Liquidity

Liquidity should be presented in one of the following formats:

1. Sequencing assets according to their nearness of conversion to cash, and liabilities according to the nearness of their maturity and resulting use of cash on the statement of financial position;
2. Classifying assets and liabilities on the statement of financial position as current and noncurrent.

The concept of classifying assets and liabilities as current or noncurrent is slightly different for not-for-profit organizations than for commercial organizations. FASB ASC 210-10 (Accounting Research Bulletin 43, Chapter 3A) covers the classification of current assets and liabilities. Commercial organizations are used to applying these criteria in evaluating current assets as those that will be turned into cash to satisfy liabilities within one year, or the organization's operating cycle, whichever is longer. Current liabilities are those liabilities that are expected to be satisfied with current assets.

While some not-for-profit organizations have an operating cycle (a college or university with a finite academic calendar is a good example), others (such as a homeless shelter) really do not.

Classification of current assets and liabilities for not-for-profit organizations should focus on liquidity. For the vast majority of not-for-profit organizations, even ones with clearly defined operating cycles, the one-year time period used in the above definition appears reasonable.

One caution in classifying current assets is a specific requirement (FASB ASB 210-10-45-4) that current assets should exclude “cash and claims to cash which are restricted as to withdrawal or use for other than current operations, are designated for expenditure in the acquisition or construction of noncurrent assets, or are segregated for the liquidation of long-term debts.” This exclusion is likely to impact a number of not-for-profit organizations because in many cases:

1. Donors restrict the use of cash and investments. These assets are often not available for use in the current operations of the organization.
2. Donors or the not-for-profit organization itself may designate funds that are to be used for acquisition and/or construction of land, buildings, or other long-term assets. These funds, many times obtained in “capital campaigns,” are not available for use in the operations of the organization.
3. Not-for-profit organizations that issue debt may be required to maintain cash and investments in reserve funds that are designed to provide additional credit protection to the debt holders. These reserve funds are not available for use in the operations of the organization.

The organization could disclose information about liquidity, including information about restrictions on the use of particular assets, in the notes to financial statements. Exhibit 1 presents a sample sequenced statement of financial position, and Exhibit 2 illustrates a sample classified statement of financial position.

ASU 2016-14 provides that the following information should be displayed either on the face of the statement of financial position or in the notes to financial statements, unless otherwise required on the face of the statement of financial position:

1. Relevant information about the nature and amount of limitations on the use of cash and cash equivalents (such as cash held on deposit as a compensating balance).
2. Contractual limitations on the use of particular assets. These include, for example, restricted cash or other assets set aside under debt agreements, assets set aside under self-insurance funding arrangements, assets set aside under collateral arrangements, or assets set aside to satisfy reserve requirements that states may impose under charitable gift annuity agreements.
3. Quantitative information, and additional qualitative information in the notes as necessary, about the availability of an NFP's financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date. Availability of a financial asset may be affected by:
   1. Its nature;
   2. External limits imposed by donors, laws, and contracts with others;
   3. Internal limits imposed by the governing board of directors.

Certain of the current methods for providing information about liquidity discussed earlier in this section remain relevant. ASU 2016-14 provides that additional information about liquidity should be provided by any of the following:

1. 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;
2. Classifying assets and liabilities as current and noncurrent;
3. 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. ASU 2016-14 requires a not-for-profit organization to disclose the following, where applicable, in the notes to the financial statements (these disclosures may be included in the quantitative disclosures about liquidity):
   1. Unusual circumstances, such as special borrowing arrangements, requirements imposed by resource providers that cash be held in separate accountants, and known liquidity problems;
   2. The fact that the not-for-profit organization has not maintained appropriate amounts of cash and cash equivalents to comply with donor-imposed restrictions;
   3. Information about significant limits resulting from contractual agreements with suppliers, creditors, and others, including the existence of loan covenants.
4. ASU 2016-14 also discusses the following items that should be disclosed in the notes to the financial statements if not provided on the face of the statement of financial position:
   1. A description of the kind of asset whose use is limited;
   2. Information about the nature and amount of limitations on the use of cash and cash equivalents;
   3. Contractual limitations on the use of particular assets;
   4. Information about the nature and amounts of different types of restrictions that affect how and when, if ever, the resources can be used;
   5. 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.

ASU 2016-14 provides illustrative note disclosures designed to meet the above requirements. To implement these requirements, a not-for-profit organization should begin by identifying its financial assets that are available within one year from the balance sheet date, keeping in mind that donor and other restricted financial assets are not available for general expenditure. These amounts would be disclosed in the notes, with a discussion of how they would or wouldn't be sufficient to meet general expenditures. This discussion would include management's plans to use short-term borrowings or lines of credit to cover any temporary shortfall in available financial assets.

Offsetting Assets and Liabilities

A question addressed by GAAP is the accounting for situations where an entity has both a receivable from and a liability to the same third party. Should these receivables and payables be reported on a gross basis (i.e., both the asset and the liability reported)? Or, should these amounts be netted against each other and only the net receivable or payable be reported on the statement of financial position?

FASB ASC 210-20-05 provides that it is a general principle of accounting that the offsetting of assets and liabilities in the balance sheet is improper except if a “right of setoff” exists. A “right of setoff” is defined as a debtor's legal right, by contract or otherwise, to discharge all or a portion of the debt owed to another party by applying against the debt an amount that the other party owes to the debtor. Such a right of setoff exists when all of the following conditions are met: (FASB ASC 210-20-45-1)

1. Each of the parties owes the other determinable amounts.
2. The reporting party has the right to set off the amount owed with the amount owed by the other party.
3. The reporting party intends to set off.
4. The right of setoff is enforceable by law.

As part of the FASB's consideration of converging its standards with International Financial Reporting Standards (IFRS) it addressed the issue of offsetting conditional amounts recognized for contracts under which the amounts to be received or paid or items to be exchanged in the future depend on future interest rates, future exchange rates, future commodity prices, or other factors. Essentially, US GAAP permits offsetting of these conditional amounts, which basically applies to reporting derivatives, while IFRS does not. Essentially, the FASB concluded that it will continue to permit netting of these conditional amounts; however, it has issued new disclosure requirements to assist in the comparability of US GAAP and IFRS financial statements. These new disclosure requirements are contained in ASU 2011-11 Balance Sheet (Topic 210) Disclosures about Offsetting Assets and Liabilities.

The disclosure requirements of ASU 2011-11 (which were amended by ASU 2013-01, as discussed below) do not apply to all instances where offsetting of assets and liabilities occurs. The disclosure requirements are designed only to apply to financial instruments such as:

• Derivatives;
• Sale and repurchase agreements;
• Reverse sale and repurchase agreements;
• Securities borrowing arrangements;
• Securities lending arrangements.

The disclosure requirements include:

1. The gross amounts of those recognized assets and those recognized liabilities.
2. The amounts offset in accordance with the guidance in FASB ASC 210-20-45 and 815-10-45 to determine the net amounts presented in the statement of financial position.
3. The net amounts presented in the statement of financial position.
4. The amounts subject to an enforceable master netting arrangement or similar agreement not otherwise included in 2:
   1. The amounts related to recognized financial instruments and other derivative instruments that either:
      1. Management makes an accounting policy election not to offset; or
      2. Do not meet some or all of the guidance in either FASB ASC 210-20-45 or 815-10-45.
   2. The amounts related to financial collateral (including cash collateral).
5. The net amount after deducting the amounts in 4 from the amounts in 3.

This information is encouraged to be reported in tabular format. In addition, a description of the rights of setoff associated with an enforceable master netting arrangement, or similar agreement, should be provided, including the nature of those rights.

The FASB issued ASU 2013-01 Balance Sheet (Topic 210) Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities in response to concerns that ASU 2011-11's disclosure requirements would apply to the standard commercial provisions of many contracts that equate to master netting arrangements. This would result in a large number of instances that would be subject to the disclosure requirements.

ASU 2013-01 clarifies that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with the FASB Codification Topic 815 Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements, reverse repurchase agreements, and securities borrowing and lending activities that are either offset or subject to an enforceable master arrangement.

Accordingly, entities with types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement other than those described in the preceding paragraph are no longer subject to the disclosure requirements of ASU 2011-11.

Acceptable Formats

There are two general views or formats of the statement of financial position that are common, and GAAP is flexible and allows either format to be used. Some organizations prefer to use a “balanced” format in which assets are presented in the left-hand column with a total, and liabilities and net assets are presented in the right-hand column with a total. The total of assets equals the total of liabilities and net assets, proving that the books are balanced. Other organizations prefer a more top-to-bottom presentation in which assets are presented first with a total, liabilities are presented second with a total, and net assets are presented last with a total. This approach emphasizes that net assets represent the difference between a not-for-profit organization's assets and liabilities, which is a useful concept to communicate. In addition, from a purely practical viewpoint, this format is usually easier to present on a single page.