Recent federal funding freezes have introduced new financial uncertainties for nonprofits that rely heavily on government grants and contracts. In this environment, nonprofits must strengthen their financial assessments, disclosures, and liquidity planning.
At Inter CPA LLC, we recommend a proactive, structured approach to evaluating going concern risks and safeguarding financial sustainability.
1. Understanding Going Concern Assessment
ASC 205-40 requires management to evaluate whether there is substantial doubt about the nonprofit’s ability to continue as a going concern for one year after the date the financial statements are issued.
Key conditions and events to monitor include:
- Loss or delay of significant federal grants.
- Dependence on a small number of funding sources.
- Cash flow shortfalls or inability to meet short-term obligations.
- Increased uncertainty around federal appropriations and renewals.
2. Step-by-Step Going Concern Evaluation
Step 1: Gather Information
- Review all current grants, contracts, and anticipated renewals.
- Update cash flow projections and timelines for funding disbursements.
- Identify fixed obligations such as payroll, leases, and debt service.
Step 2: Evaluate for Substantial Doubt
- Assess if it is probable that the organization will be unable to meet obligations within 12 months without drastic actions (such as asset sales or emergency loans).
- Document assumptions and risk factors carefully.
Step 3: Analyze Management’s Mitigation Plans
- Determine if plans such as fundraising campaigns, cost reductions, accessing liquidity reserves, or drawing on credit lines are probable and executable within the time frame.
- Only probable, actionable plans should be considered to offset substantial doubt.
3. Required Financial Disclosures
Under ASC 205-40 and ASC 958, nonprofits must disclose:
– If Substantial Doubt is Alleviated:
- Describe the conditions or events that raised concern.
- Explain the management plans that resolved the doubt.
– If Substantial Doubt Remains:
- Explicitly state the existence of substantial doubt.
- Disclose management’s evaluation and plans to address the risk.
– Liquidity and Resource Availability:
- Provide qualitative and quantitative disclosures on financial assets available for general expenditures within one year.
- Explain liquidity management strategies.
4. Best Practices for Financial Resilience
- Enhance Transparency: Use plain, accessible language to explain risks related to federal funding freezes.
- Liquidity Planning: Maintain rolling 12-month cash flow forecasts. Establish liquidity reserves when possible.
- Scenario Analysis: Model best-case, moderate, and worst-case funding scenarios and disclose key assumptions.
- Proactive Communication: Keep funders, creditors, and stakeholders informed about financial status and contingency plans.
- Board Oversight: Ensure the board of directors actively reviews and approves going concern assessments and financial disclosures.
5. Summary Table
6. Conclusion
Nonprofits facing potential federal funding disruptions must rigorously assess their going concern status, focusing on liquidity, cash flows, and credible contingency planning. Clear and transparent disclosures are essential to maintaining donor confidence, regulatory compliance, and organizational sustainability.
At Inter CPA LLC, we help nonprofit leaders navigate financial uncertainty with strategic risk management, liquidity planning, and financial reporting support.
Contact us today to discuss how your organization can proactively strengthen its financial resilience.
Disclaimer: This article is for educational purposes only and does not constitute accounting or legal advice. Organizations should consult qualified professionals for specific guidance based on current standards and regulations as of April 2025.
References:
- Executive Office of the President, Office of Management and Budget. (2025, March 5). M-25-10: Implementation of Regulatory Freeze. Retrieved from https://www.whitehouse.gov/wp-content/uploads/2025/03/M-25-10-Implementation-of-Regulatory-Freeze.pdf
- FASB ASC 205-40: Presentation of Financial Statements—Going Concern
- FASB ASC 958: Not-for-Profit Entities
- AICPA Audit and Accounting Guide: Not-for-Profit Entities
- AICPA Audit and Accounting Guide: Assessing and Responding to Audit Risk in a Financial Statement Audit
- Colegio de CPA de Puerto Rico (April 29, 2025). Webinar: Organizaciones Sin Fines de Lucro: De los Estados Financieros a las Planillas.
