Since starting to write about GIK valuation issues, I’ve noticed there are a few disclosure items that don’t seem to be visible in the financial statements of NPOs who receive large volumes of donated medicines. As I have time, I’ll start accumulating examples.
Concentrations – In general, if a line item of a financial statement contains a concentration, that concentration should be disclosed. The concept is one donor or lender or customer or vendor could go away. If loss of one counter-party would adversely impact an organization, the concentration should be visible. For example, if a huge portion of cash contributions come from just a couple of donors, that probably should be disclosed.
Concentration of revenue – Frequently a huge portion of revenue comes from donated meds for R&D charities. That’s usually obvious from the statement of activity. The concentration would be when a huge portion of the revenue arises from one or a few meds. The biggest issue discussed in the last couple of years is 500 mg mebendazole. Sometimes that is 10% or 30% or 60% of revenue. From one med. Seems to me that would be disclosable. I recall extremely few financials making that disclosure.
Concentration of donors – If a large portion of donations are received from just a few donors, there would be a disclosable concentration. I recall seeing schedule Bs on 990s that show one or two donors are providing a huge portion of revenue. We’re talking maybe 30% or 60% of revenue. Again, that would be disclosable in the notes.
Estimates – If a huge portion of revenue is derived from a medicine for which there is a dispute in the NPO community as to value the drug, seems there would be a reasonable possibility of a material change in the near future. If a huge portion of revenue is from mebendazole valued at, oh, say $10.54 or $1.50 and there is a big dispute that perhaps they should be valued at, oh, say $.05, there could be a disclosable estimate that revenue in the following year financials could shrink by a material amount.
Deferred revenue – Some NPOs are recording deferred revenue for inventory that is on hand. In addition to disclosure issues, seems to me there is a possible issue with revenue recognition.
Inbound shipping costs of meds not capitalized – I’ve seen several financial statements where there are handling fees or transportation costs or acquisition fees related to acquiring donate meds that are expensed. Seems there would be circumstances in which this should be capitalized as a part of the inventory. If so, then the revenue would be reduced accordingly. Concept is:
- GIK revenue = FMV of donated meds – acquisition fee/handling fee.
If my perception is correct, capitalizing the cost of acquisition would reduce revenue and reduce program expenses.
As mentioned above, I’ll start writing about some examples as time allows.
Materiality and hypothetical disclosures
Why do these thing matter?
There’s a concept accountants call materiality. Put in extremely simple terms, material items are those that would change the decision of a reader of the financial statements.
I’m going to make up some disclosures with numbers I pulled out of thin air. Please keep in the mind I’m thinking of some particular financial statements from the last year or so when I’m pulling numbers out of the air.
For example, if you are a donor thinking of giving to a charity, would you pause if you read one of these comments in the notes?
- Approximately 60% of contributions are received from two donors.
- The method used to value donated medicine is undergoing substantial discussion in the public environment. Certain medicines are difficult to value. These difficult to value medicines which are getting public and regulatory scrutiny constitute approximately 80% of the revenue for medical gift-in-kind contributions. If the consensus for valuation of these medicines changes or regulatory action forces a revision in valuation, the amount of total revenue in the next year ending December 31, 2014 could be reduced by a material amount.
- Donations of medicine are 72% of total revenue and support. Included in this amount are X million doses of one specific deworming medicine which constitutes 48% of total revenue and support.
- The two largest individual medicines included in the gift-in-kind contribution revenue are:
- X million doses of 500mg mebendazole valued at $1.50 per dose, constituting 30% of total revenue.
- Y million doses of drug Z valued at $x.xx per dose, constituting 10% of total revenue.
(Would that last one be even more material if the focus of the charity included neither deworming children nor addressing the illness for which medicine Z was intended?)
What do you think? Would a disclosure something like one of those hypotheticals be a made or break factor for donors?