AB 1181 was approved by California Assembly on a 56 to 0 vote. Their vote concurs with changes by the Senate yesterday, which means the bill has been passed by the legislature.
Final vote count: 31 in favor, 8 opposed, 1 no vote recorded. Holding the vote on call drew an additional 3 ayes, 1 nay, and 1 NVR.
First report 2:30 p.m. on 9/11: AB 1181 passed the California Senate on a 28 to 7 vote with the bill moved on call, which means the 5 members who did not vote will be able to vote. Even if all vote no, the bill will still pass.
Update 4 p.m. on 9/11:
Senator John Moorlach, who is a California CPA in good standing, opposed the bill. He wished the bill had gone to two additional committees since it would be in their area of responsibility.
He suggested the bill should be postponed until FASB addresses the issue. He mentioned the Nonprofit Working Group formed by FASB and their efforts to address the issue.
An amendment to AB 1181 establishes an effective date of January 1, 2021 for the revised reporting requirement to go into effect.
My understanding (for whatever that may be worth!) is that bills passed by the California legislature go into effect on January 1 of the following year unless there is an urgency clause, in which case the bill goes into effect immediately.
This means the new reporting requirement to value donated medicine restricted by donors for distribution overseas at the overseas values would be effective on January 1, 2020. This further means (if my thought process is correct) that reports filed with the Registry of Charitable Trusts in 2020 would have to be compliant. This finally means that financial statements for years ending 12/31/19 would have to reflect the new valuations.
That is a really, reaaaaaally short time to implement.
A revision to AB 1181 posted on September 6, 2019 sets the effective date at January 1, 2021.
It does two other things.
First, retains the AICPA as an official source of GAAP. Um, this might be a surprise to those of us who have read the ASC, but that is topic for another day. Might also be a surprise to FASB and FAF.
That definition of the AICPA as an official source of GAAP expires on January 1, 2021.
Second, the AG is authorized to “adopt rules and regulations” needed to carry out the new valuation requirement.
Second reading
Now that the bill has been amended again, it has to go back to the Senate floor for second read. That is scheduled for Monday 9/9/19. Having watched the Senate action a bit over the last two weeks, it will take a few moments at the start of the session to do a second read of every bill in that status. (That’s a few moments as in “the bills listed for second read are deemed read.”)
After that official step the bill may be called up for third reading and voted on during that reading.
At least that is my newly found understanding. If I’m missing something, let me know.
Amendments made on 9/6/19
I will quote the changes made on September 6, 2019 so you may see the change for yourself and assess whether my description is accurate.
A Preliminary Decision has been written by the administrative law judge (ALJ) hearing the appeal over the California Attorney General’s cease and desist order (C&DO) against MAP International (MAP), Food for the Poor (FFP), and Catholic Medical Mission Board (CMMB).
I have obtained and read a copy of the Preliminary Decision for each of the charities.
Top line summary: The ALJ concluded the charities did not violate GAAP in their accounting but did find their charitable solicitations were misleading and deceptive.
This will be a long read at over 3,400 words so you might want to get a fresh cup of coffee.
Two other notes. References to “Complainant” mean the California Attorney General. This post will focus on the content of the decisions with lots of quotations and minimal interpretation. Several longer posts are needed to interpret, explain, and describe the implication of this case. I may add more discussion later. As I see others discuss this case, I’ll try to link to those discussions.
After describing the decisions, responses from each charity are listed.
Next steps?
I’m a bit fuzzy on the where this goes from here. It is seems obvious to me that the ruling is not yet effective. I will string together a bunch of guesses on the next steps. Anyone bold enough to correct my wildly aimed guesses is welcome to do so.
So here go my guesses – – I think the decision will not go into effect until it is accepted or modified by the Attorney General. So my guess is the AG will issue a letter declaring the Preliminary Decision in effect or reissue a modified C&DO or take some other specified action to make the decision effective. I’ll guess some sort of additional communication is also necessary to address a variety of technical issues not covered in the decision, such as address to send the check, contact point for future communications, consequences of violating the C&DO, and notice of appeal options.
The Preliminary Decisions say the charities must pay the penalty 30 days after the effective date. There is a separate requirement to provide a copy of the decision to all officers, directors, and employees within 15 days of the effective date.
Since one charity (MAP) indicates in their response to me that they will appeal, I’ll guess their appeal will be filed soon after the effective date, well before that 15 day time frame expires. I’ll also make an even bigger guess that given the strength of the proposed sanction on how to refer to program ratios, the other charities will also file an appeal.
Background on timing
In December 2018, the ALJ gave verbal explanation that he would rule in favor of the charities on the issue of whether the their financial statements complied with GAAP.
In January and February 2019 additional written briefs were submitted by the Attorney General (AG) and charities on whether the written appeals sent to citizens of the state were accurate or misleading.
On April 24, 2019 additional oral arguments were heard.
Then on May 24, 2019 the administrative law judge (ALJ) issued his preliminary ruling for each of the cease and desist orders.
Food for the Poor
Although AB 1181 (which would change accounting for donated medicine which donors restrict from use in the U.S.) was scheduled for a vote today, the Senate choose not to take up the bill. They addressed maybe around half or more of the bills on the schedule.
Next session was announced as Friday, August 30. Perhaps they will address 1181 then.
Another carve out from GAAP
AB 412 was passed by the Assembly on 76-0 vote and passed today by the Senate overwhelmingly. Didn’t jot down the vote, but think there were probably zero votes in opposition.
Escrow companies in the state are required to have liquid assets greater than current liabilities by $25,000. Makes sense.
Escrow companies are required to submit audited financial statements that comply with GAAP. Good idea.
However…
Wow. Things are happening fast.
AB 1181 is scheduled as item 201 of 250 for the California Senate’s floor session at 2 p.m. this upcoming Monday, 8/26/19.
Status page for the bill shows the schedule at the bottom of this page. The Senate’s calendar can be seen here. Select the dates you wish. The agenda for 8/26/19 is here.
World Vision is now neutral on AB 1181.
Three of the five analyses prepared for AB 1181 contain a list of the organizations supporting and opposing the legislation. A comparison of the lists shows key changes.
Two items that jump out at me: first, growth and change in composition of charities opposed; second, the number of accounting groups opposed.
Charities in opposition
Forty-eight charities opposed the bill according to the 6/28/19 analysis (posted 7/8/19) prepared for the Senate Judiciary Committee.
On the 8/19/19 analysis (posted 8/21/19) prepared for the Senate floor vote, the count of opposed charities was again 48.
New to the list is Habitat for Humanity.
Dropped from the list in opposition is World Vision.
Of particular note is that a representative of World Vision had previously testified in opposition to the bill.
Analysis of AB 1181, which will be used for the vote on the floor of the California Senate, was posted yesterday, August 21. This follows the bill being read the second time on August 20 and moving out of the Appropriations Committee on August 19. You can download the analysis if you are so interested.
I don’t understand the timing of when votes are called. What I have learned is the next step after the second reading and printing the floor analysis is the vote. Stay tuned.
Oh, as an aside on whether the Assembly and Senate might resolve differences in the bills approved by the different chambers, I had an insight yesterday. Back on 8/12/19, the Senate Appropriations took action. It was reported as:
From committee chair, with author’s amendments: Amend, and re-refer to committee. Read second time, amended, and re-referred to Com. on APPR.
The ‘aha’ moment for me was realizing the Senate committee processed changes by the author, who is an Assembly member. Methinks that means the bill has a pretty good chance of sailing through the Assembly, assuming the Senate approves it.
Some comments on the floor analysis…
On August 20 Assembly Bill 1181, which would modify reporting requirements by those charities receiving specific donated medicine and supplies, was ‘read’ on the Senate floor a second time.
Second reading took place one day after bill was moved out of the Senate Appropriations committee.
As I explained yesterday, the next step is the third reading which will involve a vote of the full Senate.
On October August 21, 2019, FASB held an open meeting to address the GIK issue.
You can watch the meeting video for yourself:
[youtube=https://youtu.be/cTH1rXE6we8]
Discussion of GIK starts about the 44 minute point.
The direction the board is taking is to consider enhanced disclosures in the notes and more detailed presentation on the statement of activity. The board decided to not address measurement, i.e. valuation methodology.
The draft bill to essentially change one phrase of an AICPA audit guide on valuation of donated pharmaceuticals is on its way to the floor of the Senate without a hearing in the Appropriations committee.
On August 19, 2019, the following comment was posted on Assembly Bill 1181:
From committee: Be ordered to second reading pursuant to Senate Rule 28.8
That raises two questions. What is Senate Rule 28.8? What is the next step?
FASB officially issued an exposure draft on August 15, 2019 which proposes a one year delay for implementing three new accounting standards. Two of these proposed delays will affect many charities.
Effective date for SEC filers would not be changed.
I won’t discuss any changes for public business entities (PBE). Readers of my blog who fall into that category would be non-profits that are considered to be conduit bond obligors and EBPs that file their financials with the SEC.
You can find the exposure draft here.
The proposed delays for not-for-profit entities and private companies:
Leases
Subtle changes were made to AB 1181 on August 12, 2019 by Assembly member Limón (the bill’s author) and the chair of the Senate Judiciary Committee. The bill was re-referred to the Appropriations Committee, which is still scheduled to hold hearings on August 19.
Two changes were made yesterday.
The first reports of a new college admissions scandal indicated the scheme was in play in Illinois. A small number of minutes research on the ol’ net shows the scandal is now open in Missouri.
With a sinking feeling, I am wondering where else this will show itself.
Scheme reportedly exists in Missouri
Kansas City Star – 8/5/19 – Did rich Missouri families give up custody of kids to get college aid? How’s that legal? Cases have been found of families in Missouri transferring guardianship of children in order to get financial aid.
Information posted yesterday on the California Legislature’s web site shows the Appropriations Committee will hold hearings on AB 1181 next month, on August 19, 2019.