Chapter 3 describes the requirement for not-for-profit organizations to present liquidity information in the statement of financial position. The requirement can be satisfied by reporting a classified statement of financial position that classifies assets and liabilities as current and noncurrent. If an organization does so, classified statements of financial position should present current assets and current liabilities separately from noncurrent assets and liabilities.
With some exceptions relating to donor-imposed restrictions or restrictions on the use of cash (explained later in this chapter), not-for-profit organizations would classify assets and liabilities similarly to commercial organizations. Current assets are defined for commercial enterprises as those assets which are, or will become, cash, or will be consumed in normal business operations within a year or within one operating cycle if more than one year. Current liabilities are those obligations which will require the use of current assets or the incurrence of another current liability to liquidate them. Current liabilities also include the following:
A current liability that is expected to be refinanced on a long-term basis may be classified as noncurrent if the debtor intends to refinance the liability on a long-term basis and has demonstrated the ability to do so. These concepts applicable to commercial enterprises should be adapted for use by not-for-profit organizations.
In August 2016 the FASB issued Accounting Standards Update 2016-14 entitled Not-for-Profit Entities (Topic 958) Presentation of Financial Statements of Not-for-Profit Entities. ASU 2016-14 does not require not-for-profit organizations to prepare classified balance sheets, as described in this chapter. However, upon implementation of ASU 2016-14, additional information about an organization's liquidity is required. A discussion of these requirements is provided in Chapter 3. ASU 2016-14 is effective for annual financial statements issued for fiscal years beginning after December 15, 2017, with early application permitted.
FASB ASC 958-205-45-2 requires the statement of financial position to present information about a not-for-profit organization's liquidity in one of the following ways:
The ratio of current assets to current liabilities (current ratio) or, alternatively, the excess of current assets over current liabilities (working capital) can be interpreted as a measure of a not-for-profit organization's liquidity.
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:
Marketable securities $xxx,xxx
Receivables:
Accounts | $xxx | |
Notes | xxx | |
xxx | ||
Less allowance for doubtful accounts | (xxx) | |
xxx | ||
Affiliate organizations | xxx | |
Officers and employees | xxx | $xxx |
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 |
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.
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:
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 are obligations that are not expected to be liquidated within the current operating cycle. These include:
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 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.
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:
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:
The disclosure requirements include:
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.
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.
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 with either 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:
If reclassification of the maturing debt is based on the existence of a refinancing agreement, then the following conditions must be met:
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.
Vacation and sick leave. FASB ASC 710-10-25 provides guidance on the requirement to record a liability for vacation, illness, and holidays for which it is expected that employees will be paid; that is, compensated absences.
A liability for employees’ compensation for future absences should be accrued when all of the following conditions are met:
Under GAAP, a not-for-profit organization is not required to present a classified statement of financial position. However, if it elects to do so, the rules applicable to commercial enterprises should be followed. As such, the statement of financial position should contain totals for current assets and current liabilities. In addition, the notes to the financial statements should contain the following disclosures: