Not-for-profit Advisory Committee discusses valuation of GIK meds

This morning I listened to a webcast of the Not-for-profit Advisory Committee (NAC) as they discussed the issue of valuation of donated pharmaceuticals.  The NAC provides feedback to FASB about issues affecting the NPO community.

You can find an outline of the agenda, which includes an attachment for issues regarding donated meds here.  Attached to the agenda are several articles from William Bennett Barrett and Caroline Preston. (Oops! Sorry Mr. Barrett.)

You can find an on-line archived recording of the meeting here.  It is the March 1, 2012 meeting that started at 10 AM.

I have just a few thoughts after having listened to the meeting.


So what is the fair value of deworming medicine? Part 1

What’s the fair value?  That is the central question behind the whole issue of booking albendazole and mebendazole as GIK contribution revenue.

I will have several posts on this issue, including one or two on the accounting rules.  I’ll start with a very casual discussion, work towards more objective and verifiable valuation, and then discuss the accounting.

In recent weeks I’ve read two particular articles on health issues that describe the cost of a deworming regimen as an aside.   I doubt either of the authors or their editors knew how intense the valuation issue has become in the last 60 days.

So, let’s give the magazines and authors some slack.  Don’t pick on them too hard.  At the same time, their comments provide some background.

Here’s two weak data points for the cost of deworming meds:


Time to talk about GIK issues again

In the midst of a discussion of GIK valuation issues in December and January that I thought was taking place within the nonprofit community, news surfaced that the IRS had finished an audit which identified major concerns about the same issue.  I discussed that here and here.

I’ve held off on more discussion to see how many more shoes were going to drop.  Haven’t been too many – the Better Business Bureau and Charity Navigator are paying attention.


Charity Navigator’s raises idea to revise prior year reports for changes in GIK valuation – A brief discussion of the rules for restating financial statements

Caroline Preston, from The Chronicle of Philanthropy, reports in Watchdogs Zero In on Charity Drug Valuations, that Charity Navigator is floating the idea of asking some charities to restate the last four years of financial statements.

Many NPOs that applied SFAS #157 saw their revenue drop dramatically because of using lower valuation for medicine, especially deworming meds, most specifically mebendazole. (I know, I know, it’s actually ASC 820-10, but my brain still thinks in terms of SFAS numbers when it comes to pre-ASC rules.)

The rating methodology used by Charity Navigator, according to Ms. Preston’s article, penalizes NPOs whose income drops. That means a lot of relief & development NPOs will take a big hit on their ratings.

I don’t have any information beyond the article, so I don’t know what reaction they are getting.

It’s just my guess, but I think they will not get a very good response to their idea.  I don’t think NPOs will be at all amused to take this approach.


Better Business Bureau is looking at how charities value deworming meds

William P. Barrett just reported that the Better Business Bureau Wise Giving Alliance has asked several dozen large charities how they value deworming meds.

In his article, BBB Asks Charities To Explain Deworming Med Valuations, he says the BBB sent a letter in early January asking for a variety of information, including dollar volume of the meds distributed, number of pills, and the accounting rationale for the valuation that was used.


Valuation of deworming gets more complicated – the IRS gets involved

It’s not just two big-time reporters and this teeny-tiny blog looking at the mebendazole issue anymore. 

It is now obvious that the IRS has been paying attention for quite some time.  On Monday their involvement hit the papers.

Two articles appeared:

William P. Barrett, from Forbes magazine, posted  IRS Audit: Big Charity Filed Misleading Tax Return

Caroline Preston, of The Chronicle of Philanthropy posted IRS Levies Fine on Food for the Hungry Over Drug Valuations.

If you have any interest in the issue of valuing GIK meds, you will want to read both articles.


Graphic that shows the impact of change in GIK valuations

The Chronicle of Philanthropy has a superb graphic that shows the amount of donated mebendazole deworming medicine recorded as contributions in the financial statements of three NPOs before and after applying the change in valuation required by SFAS #157:

Graphic: How Three Nonprofits Value Medications

Impact on GIK values form change in accounting rules – Part 4 – A few final observations

Previously I’ve discussed the impact of new accounting rules on valuing of deworming medicine.  Have been looking at Feed the Children financial statements to quantify the impact.

I am not picking on Feed the Children.

I’m using their 2010 financial statements because they have the best disclosures in their financial statements that I’ve seen for the impact, plus there is public information on what per-pill valuation amounts they have been using.  It is to their credit that they have this amount of background available in their financial statements.

It is my guess, just a guess, that the same underlying valuation issues and impact on supporting services ratio that I have described previously here and here, would also be present in the financial information for other organizations that have large volumes of deworming medicine.  If I can find good info, I’ll do some calculations on other sets of financials.

I have a few more observations and then one more set of calculations.


Impact on GIK values from change in accounting rules – part 3 – change in Feed the Children financials

Previous post quoted disclosures made by Feed the Children in their 2010 audited financial statements. Essence of that note is that deworming medicine valued in the 2009 financial statements at $544M would have been valued at $21M if the 2009 financial statements had used the pricing information that was in use for 2010.

This post will look at the 2008, 2009, and 2010 financial statements through the lens of the two different valuation rates.


Impact on GIK values from change in accounting rules – part 2

Previous post here discussed the impact of changes in valuation of GIK caused by new accounting.  I already discussed World Vision’s financials.  Next I will look at Feed the Children’s financials.

The beginning point of my discussion was a Forbes article, by William P. Barrett: Donated Pills Make Some Charities Look Too Good on Paper.  This series of posts started here.  I hope my observations from a CPA’s perspective will contribute to this growing discussion.

After looking at World Vision’s financials, I looked at the financial statements of several other NPOs trying to figure out the impact of FAS 157 and especially the change in valuation of deworming medicine.

Mr. Barrett has accumulated some good numbers.  I looked at publicly available audited financial statements and 990s available from GuideStar.  I could not get a clear understanding by combining information from his published report with public data to let me get a clear understanding.  Just not quite enough data there to work with.

Then I looked at the Feed the Children website. Kudos to them for making their 2010 financial statements available online, which you can find here.

Wow.  Found some superb information in the footnotes.  Check out this comment in note 2 on page 11, which I will quote at length:


Impact of changing rules for determining fair value (SFAS 157) on GIK of NPOs

Wow. When I started blogging about GIK valuations, I knew there was a major issue, but didn’t quite grasp how big it really is.

The beginning point of my discussion was a Forbes article, by William P. Barrett: Donated Pills Make Some Charities Look Too Good on Paper. In this post I will look at the impact of a change in accounting rules on the valuation of GIKs.

Additional background

Several articles by Caroline Preston in The Chronicle of Philanthropy outline the issues.  One deworming medicine, Mebendazole, seems to be the biggest issue. In her article Aid Charities’ Accounting Practices Draw Criticism, she quantifies the significance of that one med: (more…)

What impact does a change in GIK valuation have on financial statements? (Part 4 of a series)

Before looking at some actual financial statements that have been affected by the changes in valuation of GIK, I thought it would help to look at a simple picture.

This is a continuing series of posts looking at deworming meds, especially Mebendazole, which started here.

A major component of this discussion is new accounting rules that change the definition of how to value GIKs. Those changes are discussed here.

I am quickly learning that this whole GIK valuation thing is a bigger issue than I realized and already has some interest.  I hope I will be able to contribute to the discussion from the accounting side.

To illustrate the change in valuation rules, I have made up two sample financial statements. The numbers are small and simple so we can see the overall picture.  I set the internal relationships so they are representative of an actual NPO.