Gamesmanship in GIK valuations? Part 1

Forbes magazine dives into the nonprofit community’s GIK valuation issue in an article by William P. Barrett, Donated Pills Make Some Charities Look Too Good On Paper. (In print the article had a cooler title – Magic Pill, Magical Accounting)

GIK valuation is difficult and messy.  Before anyone gets mad at me for airing dirty laundry from the NPO community, keep in mind that Forbes has a circulation that is somewhere in the range of, say, one gazillion times larger than this little blog.  The article appears in Forbes magazine guys, and on their website.  Don’t get mad at me.

My point in writing these posts?  The issues we are struggling with in the religious NPO world are getting attention from secular media.  It would be wise for NPOs and auditors to deal with this on our own. Quickly.

My hope, nay, my wild-eyed dream, is that we can address the GIK issue before more people in the business press focus on it.

The issue at hand is valuation of deworming pills.  The pills have incredible value for people in places where intestinal worms are an issue – two chewable pills a year will radically improve your health.

The issue is what financial value to put on the pills when they are donated to an NPO and then moved overseas for distribution to kids who desperately need them.

What makes it a challenge is that the pills can be bought at very low cost.  The article says:

The pills can be bought on world markets in Europe, China and India for 2 cents each.

The challenge is what value to use for recording the GIK:

But they have been valued on some nonprofits’ financial statements as noncash gift-in-kind (GIK) donations worth as much as $16.25 per pill—81,000% above that world market price.

The article places a lot of emphasis on the impact that overvaluation has on the amount of total revenue.  I think the far bigger issue is the impact on the functional allocation of expenses.  If you pump up the donation, the program services go up, and then the apparent efficiency increases.

First, the gross-up issue.

Here are the valuation amounts used by some NPOs, according to the article:

  • Crista Ministries – $10.64 per pill – dropping to a lower valuation cut their revenue by $63M.
  • Islamic Relief USA- $16.25 per pill – check out the article, which has a couple paragraphs describing the organization saying they were surprised that they were using that valuation.

Some have cut back their valuations.  My summary of the article:

  • Feed the Children – reduced from $9.07 to $0.35 – According to the article, GIK dropped last year by $668M, primarily due to the change in value for deworming meds. That valuation is still about 10 or 15 times more that the world-wide market.
  • World Vision – dropped from $10.64 in 2009 to $2.00 in 2010.
  • MAP International – dropped from $10.58 to $1.00 – still 50 times overseas market.
  • Food for the Hungry – dropped from $10.64 to $1.54.
  • Operation Blessing International Relief & Development – Forbes did additional research and figured that the NPO used an average of $6.85 over 7 years, which was $300M on total revenue of $2.2B.  More on this later.

The article says not everyone goes with valuations of $1 or $10 :

  • United States Fund for UNICEF – $0.026
  • Direct Relief International – $0.032
  • Children’s International –  buys pills for $0.04 or less instead of seeking donations

Again, compare this to the market value outside the U.S.:

FORBES can’t find any evidence that a large bulk deworming medicine donor anywhere shelled out in cash more than a few pennies per pill.

Full disclosure: I am CPA providing attestation services to the religious non-profit community.  None of the current or past clients of Ulvog CPA are involved in receiving medical or other GIKs and shipping them overseas.  More broadly speaking, all my current or former clients have inconsequential GIKs, other than some with thrift stores.

Next post: where did those valuations come from and what impact does it have on the financial statements?

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