Making the transition to the new FASB Accounting Standards Update (ASU 2016-14) will require thought and planning. The Standard will take affect for years beginning after December 15, 2017. Having discussions now gives management and the Board of Directors time to provide more useful information to the users of the financial statements. Here’s some initial steps to take.
Create a Liquidity Policy
If an organization does not already have one in place, creating a liquidity policy is the first step. It is the intent of the policy to ensure that all parties involved in the management of the organization understand which assets are considered to be liquid and available for use in the operation of the day-to-day business of the organization.
Create a Board Designation Policy
A board designation policy will ensure that management and members of the Board of Directors understand who has the authority to spend board-designated funds for a specific purpose and when those funds can be appropriated. Discussing the difference between board-designated and donor-designated net assets with the board and reviewing the various net asset classes will help calculate the available funds for operating purposes.
Create an Operating Reserve Policy
Building an operating reserve allows organizations to better manage cash flows on a daily basis and prepare for unexpected expenses. An operating reserve policy will help management and members of the Board of Directors define:
- What is an appropriate amount to reserve
- How funds will be appropriated for the reserve
- What steps should be followed if the reserve falls below the desired level
With the Standard’s emphasis on board designated assets, organizations may want to take a look at other policies that may be affected by any new policies put in place.
Decide on the Presentation Method
Finally, decide how the organization would like to present the availability of their financial assets that could be used for their cash needs in the next fiscal year. The Standard requires both qualitative and quantitative information. It does not require a specific way to present the disclosures. The disclosures can be on the face of the financial statements, in the notes to the financial statements, or both.
Organizations may want to take their prior year audited financial statements and practice implementing the new Standard as if it had been in place during that fiscal year. This would be a way to see which presentation works best for their organization and its users.
There is less than one year for organizations to get prepared before the implementation of the new Standard is required. Be proactive and not reactive. Starting the discussions now will make the transition smooth and efficient and provide more useful information to the users of the financial statements.
Contact Hawkins Ash CPAs if you have questions.