How to proceed with substantial doubts about your nonprofit’s future
Not-for-profits are required to regularly evaluate whether there is a “substantial doubt” that they will be able to continue; this policy is under the U.S. Generally Accepted Accounting Principles (GAAP). This evaluation determines if the organization will soon cease operations or liquidate its assets.
What should your management team do if it determines substantial doubt?
Each time annual or interim financial statements are issued your nonprofit’s management team must perform and going-concern evaluation. This evaluation includes two steps:
- Evaluate conditions and events are existing that raise a substantial doubt about your organization’s ability to continue as a going concern
- If so, consider if plans intended to mitigate those conditions or events that will alleviate the substantial doubt.
If substantial doubt is determined, there are certain disclosures required in your financial statement footnotes.
Substantial doubt is determined by the existence of relevant conditions and events indicating that your organization likely won’t meet financial obligations that come due within one year after the date the statements are issued. Relevant factors include:
- Current financial conditions
- Obligations due or anticipated within one year
- Funds required to maintain operations in the current financial condition, obligations, and other expected cash flows
- Other conditions and events that could adversely affect your organization’s financial stability
Adverse conditions that could result in substantial doubt include negative cash flows, a loan default, denial of credit by suppliers, or litigation. Some means of mitigating these adverse conditions include disposal of an asset, borrowing money, or reduce or delay expenditures.
The mitigating effect can only be considered if it is likely to be effective. For example, do you have the resources necessary to carry out your plan? It is important that you weight the likelihood that your plan will be adequate to alleviate the adverse conditions within one year.
We can help
If you are concerned about your nonprofit’s future working with a financial advisor is a good first step to implementing change. We can help to identify the current state of your nonprofit’s financials and determine next steps. We can also help to determine that all required information is included in your financial statements. Contact us at 818-334-8623 or click here, and we will contact you.