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2.4 Disclosures about liquidity and availability
Publication date: 27 May 2020
us NFP guide
In addition to properly sequencing and classifying assets on the face of the balance sheet, NFPs are required by ASC 958-210-50-1 and ASC 958-210-50-3 to disclose information about liquidity and the availability of assets in the notes to the financial statements.
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 restrictions and 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.
Section 958-210-45 discusses the following items that are required to be included in the notes to financial statements if they are not provided on the face of the statement of financial position:
- A description of the kind of asset whose use is limited (see paragraph 958-210-45-6)
- Information about the nature and amount of limitations on the use of cash and cash equivalents (see paragraph 958-210-45-7(a))
- Contractual limitations on the use of particular assets (see paragraph 958-210-45-7(b))
- Information about the nature and amounts of different types of restrictions that affect how and when, if ever, the resources (net assets) can be used (see paragraph 958-210-45-9)
- Subparagraph superseded by Accounting Standards Update No. 2016-14
- Information about additional limitations placed on net assets, such as information about the amounts and purposes of board designations of net assets without donor restrictions required in accordance with paragraph 958-210-45-11.
ASC 958-210-50-1A also requires specific disclosures about the amount of assets that are both liquid and available at the balance sheet date to meet near term cash needs for operations, along with high-level information on how the board manages liquidity (“liquidity and availability disclosures”).
An NFP shall disclose the following:
- Qualitative information in the notes to financial statements that is useful in assessing an entity’s liquidity and that communicates how an NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the date of the statement of financial position.
- Quantitative information either on the face of the statement of financial position or in the notes, and additional qualitative information in the notes as necessary, that communicates the availability of an NFP’s financial assets at the date of the statement of financial position to meet cash needs for general expenditures within one year of the date of the statement of financial position (see paragraph 958-210-45-7(c)). Availability of a financial asset may be affected by:
- Its nature,
- External limits imposed by donors, laws, contracts with others, and
- Internal limits imposed by governing board decisions.
See example note disclosures in paragraphs ASC 958-210-55-5 through ASC 958-210-55-8 and ASC 958-205-55-21.
2.4.1 Qualitative disclosure about liquidity
The qualitative (i.e., non-numeric) disclosure required by ASC 958-210-50-1A(a) discusses how an entity manages its liquidity and related liquidity risks. It should provide strategy or policy information about how management ensures it has cash to pay its obligations as they come due, which might include:
- An NFP’s policy of attempting to align availability of its financial assets to the timing of its general expenditures, or the settlement or maturity dates of its liabilities and other obligations
- An NFP’s policy to invest cash in excess of daily requirements in short-term investments
- In the event of unanticipated liquidity needs, the NFP’s ability to draw upon resources such as lines of credit or, if applicable, a quasi-endowment or liquidity reserve
- For an entity with a donor-restricted endowment, the flexibility under state laws that govern endowment spending (discussed in NP 9) to access endowment principal under the concept of “prudent spending,” if applicable.
The qualitative disclosure should also include information about potential cash requirements in the next 12 months that are not apparent from the balance sheet. For example, an NFP that invests in a venture capital fund may be subject to future funding commitments that could be called in the next 12 months.
2.4.2 Quantitative disclosure about availability
The quantitative (numeric) disclosure required by ASC 958-210-50-1A(b) should inform the reader of the amount of an NFP’s financial assets at the balance sheet date that are available to meet cash needs for general expenditures in the coming year. This is a standardized measure that must be disclosed in the notes and accompanied by narrative explanation, if necessary. It requires an entity to consider a one-year time horizon and should be focused solely on the entity’s financial assets. The measure should consider:
- The aggregate amount of financial assets at the balance sheet date. Financial assets are cash, contracts to receive cash (such as receivables and debt securities), and evidence of equity ownership in another entity (such as equity securities). The required focus on financial assets eliminates illiquid assets such as fixed assets, intangible assets, inventory, and prepaid expenses.
- Amounts of financial assets that won’t be converted to cash during the next year. The one-year time horizon eliminates financial assets (or portions of financial assets such as the non-current portion of multi-year contributions receivable) that are not scheduled to be collected in the coming year and thus would not be available to fund general expenditures in the next year. Similarly, lock-up provisions that restrict the NFP from selling or transferring certain alternative investments until a certain date might similarly limit the availability of those financial assets.
- Amounts of financial assets that will not be available for general expenditure during the next year due to externally-imposed limitations. As discussed in NP 2.3.1.1 and NP 2.3.1.2, financial assets would not likely to be available to fund general expenditures if they are subject to long-term limitations imposed externally by contracts, laws, or donors.
- Amounts of financial assets that will not be available for general expenditure during the next year due to internally-imposed limitations. Some NFPs regard board-designated funds as a key aspect of management’s plan for covering liquidity risk exposures. Although such resources have been formally set aside for a specific purpose through a board resolution, the board can de-designate them if necessary to meet an unforeseen liquidity need (see NP 2.3.1.3). While these resources would need to be excluded from available financial assets in calculating the amount available for general expenditure, the NFP should clearly indicate that while they are expected to be invested in accordance with the designation, they are available to meet unexpected liquidity challenges.
GAAP does not define the term available for general expenditures. As a result, some flexibility exists in how it is interpreted with regard to whether assets with donor restrictions are included in the measure. The example disclosures in the codification treat all financial assets subject to donor restrictions as unavailable for general expenditure. However, if an NFP believes that certain restrictions are so general in relation to the organization’s mission that they do not affect the organization’s liquidity or funds flow (i.e., leaving the organization broad ability to use those assets), the associated assets would not need to be excluded from the bottom line measure as long as the NFP provides additional qualitative disclosure that explains to users the approach that has been taken. The ASC Master Glossary includes a definition of liquidity.
Excerpt from ASC Master Glossary
Liquidity: An asset’s or liability’s nearness to cash. Donor-imposed restrictions may influence the liquidity or cash flow patterns of certain assets. For example, a donor stipulation that donated cash be used to acquire land and buildings limits an entity’s ability to take effective actions to respond to unexpected opportunities or needs, such as emergency disaster relief. On the other hand, some donor-imposed restrictions have little or no influence on cash flow patterns or an entity’s financial flexibility. For example, a gift of cash with a donor stipulation that it be used for emergency-relief efforts has a negligible impact on an entity if emergency relief is one of its major ongoing programs.
Question NP 2-2 discusses how an NFP may consider which financial assets are available for general expenditures.
Question NP 2-2
College has a June 30 year end. On June 29, it receives a $1 million donor-restricted gift that must be used to provide scholarships for general studies. Each year, College routinely awards at least $2 million in general studies scholarships. How should College consider this gift when calculating the amount of “financial assets available to meet cash needs for general expenditures within one year” for the availability of resources disclosure in its June 30 financial statements?
College has a June 30 year end. On June 29, it receives a $1 million donor-restricted gift that must be used to provide scholarships for general studies. Each year, College routinely awards at least $2 million in general studies scholarships. How should College consider this gift when calculating the amount of “financial assets available to meet cash needs for general expenditures within one year” for the availability of resources disclosure in its June 30 financial statements?
PwC response
If College considers all financial resources associated with donor-restricted gifts as unavailable for general expenditures (the “default” view used in the illustrative disclosures in the FASB codification), it would exclude the $1 million gift when calculating the measure.
On the other hand, College might view financial resources associated with gifts that are donor-restricted for purposes related to its regular ongoing programs as being available for general expenditure. In that case, it would likely conclude that the $1 million is available for general expenditure based on the nature of the restriction and the fact that the resources could clearly be used in the coming year to fund scholarships as part of its regular, ongoing programs.
In this situation, College would include the $1 million gift when calculating the availability measure and should supplement the quantitative disclosure with an explanation regarding the nature and amount of donor restrictions that it views as being available for general expenditures.
Question NP 2-3 describes when appropriations from an endowment may be included as financial assets available for general expenditures.
Question NP 2-3
NFP A’s fiscal year end is June 30, 20X1. On May 1, 20X1, the governing board approves the annual spending appropriation from NFP A’s endowment. In its fiscal year 20X1 availability of resources disclosure, would NFP A consider the appropriated amount as “available for general expenditures”?
NFP A’s fiscal year end is June 30, 20X1. On May 1, 20X1, the governing board approves the annual spending appropriation from NFP A’s endowment. In its fiscal year 20X1 availability of resources disclosure, would NFP A consider the appropriated amount as “available for general expenditures”?
PwC response
Yes, as long as all of the following are true:
- NFP A may use the appropriated resources to fund general expenditure in the next 12 months
- The board approved the appropriation prior to the balance sheet date
- The appropriation was in accordance with donor restrictions and applicable law
Question NP 2-4 describes the impact of internal designations on financial assets available for general expenditures.
Question NP 2-4
NFP B’s fiscal year end is June 30, 20X1. On May 1, 20X1, NFP B’s governing board designated $100,000 of cash and investments to be used for future fixed asset purchases. On August 1, 20X1, prior to the issuance of the fiscal year 20X1 financial statements, NFP B’s governing board approves a measure to remove the self-imposed limitation on the $100,000. In its fiscal year 20X1 availability of resources disclosure, should NFP B consider this amount “available for general expenditures”?
NFP B’s fiscal year end is June 30, 20X1. On May 1, 20X1, NFP B’s governing board designated $100,000 of cash and investments to be used for future fixed asset purchases. On August 1, 20X1, prior to the issuance of the fiscal year 20X1 financial statements, NFP B’s governing board approves a measure to remove the self-imposed limitation on the $100,000. In its fiscal year 20X1 availability of resources disclosure, should NFP B consider this amount “available for general expenditures”?
PwC response
No. The availability of resources disclosure is made as of the balance sheet date. At June 30, 20X1, the $100,000 was internally designated by the governing board and was therefore not available for general expenditures. If desired, management could add qualitative disclosure to indicate that the internal designation was released subsequent to the balance sheet date.
2.4.3 Format of liquidity and availability disclosures
Entities can combine the disclosures about availability and liquidity into a single note or present them in separate notes.
The qualitative liquidity disclosure will typically be in a narrative format. The availability disclosure’s quantitative information will often be provided in a table, accompanied by narrative commentary as necessary. There is no prescribed format for presentation of the quantitative information; NFPs have flexibility in how they comply with the requirements. Some NFPs might start with the total amount of the entity’s financial assets at the reporting date as the top line, and then deduct amounts that are not available for general expenditures to arrive at the bottom-line measure of availability. This approach is illustrated in Figure NP 2-2, which provides an example of liquidity and availability disclosures combined into a single note.
Figure NP 2-2
Liquidity and availability disclosures (combined format)
Liquidity and availability disclosures (combined format)
Excerpted from Note G in ASC 958-205-55-21
The following reflects Not-for-Profit Entity A’s financial assets as of the balance sheet date, reduced by amounts not available for general use because of contractual or donor-imposed restrictions within one year of the balance sheet date. Amounts not available include amounts set aside for long-term investing in the quasi-endowment that could be drawn upon if the governing board approves that action. However, amounts already appropriated from either the donor-restricted endowment or quasi-endowment for general expenditure within one year of the balance sheet date have not been subtracted as unavailable.
Financial assets, at year-end
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$ 234,410
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Less those unavailable for general expenditures within one year, due to:
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Contractual or donor-imposed restrictions:
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Restricted by donor with time or purpose restrictions
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(11,940)
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Subject to appropriation and satisfaction of donor restrictions
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(174,700)
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Investments held in annuity trust
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(4,500)
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Board designations:
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Quasi-endowment fund, primarily for long-term investing
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(36,600)
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Amounts set aside for liquidity reserve
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(1,300)
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Financial assets available to meet cash needs for general expenditures within one year
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$ 5,370
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Not-for-Profit Entity A is substantially supported by restricted contributions. Because a donor’s restriction requires resources to be used in a particular manner or in a future period, Not-for-Profit Entity A must maintain sufficient resources to meet those responsibilities to its donors. Thus, financial assets may not be available for general expenditure within one year. As part of Not-for-Profit Entity A’s liquidity management, it has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, Not-for-Profit Entity A invests cash in excess of daily requirements in short-term investments. Occasionally, the board designates a portion of any operating surplus to its liquidity reserve, which was $1,300 as of June 30, 20X1. There is a fund established by the governing board that may be drawn upon in the event of financial distress or an immediate liquidity need resulting from events outside the typical life cycle of converting financial assets to cash or settling financial liabilities.
In the event of an unanticipated liquidity need, Not-for-Profit Entity A also could draw upon $10,000 of available lines of credit (as further discussed in Note XX) or its quasi-endowment fund.
An NFP that prepares a classified balance sheet might use an approach that is similar to Figure NP 2-2, but which focuses solely on financial assets classified as current (as the reader will know from the face of the balance sheet that financial assets classified as noncurrent are not available). This approach is illustrated in ASC 958-210-55-8. Other NFPs might choose to display only net amounts of liquid resources that are free of limitations – that is, listing the net amount from each category of financial assets reduced by the amount of limitations on their use, with the total representing the bottom-line measure of financial assets available for general expenditure.
ASC 958-210-55-5 indicates that other display options are possible. For example, ASC 958-210-55-7 illustrates a combined liquidity and availability disclosure that uses a narrative format only, which might be appropriate for an NFP with no limitations on its financial assets.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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