Current Assets

According to the FASB ASC Master Glossary, current assets are cash and other assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. However, when the operating cycle exceeds one year, the operating cycle will serve as the proper measurement period for purposes of current asset classification. When the cycle is very long, the usefulness of the concept of current assets diminishes.

The following items would be classified as current assets:

1. Cash and cash equivalents including cash on hand consisting of coins, currency, and undeposited checks; money orders and drafts; and deposits in banks. Anything accepted by a bank for deposit would be considered as cash. Cash must be available for a demand withdrawal. Assets such as certificates of deposit would not be considered cash because of the time restrictions on withdrawal. Also, cash must be available for current use in order to be classified as a current asset. Cash which is restricted in use and has restrictions that will not expire within the operating cycle, or cash restricted for a noncurrent use would not be included in current assets. Cash equivalents include short-term, highly liquid investments that (a) are readily convertible to known amounts of cash, and (b) are so near their maturity (maturities of three months or less from the date of purchase by the enterprise) that they present negligible risk of changes in value because of changes in interest rates. Treasury bills, commercial paper, and money market funds are all examples of cash equivalents.
2. Short-term investments are readily marketable securities acquired through the use of temporarily idle cash. These securities are accounted for in accordance with FASB ASC 958-320, and are generally reported at fair value. The statement of financial position presentation would be as follows:

   Marketable securities

   $xxx,xxx

3. Receivables include contributions receivable, accounts and notes receivable, receivables from affiliate companies, and officer and employee receivables. The term “accounts receivable” represents amounts due from customers arising from transactions in the ordinary course of business. Pledges receivable represent unconditional promises to give that are expected to be collected within one year (or operating cycle, if longer). Allowances due to uncollectibility and any amounts discounted or pledged should be clearly stated. The allowances may be based on a relationship to sales or based on direct analysis of the receivables. If material, the receivables should be broken down into their component parts. The receivables section may be presented as follows:

   Receivables:

   Accounts	$xxx
   Notes	xxx
   	xxx
   Less allowance for doubtful accounts	(xxx)
   	xxx
   Affiliate organizations	xxx
   Officers and employees	xxx	$xxx

4. Inventories are goods on hand and available for sale. The basis for valuation and the method of pricing should be disclosed.

   Inventories—at the lower of cost or market (specific identification)

   $xxx

   In the case of manufacturing operations, raw materials, work in process, and finished goods should be disclosed separately on the statement of financial position or in the footnotes.

   Inventories:

   Finished goods	$xxx
   Work in process	xxx
   Raw materials	xxx	$xxx

5. Prepaid expenses are assets created by the prepayment of cash or incurrence of a liability. They expire and become expenses with the passage of time, usage, or events. Examples include prepaid rent, prepaid insurance, and deferred taxes.

Noncurrent Assets

The following are not current assets since they generally are not expected to be converted into cash within one year (or operating cycle, if longer) or, because of restrictions, are not freely available as part of the working capital of the not-for-profit organization.

1. Cash or other assets received with donor-imposed restrictions that limit their use to long-term purposes.
2. Cash restricted for other special purposes, such as cash restricted as to withdrawal or use for current operations, or for the liquidation of long-term debt.
3. Long-term investments.
4. Capitalized collections.
5. Unconditional promises to give not expected to be collected within one year (or operating cycle, if longer).
6. Other receivables not expected to be collected within one year (or operating cycle, if longer).
7. Cash surrender value of life insurance policies.
8. Land and other natural resources.
9. Depreciable assets.
10. Prepayments or deferred charges that will not be charged to operations within one year (or operating cycle, if longer).

Current Liabilities

The liabilities are displayed on the statement of financial position in the order of payment. Current liabilities are obligations, the liquidation of which is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of current obligations. Obligations that are on demand or which are callable at any time by the lender are classified as current regardless of the intent of the entity or lender. Current liabilities include:

1. Obligations arising from the acquisition of goods and services entering the operating cycle (e.g., accounts payable, short-term notes payable, wages payable, taxes payable, and other miscellaneous payables).
2. Collections of money in advance for the future delivery of goods or performance of services, such as rent received in advance and unearned subscription revenues.
3. Other obligations maturing within the current operating cycle to be met through the use of current assets, such as the current maturity of bonds and long-term notes.

The distinction between current and noncurrent liquid assets and liabilities generally rests upon the ability of the entity and the intent of the entity to liquidate or not to liquidate within the traditional one-year concept.

Noncurrent Liabilities

Noncurrent liabilities are obligations that are not expected to be liquidated within the current operating cycle. These include:

1. Obligations arising through the acquisition of assets, such as the issuance of bonds, long-term notes, and lease obligations.
2. Obligations arising out of the normal course of operations, such as pension obligations.
3. Contingent obligations involving uncertainty as to possible losses. These are resolved by the occurrence or nonoccurrence of one or more future events that confirm the amount payable, the payee, and/or the date payable, such as product warranties.

On all long-term liabilities, the maturity date, nature of obligation, rate of interest, and any security pledged to support the agreement should be clearly shown. Also, on bonds and long-term notes, any premium or discount should be reported separately as an addition to, or subtraction from, the bond or note. Long-term obligations with certain covenants are classified as current liabilities if any of those covenants have been violated and the lender has the right to demand payment. Unless the lender expressly waives that right, or the conditions causing the default are corrected, the obligation is current.

Other Liabilities

Other liabilities are items that do not meet the definition of a liability, such as deferred income from revenue collected in advance of being earned under a cost-reimbursement contract. Many times these items will be included in current or noncurrent liabilities even though they technically are not similar. In some cases, authoritative literature specifically states how certain assets and liabilities are to be classified. For example, FASB ASC 940-10 provides specific guidance for classifying deferred tax assets and liabilities.

Offsetting Assets and Liabilities

In general, assets and liabilities are not offset against each other. The reduction of contributions receivable by an allowance for uncollectible amounts, or property, plant, and equipment by the accumulated depreciation, are acts which reduce these assets by the appropriate valuation accounts. (Note that while an allowance for uncollectible amounts may be offset against contributions receivable, bad debt losses are prohibited from being netted against contribution revenue.) The right of setoff exists only when all the following conditions are met:

1. Each of two parties owes the other determinable amounts (although they may be in different currencies and bear different rates of interest).
2. The entity has the right to setoff against the amount owed by the other party.
3. The entity intends to offset.
4. The right of setoff is legally enforceable.

In particular cases, state laws or bankruptcy laws may impose restrictions or prohibitions against the right of setoff. Furthermore, when maturities differ, only the party with the nearest maturity can offset because the party with the longer maturity must settle in the manner determined by the earlier maturity party.

The offsetting of cash or other assets against a tax liability or other amounts due to governmental bodies or against a tax liability is also not acceptable except under limited circumstances. The only exception is when it is clear that the purchase of securities is, in substance, an advance payment of taxes payable in the near future and that the securities are acceptable for the payment of taxes. This occurs primarily as an accommodation to governmental bodies.

For forward contracts, interest rate swaps, currency swaps, options, and other conditional or exchange contracts, the conditions for the right of setoff must exist or the fair value of contracts would be in a gain position. Neither can accrued receivable amounts be offset against accrued payable amounts. If, however, there is a master netting arrangement, then fair value amounts recognized for forward, interest, or currency swaps, options, or other such contracts may be offset without respect to the conditions previously specified. Financial instruments are further discussed in Chapter 29.

As also discussed in Chapter 3, as part of the FASB's process to converge 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. As described above, US GAAP permits offsetting of these conditional amounts in certain circumstances, 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 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 a 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.

ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013. Disclosures should be provided retrospectively for all comparative periods provided.

Callable Obligations

An obligation that is due on demand at the statement of financial position date is properly classified as a current liability. This is true regardless of the probability of whether the creditor will actually call the obligation.

In addition, if violations of noncurrent liability debt covenants cause the debt to be callable, the long-term debt should be classified as a current liability. (FASB ASC 470-10-45-11) However, the not-for-profit organization may still classify the debt as long-term if it obtains a waiver from the creditor or cures the violation before the financial statements are issued. If a grace period exists and the organization demonstrates that it can cure the violation within the grace period, the obligation should also be classified as current.

Short-Term Obligations Expected to Be Refinanced

If a not-for-profit organization intends to refinance the currently maturing portion of long-term debt or intends to refinance callable obligations by replacing them either with new long-term debt or with equity securities, the GAAP requirements contained in FASB ASC 470-10 must be followed. An enterprise may reclassify currently maturing debt (other than obligations arising from transactions in the normal course of business that are due in customary terms) as long-term, provided that the enterprise intends to refinance the obligation on a long-term basis and its intent is supported by either of the following:

1. Post-statement of position-date issuance of a long-term obligation or equity securities. After the date of the enterprise's statement of position, but before that statement of position is issued, a long-term obligation has been issued for the purpose of refinancing the short-term obligations on a long-term basis.
2. Financing agreement. Before the statement of position is issued, the enterprise has entered into a financing agreement that clearly permits the enterprise to refinance the short-term obligation on a long-term basis on terms that are readily determinable.

If reclassification of the maturing debt is based on the existence of a refinancing agreement, then the following conditions must be met:

1. The agreement will not expire within one year or operating cycle of the statement of position date and is noncancelable.
2. The replacement debt will not be callable except for violation of a provision of the agreement with which compliance is objectively determinable or measurable.
3. The enterprise is not in violation of the terms of the agreement.
4. The lender or investor is financially capable of honoring the agreement.

The amount of currently maturing debt to be reclassified cannot exceed the amount raised by the actual refinancing, nor can it exceed the amount specified in the refinancing agreement. If the amount specified in the refinancing agreement can fluctuate, then the maximum amount of debt that can be reclassified is equal to a reasonable estimate of the minimum amount expected to be available on any date from the date of the maturing obligation to the end of the fiscal year or operating cycle. If no estimate can be made of the minimum amount available under the financing agreement, then none of the maturing debt can be reclassified as long-term.

FASB ASC 470-10-45-21 provides that if an enterprise uses current assets after the statement of position date to liquidate a current obligation, and replaces those current assets by issuing either equity securities or long-term debt before the issuance of the balance sheet, the current obligation must still be classified as a current liability at the statement of position date.