GIK – gift-in-kind valuation

An open letter to the evangelical nonprofit community receiving GIK meds

Dear brothers and sisters in Christ:

The accounting for donated pharmaceuticals has been poor for a number of years. 

The valuations are not supportable by accounting rules either before or after SFAS 157 went into effect. 

Paying a handling fee roughly comparable to available open market price lists sure makes the donations look like purchases.  Fair value does not involve using a valuation in the U.S. for meds that can’t be legally sold here.  A reference book that is known to not reflect actual market prices is not a reasonable basis for determining fair value.  

People outside the evangelical NPO community are starting to notice.

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Jim Ulvog

Three questions for valuing donated medicine plus a bonus question

There is a big issue in the NPO community now about how to value donated pharmaceuticals. To help the discussion along, I have three questions to help charities and their auditors process through what is the appropriate methodology.

I will pose three questions and ponder them for a moment. Each of the questions is really worth a long, extended conversation.

Should the medicine be valued at what was paid in the course of acquiring it or is there a bargain purchase?

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Jim Ulvog

The time left to clean up the valuation of GIK meds is running out

There is a fire burning in the nonprofit community. The fire is the issue of valuing donated pharmaceuticals. Primarily issue is about mebendazole.  Albendazole and antibiotics are involved, but to a much lesser degree. There are many alarm bells ringing. 

The loudest fire alarm went off yesterday.

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Jim Ulvog

Other media sources looking at Breast Cancer Society

I did a quick search on the ‘net before starting to research the 990s of Breast Cancer Society of Mesa, Arizona. Found out that a few researchers have been looking at their finances in addition to the Chronicle of Philanthropy.

If you are following the GIK meds issue, you might be interested in these reports:

First, ABC15 in Phoenix, Arizona has a print article in May 2012 – Questions about Valley Breast cancer charity, where donation money is really used. They also have an on-air segment that doesn’t go into as much detail. There is an on-camera interview with the CEO in the video report.

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Jim Ulvog

Philanthropy 400 list is published

The Chronicle of Philanthropy has published their 2012 edition of Philanthropy 400, a list of the largest NPOs in terms of the amounts raised from private sources. The list, here, is behind a paywall. It was also in the e-mail version sent out over the weekend and will be in the paper copy.

An accompanying article discusses the GIK at a few more charities:  Gifts of Medicine and Food Fuel Growth But Draw Regulatory Scrutiny

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Jim Ulvog

Valuation of deworming meds illustrates the front-page-of-the-newspaper test – part 2

Previous post discussed how we are seeing the front-page-of-the-newspaper test for decision-making play out in the deworming med issue.

Reputational risk

I perceive there is a danger of damaging the reputations of many organizations from the way donated meds are valued. 

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Jim Ulvog

Valuation of deworming meds illustrates the front-page-of-the-newspaper test – part 1

“How will this look on the front page of the newspaper?”

That is a helpful way to evaluate decisions.

When you are trying to figure out what’s the right thing to do, ponder for a moment how your decision will look if you read about it on the front page of your local newspaper.

If you are going to look really bad, then maybe, just maybe, you might be making a bad decision.  I mentioned this in a post some time ago.

We are seeing this illustrated live with the issue of valuing deworming medicines. Mebendazole is in the news!

Newspaper test in action

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Jim Ulvog

Another newspaper focuses on valuation of deworming medicine – provides some great quotes

Bill Zlatos, from the Pittsburgh Tribune-Review has a superb article out:  Charities’ methods of valuing donations called into question.

If you are following this issue, you should go read the article.

Mr. Zlatos has been talking to a lot of people and has a lot of great comments. Here are some of the best news-making quotes. I’ll have more to say on these ideas over the next few days.

Reputational risk

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Jim Ulvog

What is a bargain purchase? Part 2

Previous post described how the accounting literature defines a bargain purchase.

This post will give an example.

Let’s say a friend of your organization is a real estate investor who has a small building available and would like to provide it to the organization. The building is not in the nice, high-rent downtown area but is still in a very average area of one of the outlying suburbs. The benefactor can’t afford to make this space available for free, because there are property taxes and other costs involved. So the benefactor offers the space to the organization at a price of $10,000 per year.

The property would nicely meet the needs of the organization, so you snap up the offer and move in. What are the accounting entries?

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Jim Ulvog

What is a bargain purchase? Part 1

I think it’s about time to talk about bargain purchases and review what the accounting literature has to say.

“That’ll be exciting,” I hear you say.

I know, I know.  This is cool stuff.

Bottom line

The core issue is fair value: what is the fair value of the goods or services received? The second point is the contribution component is the difference between fair value and the amount paid for the goods or services.

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Jim Ulvog

Forbes article on Islamic Relief adopting exit pricing for donated meds

An article in Forbes by William Barrett reports that Islamic Relief USA Says Drug Donations Fell 91%.

Since I’m an accountant, I’ll comment on a couple of the things I observed in the financial statements. If you are interested in this issue, you really should check out the full article.

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Jim Ulvog

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:

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Jim Ulvog

Check out this set of financial statements to see a live example of the pharmaceutical GIK issues – part 5

This series of posts looks at the issues surrounding valuation of GIK medication in the nonprofit community that have been getting attention lately by seeing how those issues present themselves in one set of financial statements. 

See the first post in this series for tips on downloading a copy of the full 990 and audited financial statements.

I just checked their website today and found it is up and operating. You can find their last 3 audited financial statements here and the last three 990s here.

The 2011 financial statements have the cover letter from Dr. Harder indicating the ministry will use cost for 2012.

Kudos to the organization for making the reports for the last three years easily available on their website. 

As I’ve mentioned before, the goal is to see a live set of financials that lets us see the issues, not to pick on any particular NPO.

Supplemental schedule

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Jim Ulvog

Check out this set of financial statements to see a live example of the pharmaceutical GIK issues – part 4

This series of posts looks at the issues surrounding valuation of GIK medication in the nonprofit community that have been getting attention lately.  We are looking at how those issues can be seen in one specific set of financial statements. 

See the first post in this series for ideas on downloading a copy of the full 990 and audited financial statements.

This post continues a discussion of note 3 regarding valuation of purchased meds. See previous post for text of the note.

Note 3 – continued discussion

As mentioned earlier, Note 1 says the “bulk” of medicines were purchased from two  overseas suppliers.

Note 3 indicates the

..majority of the value of the Ministry’s pharmaceutical products are not legally permissible to be sold in the United States..

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Jim Ulvog

Check out this set of financial statements to see a live example of the pharmaceutical GIK issues – part 3

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. (more…)

Jim Ulvog