This series of posts looks at the issues surrounding valuation of GIK medication in the nonprofit community that have been getting attention lately. We are looking at how those issues can be seen in one specific set of financial statements.
See the first post in this series for ideas on downloading a copy of the full 990 and audited financial statements.
This post continues a discussion of note 3 regarding valuation of purchased meds. See previous post for text of the note.
Note 3 – continued discussion
As mentioned earlier, Note 1 says the “bulk” of medicines were purchased from two overseas suppliers.
Note 3 indicates the
..majority of the value of the Ministry’s pharmaceutical products are not legally permissible to be sold in the United States..
The first sentence of note 3 repeats the point that all medicines are valued at AWP which represents prices in the United States.
There are two very major assertions in that one sentence from note 3. First, that AWP is a relevant reference point. Second, that prices in the U.S. are the appropriate reference point for drugs not legally usable in the United States.
Evaluate those two assertions for yourself, conclude whether they are correct, and you will have resolved most of the issues surrounding GIK valuation for yourself. There is still one more massive assertion you would need to address.
We pause this analysis for an editorial discussion from the author.
There is a major technical point of interest to CPAs. Bear with me a moment and it may be of interest to other people.
Note 3 places the focus on following AERDO standards. That Blessings International chooses to follow AERDO guidelines is commendable. However, the governing accounting rules are U.S. GAAP.
It is GAAP that creates a requirement for exit price in the principal market under SFAS #157, not voluntary compliance with AERDO standards. (I don’t yet talk well in telephone numbers, so pardon the reference to FASB numbers instead of ASC 958-605-30-11.)
In the CPA world, we categorize accounting guidance into two categories: authoritative and non-authoritative. Authoritative rules are the ones that must be followed. In regular-people language, you could say that non-authoritative guidance is nice and helpful, but it is not a part of the required rules. It is merely nice and helpful – suggestions or conventions everyone in the industry agreed upon and decided to follow.
Let’s look at that note again. In explaining the required accounting for GIK, there is one word saying the organization is required to follow GAAP (that’s the authoritative stuff). Then there’s 210 words explaining AERDO standards, how difficult it is to follow those rules, and as a result the organization is departing from those rules that everyone in the industry decided to follow voluntarily.
You need to realize the revised, non-authoritative AERDO standards mirror the authoritative requirements in GAAP.
I do not have any insight why the notes focuses on voluntary, industry-developed suggestions instead of the requirement from GAAP.
A better way to phrase that paragraph would be to reference GAAP as the required standard and not AERDO. Let me take a try at rephrasing the paragraph. Here’s my edited suggestion with
deletions in strike through and additions in bold italic:
GIK donations must be recorded in accordance with GAAP.
and industry standards, referred to as the Interagency GIK Standards, as developed by an interagency task force appointed by the Association of Evangelical Relief and Development Organizations (AERDO) (now known as “Accord”). The AERDO Interagency GIK Standards were GAAP was revised in December 2009 effective with the organization’s year ended August 31, 2010 to provide that GIK should be valued and recorded as revenue at their estimated fair value based on the organization’s estimate of the wholesale values that would be received for selling the goods or products in their principal exit markets. The Ministry distributes pharmaceuticals overseas to over 150 developing nations. As the majority of the value of the Ministry’s pharmaceutical products are not legally permissible to be sold in the United States, but approved for sale outside the United States, they would have to be valued using various wholesale market price data in countries representing the principal exit markets of such products in order to comply with the AERDO Interagency GIK Standards GAAP. Due to the extremely large number of exit markets involved and the considerable volume of the Ministry’s pharmaceutical products, compliance with the AERDO Interagency GIK Standards GAAP is not practicable. No determination of the effects of this departure from current industry standards GAAP on the August 31, 2011 and 2010 financial statements can be made at this time.
(There are a couple more revisions that could be made, such as rephrasing the definition of fair value and the scope of finding fair value, whether that is done for each medicine in each country or the principal market for each medicine. I think those would also be material revisions, but won’t go into those now.)
You decide for yourself whether a focus on GAAP as the driving requirement changes the meaning.
When you hear the phrase ‘following industry standards’ in the GIK discussion, make a mental note that the speaker actually means non-authoritative rules. If you want a totally non-accountant way to analyze that phrase, try substituting ’…but everybody is doing it.’
The AERDO standards are helpful when there isn’t guidance in GAAP, such as the prohibition of ‘daisy chains.’ However, those voluntary standards do not replace GAAP when there is guidance in place.
The next post will resume the technical analysis of the financial statements.