Check out this set of financial statements to see a live example of the pharmaceutical GIK issues – part 6

This is the final post in a series that has looked at the 2011 financial statements for Blessings International as an opportunity to see where the donated GIK issues show up in an R&D NPO’s financials. 

Again, the goal is not to focus attention on this particular organization, but to look at the impact of donated GIK on the financial statements.

You can download a copy of the full 990 and audited financial statements for the last 3 years from the organizations website, located here. Give them credit for making three years of reports easily available. Most NPOs only put 1 year on their website.

What would the financials look like without the GIK?

Let’s do some number crunching.

In a cover letter to the financial statements on the organization’s website, the president says:

For over twenty years Blessings has used nationally published average wholesale prices (AWP) to value its inventory of both donated inventory or purchases from pharmaceutical companies. Last fiscal year we did not receive any pharmaceutical donations. Rather we purchased all of our medicines. Furthermore in late 2010, generally accepted accounting principles (GAAP) changed. As a result our auditor qualified his opinion and recommended that we stop using AWP. This fiscal year we will be using cost to value our entire inventory.

By that last sentence, I infer that the GIK in 2012 will be valued at the amounts paid to acquire the meds.

What would the 2011 financial statements look like if that new policy for 2012 had been applied in 2011?  Let’s see.

I’ll back out half of GIK income and GIK expense. A 50% assumption will be used for a sensitivity analysis.  Then I’ll back out the full GIK amounts.

Here are the amounts on the statement of activity from the audited financials.

 unrestricted revenue            3,361,952
 AWP of donated meds          57,828,484
 other restricted contributions                 72,682
 ——
 Total revenue          61,263,118
 Estimated AWP          45,491,390
 Other program costs            2,851,966
 General               215,860
 Fund raising                 34,300
 ——–
 Total expenses          48,593,516
 Change in net assets          12,669,602

Here is the statement of activity, in millions, with three different presentations: as presented in the audit, with a 50% reduction in GIK, and recording donated meds at cost: 

 per f/s  50% awp  cost
 revenue     61.26        32.36    3.46
 expense     48.59        25.89    3.09
 net change     12.67          6.47    0.37

Here is the functional allocation of expenses as a percent of total expenses, with calculations as presented in the audit, then with 50% and then 100% reduction in GIK. Analyzing the functional categories as a percent of total expenses is the most consistent way to analyze costs across time and between organizations.

 per f/s  50% awp  cost
 program 99.49% 99.04% 91.94%
 general 0.44% 0.83% 6.96%
 fundraising 0.07% 0.13% 1.10%
 total 100.00% 100.00%  100.00%
 supporting
 services 0.51% 0.97% 8.06%

As you can see, looks to me like dropping all GIK to cost retroactively would increase supporting services from a reported 0.5% to a proforma 8.1%.

I hope this series of posts has illuminated where GIK appears on the financial statements of an R&D NPO. Impact on other organizations will vary depending on the amounts and proportions involved. However, this allows you to see what the amounts are in one actual situation. 

I also hope this series of posts helps you read and analyze other financial statements.

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