Treasury Function: Cash, Investments and Cash Flow Statements

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• Distinguish among the types of cash and investment instruments

• Identify elements of an Internal Control System over Cash

• Understand the differences between cash vs. accrual basis of accounting

• Identify what regulations govern investments of a NPO

• Describe how investments are reported on a Balance Sheet with related disclosures

• Sketch out an Investment Policy• Analyze a cash flows statement

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• Identify what you have by:– Cash– Cash equivalents– Investments– Compensating Balances

• Where is it located?• Who has access to it (and is authorized

to deposit and withdraw)?• What is the interest rate (current and

trend over time)?• What are the service charges (current

and trend over time)?• What is the Balance as of xx-xx-xx?

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◦ Coin◦ Currency◦ Checking accounts (demand deposits)◦ Money orders◦ Certified checks◦ Cashier’s checks◦ Bank drafts◦ Savings accounts (bank has the right to

demand notice before withdrawal)

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• Definition: Short-term, highly liquid investments that are readily convertible to known amounts of cash, and so near their maturity that they present insignificant risk of changes in interest rates; generally investments with maturities of 3 months or less.

– U.S. Government Treasury Bills (91 to 182 day maturities) sold in $10,000 denominations at weekly government auctions

– Commercial paper – short term notes issued by corporations with good credit ratings; issued in $5,000 and $10,000 denominations.

– Money Market funds

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◦ Commercial paper (investments in corporate debt with maturity of 3 to 12 months)

◦ Certificates of Deposit (CDs) – formal evidence of indebtedness, issued by a bank, subject to withdrawal under specific terms; issues in $10,000 and $100,000 denominations, maturing in 30 to 360 days

◦ Money market savings certificates issued by banks and savings and loan associations in denominations of $10,000 or more for 6 month periods (6 to 48 months); interest rate is tied to the 26-week Treasury bill rate

◦ U.S. Treasury Bonds◦ U.S.Treasury Notes

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Equity securities – common stock Equity securities – preferred stock Corporate bonds Municipal debt securities Convertible debt Land contracts held as an investment Mortgages held as an investment Derivatives – financial instruments

whose value is derived from the value of some underlying assets, such as stock, bonds, or commodities – or is tied to a basic indicator, such as interest rates or the Dow Jones averages.

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Cash that is legally restricted – so separately classed as a deposit

Cash under an arrangement that is without legal restriction – so it is shown as cash but with note disclosure

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Operating Revenue◦ Providing services or selling goods

Could be paid when revenue is earned or a collection of accounts receivable from revenue provided in past periods.

◦ Membership dues Contributions or grants Nonoperating Revenue

◦ Gain on sale of long-term assets (capital assets or investments)

◦ Investment income (interest and dividends) Borrowing

◦ Short term loans from Bank (notes or line of credit)

◦ Long-term debt (notes payable or bonds)

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Is your cash safe?◦ Lock up petty cash◦ Two signatures on checking accounts

Budget for cash needs (daily or monthly) Use Bank “sweep” accounts to earn interest

on excess cash and borrow to meet short-term needs

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Are the accounting records over cash and investments reliable?◦ Reconcile the bank statements monthly – by

someone other than the person responsible for writing checks (in a small organization, the Board Treasurer can receive the bank statements directly rather than the Executive Director).

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Both provide important information ◦ Balance Sheet shows the balance in the cash,

investments, receivables, other current assets, payables, other current liabilities at the end of each year.

◦ Statement of Activities shows the change in revenues earned and expenses incurred without regard to whether cash was received or paid

◦ Statement of Cash Flows reports on the reasons that cash changed during the period.

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Consider a one-page spreadsheet that shows Cash Basis Budget for each month of the year, with a section for Accrual Adjustments at the bottom of the page◦ Show each month of the year as a column◦ Start with beginning cash balance◦ Show enough detail of Cash Receipts and

Disbursements as necessary as rows◦ Draw totals to ending cash balance for each

month◦ Then show those cash receipts and

disbursements that affected receivables and payables at the bottom of the page.

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Valuation and Nature of Investments Investment risks and derivatives Details of Mortgages, Other Loans, and

Lease Commitments Amount of Unconditional Pledges Due in 1

year, 1 to 5 years, and > 5 years (SFAS No. 117)

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Uniform Prudent Investor Act of 1994 (see update)

Sample Investment Policy

Boardsource books and training seminars www.boardsource.org

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• Mark equity investments that have readily determinable values and all debt securities to fair value.

• Report realized and unrealized gains and losses and investment income in the Statement of Activities.

• Report income and gains and losses as changes in unrestricted net assets, unless their use is restricted by the donor or legally restricted by state law.

• Similar to SFAS No. 115 for businesses and GASB Statement No. 31 for governments, but simpler.

Reporting Investments

SFAS No. 124

Newspaper or trade journal Quotes from recognized exchanges (NYSE,

AMEX, NASDAQ) Pricing services Broker quotes Custodian or investment advisor Pricing matrices

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Donors may stipulate that a portion of appreciation is to be permanently restricted to maintain the purchasing power of the endowment.

If a donor is silent as to losses, losses reduce unrestricted net assets if the net appreciation requirement has been reached, otherwise temporarily restricted net assets.

SFAS No. 124 requires extensive disclosures regarding investments and related income.

Investments

Most states have adopted some version of the ◦ Uniform Management of Institutional Funds

Act (Act 157 of 1976)◦ Uniform Prudent Investors’ Act (1994)

which describe standards of care, portfolio theory, and delegation of investment authority.

For governmental entities, Michigan has◦ Investment of Surplus Funds of Political

Subdivisions (Act 196 of 1997 – Amendment to Public Act 20 of 1943 – Basic Investment Policy

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Example:“Goal is to optimize invested funds while

maintaining a safe amount of risk and meeting the fiduciary responsibility assumed by the organization.”

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Display◦ Realized Gains and Losses (from sales of assets)◦ Unrealized Gains and Losses from changes in

fair value) Disclosures

◦ Methods and assumptions used to estimate fair value

◦ Policy to determine investments carried at amortized cost

◦ Involuntary participation in an external pool

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Cash flows from

Operations (look on statement of activities)

Investing Activities (changes in long-term assets on the statement of net assets)

Financing Activities (changes in long-term liabilities on the statement of net assets)

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SFAS No. 95 was amended to extend coverage to not-for-profit organizations as well as for-profit businesses.

The indirect method or direct methods (with a reconciliation) may be used. This method refers only to the “Operating Section”

Unrestricted gifts are included with operating activities.

Restricted contributions given for long-term purposes are included with financing activities along with the related income.

Noncash gifts or in-kind contributions are disclosed as noncash investing and financing activities in a separate section.

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