This series of posts looks at the issues surrounding valuation of GIK medication in the nonprofit community that have been getting attention lately. The 2011 financial statements for Blessings International illustrate these issues. This series of posts show how those issues appear in one set of financial statements.
See the first post in this series for ideas how to download a copy of the full 990 and audited financial statements.
Notes to the financial statements – continued observations
The final item I will quote at length is note 3, which describes the valuation of donated meds.
Kudos again to Blessings International for spelling this out clearly. My guess is that we would see similar issues, explanations, and general relationships in many other financial statements if all organizations were as clear as Blessings International.
By the way, this is a great description of current valuation methodologies in use today. Considering the topic, it is also reasonably concise.
Note 3 – Valuation Methodology for Purchased Pharmaceuticals
As described in Note 2, the Ministry has historically recorded the receipt of pharmaceutical products acquired by purchase or gifts-in-kind (GIK) donation at their current AWP or the AWP of substantially equivalent products per the Thomson Reuters Red Book (“Red Book”), whose AWP’s approximate wholesale prices in the United States. The Red Book is also the basis for the recorded value of pharmaceutical shipments included in program services expenses as well as the end of year pharmaceutical inventory. For the years ended August 31, 2011 and 2010, all pharmaceuticals received by the Ministry were acquired by purchase from both United States and overseas pharmaceutical companies at bargain purchase prices which have historically been equated to donations.
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 revised in December 2009 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. 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 is not practicable. No determination of the effects of this departure from current industry standards on the August 31, 2011 and 2010 financial statements can be made at this time.
Next post will discuss what that paragraph means.
(Links will be added as additional parts are posted.)