More background on two charities that revised GIK from WAC up to AWP

Previously discussed here and here two charities that revised their 2012 financial statements by increasing their valuation on donated medicine from WAC to AWP.

I reached out to both organizations on Wednesday, February 5, for comment on this post. I have not heard back from either organization. If they provide any comment, I will update this discussion.

You might want to get a fresh cup of coffee. This will be a long post.

Why look at these restatements?

Two reasons.

First, it is counter to the trend we are seeing of organizations reducing the valuation of GIK.

Second, it provides a glimpse into the reasoning for using AWP. There is very little in the public realm (at least that I’m aware of) that explains why organizations are using AWP.

I’ve looked at more than a few financial statements in the last two years for organizations that have a large volume of GIK. I’ve even had a few posts on point. Usually a specific issue is not very visible in the financial statements. Occasionally, a set of financials will clearly illustrate some issue that is widely present in this sector.

When that happens, I like to write about it. I think it helps all of us when we can see a live example of some issue. There’s another post waiting for comment from another charity before talking about something that is uniquely visible in their tax return.

All that to say I’m not picking on any of these three organizations (two in this post; one later).  Their financials allow all of us to see an issue. These particular issues probably exist in many other NPOs, but are not as visible elsewhere.

Restatements

You can find the filings for the Cancer Fund of America (CFA) at the New York AG here.  The Children’s Cancer Fund of America filing can be found at the AG’s website here.

For CFA, here is the amount of medicine GIK from Schedule M and the total revenue from the audited financial statements:

  • Drug GIK         total revenue   year                             990 date
  • $14.1M            $35.1M            2011                            6/11/12
  • $  3.4M            $20.6M            2012 first report          8/8/13
  • $19.3M            $36.5M            2012 restated report    10-28-13

For CCFA, here is the total revenue and medicine GIK from Schedule M from the 990:

  • Drug GIK   total revenue    year                      990  date
  • $8.1M          $14.8M           2011                     5/7/12
  • $1.8M          $  8.3M           2012 first report   7/31/13
  • $8.9M          $15.4M           2012 revised         9/26/13

You can see from both of the organizations that the restatement of GIK valuation increased the dollar amount substantially.

Disclosures in public documents

Because the filings are now public information, because they were filed with full knowledge they would be public information, because you can find the information yourself with a few mouse clicks, and because it is relevant to the wider NPO community, I will quote several comments in the filings with the AG at length. The tax returns are prepared in ALL CAPS. I will transcribe that to sentence case for ease of reading. Two typos will be corrected without notation since the goal of this post is to discuss valuation, not assess proofreading.

Please see pages 25 and 26 of the CFA filing with the AG. The 990 for 2012 (dated 10-28-13) provides the following comment on Schedule O:

The organization using Thomson Reuters Red Book to value its medications donated and distributes using average wholesale price (AWP). In most cases, the AWP used is the manufacturer’s suggested AWP and does not necessarily reflect the actual AWP charged by the wholesale. AWP is reported by the manufacturer and is calculated based on a markup specified by the manufacturer.  The AWP used is not an independent valuation and Thomson Reuters does not perform any independent analysis to determine or calculate the actual AWP paid by providers to wholesalers. Because of this lack of independence, this otherwise observable market data is consider a level 3 input valuation according to the fair market value standards of accounting. Significant difference could exist in the values of AWP provided by the Red Book and other sources, but the organization uses the Red Book to develop its unobservable inputs without undertaking all possible efforts to obtain information about market participation as it believes it provides the most consistent fair value measurements. The organization also believes any differences in valuations are consistent with the many classes of trade within the health care environment and its market participants.

The same comment appears in note 1 of the audited financial statements, which you can find on page 61 of the filing with the AG.

Note 11 of the audited financial statements (opinion date 10/10/13) has the following comment, which you can find on page 65 of the filing:

Subsequent to the issuance of Cancer Fund of America, Inc. and Affiliate’s December 31, 2012 consolidated financial statements, management and the Board of Directors made the decision to revalue the Organization’s gifts in kind to what they estimate more accurately reflects fair value in accordance with generally accepted accounting principles and to report such values consistent with prior years. Gifts in-kind donated were originally reported as $6,764,392 in contributions and gifts in kind distributed were originally reported as $7,670,027 in expense. After revaluing the donations using Average Wholesale Price as used in prior years and explained in Note 1, gifts in-kind as restated are $22,638,615 and gifts in-kind distributed as restated are $22,544,250. The effect of this restatement to net assets and change in net assets is zero.

CCFA’s amended 990 for 2012 (signed 9/26/13) has the following comment on Schedule O, which you can find on page 39 of the filing with the AG, which will be transcribed in sentence case:

Return is being amended to reflect a change in the valuation of gifts in kind from WAC to AWP. This change was made by management and the board subsequent to the completion of the original 990.  The change was made to more accurately reflect these values in accordance with generally accepted accounting principles and to be consistent with methods used in prior years.

Note 1 of the restated financial statements for CCFA’s 2012 year (opinion date 9/16/13) contains the following comment, which you can find on page 51 of the filing:

The Organization uses Thomson Reuters Red Book to value its medications donated and distributed using Average Wholesale Price (AWP). In most cases, the AWP used is the manufacturer’s suggested AWP and does not necessarily reflect the actual AWP charged by the wholesaler. AWP is reported by the manufacturer and is calculated based on a markup specified by the manufacturer. The AWP used is not an independent valuation and Thomson Reuters does not perform any independent analysis to determine or calculate the actual AWP paid by providers to wholesalers. Because of this lack of independence, this otherwise observable market data is considered a Level 3 input valuation. Significant differences could exist in the values of AWP provided by the Red Book and other sources, but the Organization uses the Red Book to develop its unobservable inputs without undertaking all possible efforts to obtain information about market participation as it believes it provides the most consistent fair value measurements. The Organization also believes any differences in valuations are consistent with the many classes of trade within the health care environment and its market participants.

That appears to be essentially the same wording as in the CFA financials.

Note 8 to the CCFA financials contains the following comment, which you can find on page 55 of the filing:

Subsequent to the issuance of Children’s Cancer Fund of America’s December 31, 2012 financial statements, management and the Board of Directors made the decision to revalue the Organizations gifts in kind to more accurately reflect fair value in accordance with generally accepted accounting principles and to report such values consistent with prior years. Donated Supplies and Commodities were originally reported as $1,945,305 in contributions and Supplies and Commodities Distributed were originally reported as $1,933,806 in expense. After revaluing the donations using Average Wholesale Price as used in prior years, Donated Supplies and Commodities as restated are $9,020,878 and Supplies and Commodities Distributed as restated are $9,009,379. The effect of this restatement to net assets and change in net assets is zero.

Disclaimers about AWP in the Red Book

It is my understanding the Red Book says (or used to say) that AWP can be one of several things. It can be the AWP reported by manufacturers. Or it can be a markup over WAC or Direct Price (DP) when that markup is provided by the manufacturer. Or it can be a standard 20% markup over WAC when the manufacturer doesn’t provide either AWP or their standard markup.

I understand that the Red Book contains several disclaimers:  the listed AWPs don’t necessarily represent actual prices paid; the book’s publisher does not verify any AWPs actually paid; and the publisher does not verify any actual WAC or DP prices.

If I understand that correctly, it means the AWP prices are either self-reported by manufacturers or calculated by the book’s publisher or represent an assumption by the publisher.

That makes the disclaimers in front of the IDPIG mild by comparison. (If you are still reading this meandering post, you probably understand that deep inside-baseball comment.)

Am I missing something? Anyone care to enlighten me?

Relationship between AWP and WAC

As I understand, the proportionate relationship between AWP and WAC is that WAC is about 20% less than AWP. I’m not sure if the 20% differential is based on AWP or WAC. In other words, is the relationship 100%:80% or is it 120%:100%. The reason is the difference is in those two ratios, WAC is 20% or 16.7% lower. Calculating from the opposite direction, WAC is either 80% or 83.3% of AWP.

Let’s look at the proportions visible in the original and amended returns.

Here is the donated medicine from Schedule M:

  •      CFA           CFA
  • $  3.4M        $1.8M  –  original filing, which represents WAC
  • $19.3M        $8.9M  –  amended return, which represents AWP
  •      18%           20%  –  ratio of WAC to AWP

I would have otherwise expected that ratio to be about 80%.

The reported numbers suggest WAC (weighted average given the mix of product) is currently around 20% of AWP.

Presumably those relationships would apply to 2011 if one wanted to roughly estimate how much the 2011 financials would change if the meds were valued at WAC instead of AWP.

What am I missing? Am I on the right track? 

Does the above relationship reflect a new valuation methodology reported in the Red Book?

Can someone enlighten me?

Further discussion

This post is already too long at over 1,900 words. Really should be split into 3 or 4 separate posts. Time for me to stop and hit the publish button.

Topic for a future post is pondering the disclosed comments in the notes for the reason AWP is used.

To start the discussion, would any CPAs like to comment on how those explanations compare with GAAP?

Question for debate

Here’s a question for debate amongst all interested participants:  After looking at the comments in the audited financial statements, the 990s, and the disclaimers from the publishers, would a reasonable reader of the reports start to wonder what correlation AWP has to exit price?

What do you think?

Your comments please. I welcome all comments, assuming they are written with a minimal level of professionalism. Just so we all know how this is going to work, the cutoff for “minimal” will be determined unilaterally by your humble correspondent. I’ve not yet edited or deleted any comments, other than about 4 gazillion obvious servings of spam.

I especially welcome any comment from the two organizations discussed above. As mentioned earlier, I reached out to them on 2/5.  Post will be updated for any comments received from them.

Is anyone aware of other public comments from a charity providing the reason for using AWP?

What do you think of all this? 

Previous posts in this series:

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