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 Valuationswas 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.

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

  1. NewToSeattle says:

    Clarifying your point about timing, it might be worth noting that my December 19, 2011, story for Forbes about deworming accounting stated, “In a policy change, OBI says for the time being it will assign no value to the pills on its financial statements.” OBI announced this policy after I asked it about the rather stark discrepancy between what OBI said publicly about the cost of deworming pills–“a nickel apiece,” OBI president Bill Horan’s declared in a YouTube-posted video–and the $6.85 valuation stated on formal but lesser-read financial filings. My story can be found here: http://onforb.es/sXZCf1

  2. Jim Ulvog says:

    Thanks for pointing that out and linking back to your article. The OBI comment to you would presumably have been in early- or mid-December, which means they had made the decision sometime before that.

    From their comment I would have otherwise expected the change to zero valuation to first appear on their audited financials for the March 31, 2012 fiscal year. They moved faster and applied it for the as-yet-unfiled 990.

    For those new to this issue, it would be well worth your time to read Mr. Barrett’s December article.

  3. NewToSeattle says:

    The face date of an article published in Forbes magazine is weeks after it was reported and set in type. I would say OBI declared its zero-valuation policy sometime in November 2011.

  4. Jim Ulvog says:

    That helps understand the timing of their decision. Thanks. They would have made their decision some amount of time before announcing it and they would have been discussing it internally well before that.

    Oh, of course there is a lag time between finishing an article and it being published in a magazine. One of many reasons I enjoy being a sole practitioner is that I have a lightning fast operating cycle. Blogging is the same way – the turnaround time is super fast.

  5. Keith Marquard says:

    What I would be very interested in finding out is if any of the donors valued their donations for either publicity or tax purposes at the same level as the charities did. And if they did for tax purposes in the US, is the IRS going after any of the donors?

  6. Jim Ulvog says:

    That is a good question Keith.

    I don’t know who the original donors are. You can track back through the articles by Mr. Barrett and Ms. Preston for the source of some of the medicine. From the 990s I have read, the average donation is very large.

    Since this post looks at the treatment on the 990 by Operation Blessing International, let’s look at their 990 for 2010 and 2009.

    You can find some good information on Schedule M.

    On the 2010 990, Schedule M shows $142.7M of drugs and medical supply donations from 76 contributions. That is an average of $1.88M per donation. That’s a lot of meds.

    On the 990 for 2009, there are $337M worth of drugs and medical supply donations listed which are from 85 contributions. That is an average of $3.96M per donation.

    Let’s list the range of possible donors to include individuals, US NPOs, US businesses, or overseas businesses.

    I don’t know who those donors are, but it would be reasonable to guess they are not individuals.

    If those donations are coming from NPOs, the valuation has no direct impact on income tax. If they are from businesses, then there are separate rules that govern what kind of deduction they can take for their inventory. Those valuations would be completely independent of the fair value used by the recipient NPO.

    If the donors are overseas businesses, I would have no idea what the tax impact would be for them.

    So, it looks like my long answer is essentially ‘I don’t know’. Hope that gives a little insight though. Does that help?

  7. Leif says:

    I think its interesting that they say they are not-valuing because there is “no clear and uniform industry standard.” I wasn’t aware that fair value was based on “uniform industry standard.” Isn’t fair value based upon exit price in the principle market? So was Operation Blessing always just determining fair value based upon what someone else was doing and not ever researching fair value for themselves?

  8. Jim Ulvog says:

    Good question Leif. I do not know the rationale for their previous or current valuation.

    At last we agree! The standard of ‘clear and uniform industry standard’ is not discussed in the literature. If I recall correctly, the standards point toward figuring out what the exit price is for your organization in your situation in your principal market with the meds you have. That means that different organizations can wind up with different values because of different circumstances. And that’s okay.

    If medicines are donated, still have a shelf life remaining, and are usable in your program or someone else’s program, their value is not zero. When we think about mebendazole for example, the exit price in the principal market may be $0.05, $0.20, $1.00, or even $5.00. We can debate the exit price. In fact there is an ongoing conversation and I’m confident the discussion will continue. I don’t understand a value of zero. When multiplied by 1 or 10 million doses of meds, it’s a big number.

    I’ll go out on a limb and guess there may be more to the issue than is currently visible. All I know is what is publicly available.

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