Operation Blessing excludes value of deworming medicine from its 2011 tax return

The Form 990 from Operation Blessing International for their year ending March 31, 2011 does not include any value for $113,043,709 of deworming medicine that was included on their audited financial statements for that year.

Between the date the audited financial statements were released and when the 990 was filed about seven months later, the ministry decided to remove the amount of contributions for deworming medicine and remove expenses of the same amount.

Operation Blessing has made it really easy to read their audited financial statements and tax return for 2011. You can get either of them with one click at the bottom of this page of their website.  Hats off to them for putting both reports in an easy to find place.

Here is the timing:

March 31, 2011 – last day of the 2011 fiscal year

July 1, 2011 – date of the auditor’s report on the audited financial statements. This is about three months after the end of the fiscal year. The financials would probably have been released a few days after that.

February 9, 2012 – date the 990 was signed. It was officially received by the IRS on February 21, 2012 according to the 990 copy available from Guidestar.

Reason for the change

Schedule M of the return, which is on page 37 of the file, provides an explanation of the change. To be as fair and precise as possible, I will quote the explanation in full, since it is a public document. Here is how OBI describes the change:

Subsequent to the issuance of its March 31, 2011 audited financial statements, OBI revised its methodology for recording the estimated fair value of donated anti-parasite medication. After reviewing recent trends in the way the non-profit community reports the value of these medications, OBI has determined there is no longer a clear and uniform industry standard for estimating their fair market value. Until industry standards for the recognition and valuation of these medications become clearer, OBI has decided to discontinue recognition of any value for such donations for financial reporting purposes. Such changes in methodology are implemented prospectively in the reporting period they are identified. As a result, $113,043,709 of donated anti-parasite medication previously reported as revenue and program expense on OBI’s issued March 31, 2011 audited financial statements have been excluded from this Form 990. This change has no impact on OBI’s March 31, 2011 net assets, change in net assets or cash flows, and will not affect OBI’s on-going anti-parasite program which helps millions of children globally each year.

If you want to trace the amounts from the audited financial statements to the 990, there is a place on the 990 to do that. Take a look at part XII and XIII on page 20 of the 2011 package. Part XIV has the detail of the reconciling items. You can see that revenue and expenses from the audited financial statements were both reduced by $113,043,709 to get the amounts for the 990.

Neither the 990, the audited financials, nor the annual report provide indications of the per-pill valuation or the number of doses. I am guessing that mebendazole is the predominate pill included.

Impact on tax return

Excluding the deworming medicine means the 2011 total revenue was reduced by 29.9%.  This is calculated as the amount removed, $113,043,709, divided by total revenue from the audited financial statements, $377,963,289. The inference to me is that mebendazole was 30% of 2011 income.

On the expense side, the $113.04M of deworming meds would have been included in program expenses. As reported on the 990, program services are $259.75M and supporting services are $3.07M.  That means program service are 98.83% of total expenses.

If the $113.04M were added back, the program services would be $372.79M.  In that case, the program services would have otherwise been 99.18% {calculated as (113.04 + 259.75 ) / ( 113.04 + 262.83) }.

Back to the timing again

One more factor on the timing is the IRS audit of Food for the Hungry (FftH).

The OBI audited financial statements were released in very early July 2011. The 990 was signed by KPMG on February 8, 2012 and signed by the ministry on February 9, 2012.

According William Barrett’s report, IRS Audit: Big Charity Filed Misleading Tax Return, the IRS dated their audit report of FftH on January 6, 2012. Presumably it was mailed that day or a few days later.  Mr. Barrett’s report is dated January 30, 2012.  Another report by Caroline Preston, IRS Levies Fine on Food for the Hungry Over Drug Valuations, was also dated January 30 (her updated article is at the preceding link).

The final tax return was signed by the accountants on February 8.

Keep in mind February 15, 2012 would have been the deadline after a second extension for the March 31, 2011 fiscal year. For those who are not accountants, don’t read anything into the tax return be filed only a week or so before the final deadline. That happens fairly often. Umm, let’s just say I’ve been there with some of my clients before. So have all of my colleagues.

Sitting at my little desk in my little corner of the accounting world, I do not know how much news had been circulating around of the existence of the IRS audit last fall or how fast copies of the IRS report were circulated in January.  I learned about it when I read the articles by Mr. Barrett and Ms. Preston.  I do perceive that couple versions of copies of the IRS’ report have circulated fairly widely since then.

You’ll have to make your own guesses whether there is any significance for the timing of the filing.

Update:  See comment  below from Mr. Barrett on the OBI decision from late last year to change their valuation methodology.