 2.3.1. Liabilities are presented in order of when they are due, so that accounts payable are listed first and items such as long-term debt are listed last. See ASC 958-205-55-9 for an illustration of an unclassified balance sheet.
In a classified balance sheet, “current” refers to the reporting entity's operating cycle, which for most NFPs is one year. If no limitations on their use exist, cash and assets that are expected to be converted to cash within one year are classified as current. Financial assets that are not expected to be converted to cash within one year are classified as noncurrent, as are the long-lived assets used in carrying out the NFP’s activities. Obligations expected to be paid within one year are considered current liabilities; liabilities whose settlement is more than a year away are considered noncurrent. See ASC 958-210-55-8 for an illustration of a classified balance sheet.
Apart from NFP HCOs (which, with the exception of continuing-care retirement communities, are required to present a classified balance sheet), NFPs are free to choose either format. Unlike business entities (which most often provide classified balance sheets), most NFPs use an unclassified format.
2.3.1 Impact of constraints on classification and sequencing of assets
According to ASC 958-210-45-4, the classification and sequencing of assets in the balance sheet should reflect the effects of restrictions on liquidity due to long-term donor-imposed and other contractual restrictions. This requires aggregating assets that have similar characteristics and segregating them from assets that have different characteristics, as required by ASC 958-210-45-5.
Excerpt from ASC 958-210-45-4
A statement of financial position…provides relevant information about liquidity, financial flexibility, and the interrelationship of an NFP’s assets and liabilities. That information generally is provided by aggregating assets and liabilities that possess similar characteristics into reasonably homogeneous groups that include the effects of donor-imposed restrictions as well as other contractual restrictions.
Excerpt from ASC 958-210-45-5
Classifying and aggregating items with similar characteristics into reasonably homogeneous groups and separating items with differing characteristics is a basic reporting practice that increases the usefulness of information.
As a result, when liquid assets, such as cash and cash equivalents, current pledges receivable, and marketable securities are subject to limitations on use that override their natural liquidity, they should be reported separate from similar assets that are not subject to those limitations. Such limitations might arise from donor restrictions for long-term purposes (see NP 2.3.1.1), from contractual or legal restrictions (see NP 2.3.1.2), or from assets set aside for long-term purposes in connection with board designations of net assets (see NP 2.3.1.3).
In a classified balance sheet, such constraints will cause assets that normally would be reported as current to be classified as noncurrent. According to ASC 210-10-45-4, current assets exclude assets that will not be used in current operations, are restricted for acquisition or construction of noncurrent assets, or are restricted for liquidation of long-term debt. ASC 954-305-45-1 provides similar guidance that, in addition, explicitly refers to limitations imposed by donor restrictions for long-term purposes.
Cash and claims to cash that meet any of the following conditions shall be reported separately and shall be excluded from current assets:
- They are restricted as to withdrawal or use for other than current operations.
- They are designated for expenditure in the acquisition or construction of noncurrent assets.
- They are required to be segregated for the liquidation of long-term debts.
- They are limited to use for long-term purposes by a donor-imposed restriction.
In an unclassified balance sheet, NFPs must segregate assets that are nonhomogeneous due to liquidity restrictions and report them separate from assets that are available to meet current operating requirements. For example, cash and claims to cash restricted as to withdrawal for use for other than current operations should not be combined with operating cash and cash equivalents, because they are not homogeneous items. For similar reasons, cash held within a donor-restricted endowment awaiting investment must be displayed apart from operating cash.
AAG-NFP discusses several ways in which resources might be presented in an unclassified balance sheet to clearly communicate their unavailability for use in current operations. For example, they could be separately displayed on the face of the balance sheet in a position of longer-term relative liquidity as compared to similar assets available for current operating purposes (for example, a line item captioned “assets restricted to investment in property and equipment” that is displayed near the line item for property and equipment). Alternatively, they could be aggregated with other assets that are limited to long-term purposes and reported in a line such as “long-term investments” or “assets whose use is limited” that is sequenced with other assets that will be consumed in a similar term. If the amount and purpose of a donor-restriction or board designation on assets whose use is limited is not clear from the description on the face of the balance sheet, ASC 958-210-45-6 requires disclosure of that information in the notes. AAG-NFP 3.12 discusses similar disclosure for limitations imposed by law or contract.
For additional discussion of the effects of limitations on display of assets, see AAG-NFP 3.09 through AAG-NFP 3.23, AAG-NFP 4.74 through AAG-NFP 4.76, AAG-HCO 4.07 through AAG-HCO 4.11, and AAG-HCO 9.16 through AAG-HCO 9.17.
2.3.1.1 Constraints imposed by donor restrictions
The general rules described in NP 2.3 for classification and sequencing of assets are based on principles underlying reporting by business entities. Because contribution transactions are unique to NFPs, ASC 958-210-45-6 provides specific guidance regarding classification and sequencing of assets that are limited to use established by donor restrictions.
Excerpt from ASC 958-210-45-6
Generally…restrictions apply to net assets, not to specific assets. Assets need not be disaggregated on the basis of the presence of donor-imposed restrictions on their use; for example, cash available for current use and without donor restrictions need not be reported separately from cash received with donor-imposed restrictions that is also available for current use. However, cash or other assets received with a donor-imposed restriction that limits their use to long-term purposes shall not be classified with cash or other assets that are without donor restrictions and are available for current use.
This guidance makes two key points. The first is that while donors will sometimes restrict specific assets (for example, require that their gift be separately invested), donor restrictions generally apply to a donee’s net assets, rather than to specific assets. As a result, contributed assets need not be disaggregated simply because a donor restriction exists.
The second point provides an exception to that general rule. In situations when cash or other assets are received with a donor restriction limiting their use to long-term purposes (for example, cash, investment, or pledges associated with donor-restricted gifts to acquire property, plant, and equipment; donor-restricted cash gifts or pledges that must be invested in perpetuity or for a specified time period), those resources should not be classified with cash or other assets that are unrestricted and available for current use. Combining them would violate the principle of aggregating assets with similar characteristics and separating assets with different characteristics.
In many cases, the amounts associated with long-term donor restrictions will not be directly traceable to specific assets. For example, cash gifts for constructing a new building might be invested together with resources that are available for current operating purposes. According to AAG-NFP 3.14, in such circumstances, a portion of the investments corresponding to the amount of the donor-restricted gifts would be segregated and captioned as “long-term investments” or “assets restricted to investment in property, plant and equipment.”
Question NP 2-1 addresses the display of assets received with donor-restrictions that do not pertain to long-term purposes.
Question NP 2-1
College has a June 30 year end. On June 29, it receives a receives a $1 million donor-restricted gift of cash that must be used to provide scholarships for general studies. The proceeds are deposited in the operating account. Each year, College routinely awards at least $2 million in general studies scholarships. Is College required to classify these resources apart from operating cash in the balance sheet in its June 30 financial statements?
College has a June 30 year end. On June 29, it receives a receives a $1 million donor-restricted gift of cash that must be used to provide scholarships for general studies. The proceeds are deposited in the operating account. Each year, College routinely awards at least $2 million in general studies scholarships. Is College required to classify these resources apart from operating cash in the balance sheet in its June 30 financial statements?
PwC response
According to ASC 958-210-45-6, cash received with donor-imposed restrictions that is available for current use need not be reported separately from cash that did not arise from donor restricted gifts that is also available for current use. In this fact pattern, the contributed resources are available for current use, as they will clearly be used in the coming year to fund scholarships that are part of College’s regular ongoing programs. Thus, the $1,000,000 cash gift received is not required to be reported separate from operating cash (but could be reported separately if desired, as discussed in AAG-NFP 3.19).
2.3.1.2 Constraints imposed by contract or law
Assets might be unavailable for use in current operations due to the existence of contractual or legal provisions or laws that impose long-term limitations on their use. Figure NP 2-1 shows examples of such external limitations that might override the natural liquidity of otherwise liquid assets. In such circumstances, those assets must be reported separate from similar assets that are not subject to limitations, as discussed in NP 2.3.1.
Figure NP 2-1
Examples of external limitations that can constrain liquidity
Examples of external limitations that can constrain liquidity
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A common contractual limitation on the use of liquid assets arises in connection with issuance of long-term debt, particularly municipal bonds. Such arrangements often require cash or investments to be set aside in special accounts that can only be used for debt- or capital-related purposes, such as when unexpended proceeds of debt issues or funds deposited with a trustee are limited to use in accordance with the requirements of a bond indenture or similar document (for example, sinking funds, debt reserve funds, or defeasance-related escrows).
When classifying these limited-use assets in a classified balance sheet, special considerations apply, because the classification of assets set aside for payment of a specific liability should be based on the classification of that liability. If a portion of the liability is classified as current, ASC 210-10-45-4(a) indicates that the assets that will be used to satisfy the current installment of the liability should also be classified as current, with the remainder of the assets classified as noncurrent.
Excerpt from ASC 210-10-45-4(a)
Even though not actually set aside in special accounts, funds that are clearly to be used in the near future for the liquidation of long-term debts, payments to sinking funds, or for similar purposes shall … be excluded from current assets. However, if such funds are considered to offset maturing debt that has properly been set up as a current liability, they may be included within the current asset classification.
Example NP 2-1 illustrates how assets set aside for liquidation of a liability might be displayed in a classified balance sheet. In this example, the NFP aggregates assets limited to use for various long-term purposes under an “assets whose use is limited” heading (a reporting convention that is widely used by NFP HCOs.)
EXAMPLE NP 2-1
Assets whose use is limited – classified balance sheet
Assets whose use is limited – classified balance sheet
Hospital has tax-exempt bonds outstanding. Under the terms of the bond indenture, Hospital is required to make payments to a bond sinking fund and a debt service reserve fund, both of which are held by a trustee. The total amount on deposit with trustees for future debt service payments is $25 million. During the coming year, $900,000 of bonds are coming due and are classified as a current liability. In addition, Hospital has $10 million of assets that are donor-restricted for capital acquisition, and $3 million of assets designated by its governing board for capital acquisition.
Hospital uses a reporting convention of aggregating its limited-use assets using an “assets whose use is limited” heading or caption. How would the assets described above be reflected in Hospital’s classified balance sheet?
Analysis
The $13 million of assets that are restricted or designated for capital acquisitions would be classified entirely as noncurrent. Of the $25 million held by trustees for debt service, a portion that corresponds to the amount that will be used to liquidate debt maturing in the next year (and thus, classified as a current liability) may be classified as current ($900,000), with the remaining $24.1 million classified as noncurrent.
If Hospital chooses to disclose information on the face of the balance sheet regarding the nature and amounts of the limited-use assets, all of the limited-use assets would be reported in the noncurrent section of the balance sheet with a subtotal, with a reclassification to current assets displayed for the portion of “assets whose use is limited” that will be used to liquidate the current installment of debt, as follows.
(amounts in thousands)
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Current assets:
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Assets limited as to use
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$ 900
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Noncurrent assets:
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Assets limited as to use:
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Internally designated for capital acquisition
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$ 3,000
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Donor-restricted for capital acquisition
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10,000
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Held by trustees under indenture agreement
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25,000
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38,000
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Less amount required to meet current obligations
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(900)
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Assets limited as to use, noncurrent portion
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$37,100
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Alternatively, Hospital might choose to provide the detailed information regarding nature and amount of limitations in the notes. In that case, the face of the balance sheet would display the following amounts.
(amounts in thousands)
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Current assets:
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Assets limited as to use
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$ 900
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Noncurrent assets:
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Assets limited as to use
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$37,100
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Sometimes the details regarding the nature and amount of limitations will be provided in conjunction with an entity’s investment disclosures. If Hospital utilizes that approach, the information within the investments disclosure might appear as follows.
Assets limited as to use
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Internally designated for capital acquisition:
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Money market fund
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$3,000
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Donor-restricted for capital acquisition:
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Money market fund
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10,000
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Held by trustee under indenture agreement:
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Cash
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750
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US Treasury obligations
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24,000
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Interest receivable
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250
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25,000
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Total
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$38,000
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2.3.1.3 Constraints imposed by governing boards
Governing board internal designations of net assets are discussed in NP 2.5.1.1. In those situations, if the governing board “funds” the designation of net assets by requiring that a corresponding amount of financial resources be set aside, those assets are subject to long-term limitations on their use. For example, assets might be set aside for long-term purposes in connection with governing board designations related to debt service reserves, quasi endowment, or the future acquisition of property and equipment.
In those cases, the considerations discussed in NP 2.3.1.3 would apply to classifying the assets. In a classified balance sheet, they would be reported as noncurrent. In an unclassified balance sheet, AAG-NFP 3.15 indicates that they should be sequenced with other assets that will be consumed in a similar term. If the nature and amount of the limitation is not apparent from the details provided on the face, that information should be provided in the notes to the financial statements, as required by ASC 958-210-50-1.
Excerpt from ASC 958-210-50-1
An NFP shall disclose in notes to financial statements relevant information about the liquidity or maturity of assets and liabilities, including…self-imposed limits on the use of particular items, in addition to information provided on the face of the statement of financial position, if shown, in accordance with paragraph 958-210-45-8.
A key distinction between constraints imposed by governing boards and the externally-imposed limitations discussed in NP 2.3.1.1 and NP 2.3.1.2 is a governing board’s ability to “de-designate” those resources, if necessary, to meet an unforeseen liquidity need. Accordingly, ASC 954-210-45-4 requires NFP HCOs to distinguish internally-designated funds from those whose use is contractually limited by external parties or donors, either on the face of the balance sheet or in the notes. For other types of NFPs, AAG-NFP 3.15 states that it is “best practice” to report board-designated assets separate from assets subject to external limitations, either on the face of the balance sheet or in the notes.
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