Impact on GIK values from change in accounting rules – part 2

Previous post here discussed the impact of changes in valuation of GIK caused by new accounting.  I already discussed World Vision’s financials.  Next I will look at Feed the Children’s financials.

The beginning point of my discussion was a Forbes article, by William P. Barrett: Donated Pills Make Some Charities Look Too Good on Paper.  This series of posts started here.  I hope my observations from a CPA’s perspective will contribute to this growing discussion.

After looking at World Vision’s financials, I looked at the financial statements of several other NPOs trying to figure out the impact of FAS 157 and especially the change in valuation of deworming medicine.

Mr. Barrett has accumulated some good numbers.  I looked at publicly available audited financial statements and 990s available from GuideStar.  I could not get a clear understanding by combining information from his published report with public data to let me get a clear understanding.  Just not quite enough data there to work with.

Then I looked at the Feed the Children website. Kudos to them for making their 2010 financial statements available online, which you can find here.

Wow.  Found some superb information in the footnotes.  Check out this comment in note 2 on page 11, which I will quote at length:

FTC receives donations of food, medical supplies, clothing and other goods for use in its ministry programs. These donations are recorded at their estimated fair value based upon FTC’s estimate of the wholesale values that would be received for selling the goods in their principal market, considering their condition and utility for use at the time the goods are donated. Several methodologies are used in the determination of estimated wholesale value, including values provided by the donor, published industry pricing guides, internally-researched values, and internal average values for like-kind items.

Donations of gifts-in-kind that are legally allowed to be used in the United States are valued at their estimated wholesale value in the United States, determined as discussed above.

Donations of gifts-in-kind restricted from use in the United States (currently limited to certain pharmaceutical donations) are valued based upon the estimated wholesale market value of the items within the countries that represents the principal market of use. The estimated wholesale value of these donations is obtained from market price data compiled from wholesale commercial transactions within this non-United States principal market.

Regardless of the methodology, the condition and utility for use of the donated materials is taken into account for valuation purposes. Donated inventories received with restrictions, such as the provision that they cannot be distributed within the United States, are considered to have purpose restrictions and are therefore reported as restricted contributions.

As discussed above, FTC adopted SFAS No.157 for its nonfinancial assets and liabilities as of the beginning of its fiscal year ended June 30, 2010. FTC receives donations of deworming pharmaceuticals for use in its international programs, which are restricted from use in the United States. Due to the significant difference in prices between pharmaceuticals in the United States and in FTC’s principal market for the use of deworming medication, the adoption of this new standard had a material effect on the recognized gift-in-kind revenues and FTC’s international pharmaceutical donations restricted from use in the United States. Program expenses are affected as the related items are used.

The provisions of SFAS No. 157 are required to be adopted prospectively as of the beginning of the fiscal year; retrospective application is not allowed. During fiscal 2010 approximately $23 million of related contributions of deworming pharmaceuticals were recognized under this new standard. During 2009, under the accounting standards that were required to be used at that time, FTC recognized contributions of deworming pharmaceuticals of approximately $544 million. Had the provisions of SFAS No. 157 been applied at that time, and had the 2009 contributions been valued at the same amount per dose as the 2010 contributions, 2009 contributions of deworming medication would have been recognized at approximately $21 million.

Let me translate that comment from accountantese into English.

The organization changed the way it accounted for donated medicine. Previously they valued GIK at the wholesale value in the United States.

New accounting rules point towards using the value in the principal market, which would be the countries where they are going to distribute the medicine. Some pharmaceuticals, specifically deworming meds, cannot be legally distributed in the United States. Therefore the principal market is obviously overseas.

There is a dramatic difference in the value of medicines overseas versus in the United States. Starting in 2010 the deworming meds are valued at their wholesale price overseas. In 2009 they were valued at wholesale prices in the United States.

The impact for 2009 is that the deworming meds were valued at $544M.  If the new pricing methodology had been used, they would have been valued at $21M.  That is a drop of $523M.

In 2010, these deworming meds were valued at $23M.

That’s the end of my translation. Reduced it from 450 words to 150. Others may translate that differently, but that’s how I would explain it.

Wow.  That is a lot of good info.

I pulled their 990s off GuideStar for 2010, 2009, and 2008. Now I can do some number crunching.

But this post is already too long. To be continued.

Editorial comment:

You don’t have to surf the net more than, oh, about 2 minutes, to find out that Feed the Children has taken a lot of heat over the years. I’m not going to get into that. If you’re still reading, you are quite interested in the issue and you obviously have access to the ‘net, so you can surf to your heart’s content.

On this issue, it looks to me like Feed the Children needs to get a big pat on the back. The information in note 2 that I quoted above is not required.  Accounting rules don’t require any sort of discussion like that.

It is very unusual for audited financial statements to explain why there is a radical change in the numbers from one year to the next. In my experience and observation, it is very unusual to quantify the impact of an accounting change on prior year financial statements when those prior-year numbers are not included in the current year report. It is even more unusual when the impact of that disclosure is essentially going to make the organization look bad.  Good job.

That kind of explanation of the impact from FAS 157 is what I had been hoping to see in some other financial statements.  I’ve not seen anyone else providing this much background.  Maybe I haven’t looked hard enough.

All around, I would say job well done.

At the same time, there are still lots of questions that are open for discussion.  The wider NPO community can discuss those later.

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