Impact on GIK values from change in accounting rules – part 3 – change in Feed the Children financials

Previous post quoted disclosures made by Feed the Children in their 2010 audited financial statements. Essence of that note is that deworming medicine valued in the 2009 financial statements at $544M would have been valued at $21M if the 2009 financial statements had used the pricing information that was in use for 2010.

This post will look at the 2008, 2009, and 2010 financial statements through the lens of the two different valuation rates.

I described here the method I will use to analyze the financial statements.

This series of posts started from an article in a Forbes article, written by William P. Barrett: Donated Pills Make Some Charities Look Too Good on Paper.

If you’re really interested in this issue, you really need to read my previous two posts and the article I just mentioned. To hold down the size of this post I won’t repeat that information.  I’ll assume you are familiar with what is discussed there.

Go ahead. Check them out. I’ll wait.

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Okay, we can get started.

By the way, I’m going to refer to the change in accounting rules as SFAS 157 instead of ASC Topic 820-10.  Don’t know about you, but I haven’t made that mental transition – I still think in terms of FAS numbers.

Feed the Children reported in their 2010 financial statements that they used new pricing for some pharmaceuticals, particularly deworming meds.  See page 11 of the notes.

I am going to calculate the impact on the 2008, 2009, and 2010 financial information using valuation methodology used before and after SFAS 157 went into effect.  There’s enough disclosed information to do those calculations.

Let’s start with 2009. Medicines that were previously valued at $544M would have been valued at $21M using the new method. That means the 2009 donations would drop by $523M (calculated as $544M – 21M) and program expenses would drop by the same amount.

The ratio of the drop in valuation to the valuation with new pricing is 24.9 (calculated as $523M / $21M ). We can use that ratio to gross up to what the 2010 valuation would have been if the old methodology had been used.

So, in 2010 since the deworming medicines were valued at $23M using the new pricing information, then a ratio of 24.9 would mean that the deworming meds would have been approximately $572.8M higher (24.9 x $23M).  That would increase income in 2010 with an offsetting increase in program expenses.

For 2008, you can see that the recorded amount of GIK is almost the same as in 2009 ($1,062M in ’08 compared with $1,069M in ’09). So I will use the same dollar impact for 2008 as is disclosed by the financial statements for 2009, which is $523M.

Okay, now to the 990s and calculating the impact of using different pricing, as required by SFAS 157. I put key information from the tax returns into a spreadsheet.

Then for 2009 I subtracted the estimated impact if the rules had been applied retroactively ( -$523M). I subtracted the same amount in 2008 ( -$523M).

I then added back to the 2010 amounts the estimated impact ( +$572.8M).

All of the changes to GIK income would have a direct offset to the amount of program income.

I then calculated the program percentage, which is the program services divided by total expenses. I also calculated the supporting services as a percentage of total expenses. As I’ve mentioned previously this is the best way I have found to analyze program services over multiple years.

You can see spreadsheets that shows my calculations here. Will put all that on a separate post since it too much to include here.  I’ll include those spreadsheets for three reasons.  First, so you can check my math.  Second, so you can revise my assumptions anyway you wish if you think there is a better assumption someone.  Third, so you have a methodology you can use to analyze the financial statements of any other NPOs that have GIK issues.

Now for the results.

In 2010, the supporting services are disclosed at 9.8%.  If the higher valuations had been used, I estimate the supporting services would have been 6.0%.  That is a swing of 3.8%.

In 2009, the disclosed supporting services are 7.0% of total expenses.  Applying the impact of a $523M difference in pricing would have increased the supporting services to 12.1%.

In 2008, assuming the same dollar impact as in 2009, the disclosed supporting services of 8.1% would’ve increased to 14.9%, which is a swing of 6.8%.

Putting all those numbers together in a more condensed format shows the numbers side by side.  For each year, the supporting services using the old pricing, using the new pricing under FAS 157, and the change is:

• ‘10 from 6.0% to 9.8%, difference of 3.8%
• ’09 from 7.0% to 12.1%, difference of 5.1%
• ’08 from 8.1% to 14.9%, difference of 6.8%

As I mentioned before, you can get the 2010 audited financial statements here. You can pull the 2008, 2009, and 2010 tax returns from GuideStar. You will have to register at GuideStar to get the 990s, but there is no charge for the basic service.

Full disclosures. I have no involvement on the audits of any of these organizations.  I have no private or confidential information about either World Vision’s or Feed the Children’s financial information.  No clients of Ulvog CPA are involved with medical or overseas GIK.  Everything I have written here is based on publicly available information and anyone who wishes to do so can find all my sources on-line and can recalculate all my work.