Presentation at CalCPA Accounting and Auditing conference: “California GAAP” – A case study in valuation of donated medicine

October 16, 2019, 11:20 am

Image courtesy of CalCPA.

On October 24 at 3:55 I will be speaking at the California Society of CPAs Accounting and Auditing Conference where industry speakers and experts will provide comprehensive updates on current issues and emerging trends. The conference runs the 24th and 25th.

My topic is valuation of donated medicine in the not-for-profit community. I have the privilege of working with a 75 minute block of time.

If you are able to attend the session you will gain an understanding of the long-term enforcement effort at the federal and state level regarding valuation of donated meds. My concern is that the governor’s veto of AB 1181 is not the end of the enforcement actions considering what has happened over the last 9 years.

Title of the session is “California GAAP” – A case study in valuation of donated medicine.

Overview of the session from the conference schedule:

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How big is the world of donated medicine?

September 25, 2019, 7:09 am

Pharmaceutical products and medicine on shelves. Image courtesy of Adobe Stock.

All this attention on donated medicine got me wondering just how big the sector is.

There is a small number of charities receiving big volumes of medicine donated by the pharmaceutical companies. Those charities then get all those meds distributed to charity clinics and hospitals around the world. That is incredible work which is improving the lives of millions upon millions of poor people around the world.

So, how large is that sector?  Here is a bit of research.

For the charities I’m aware of, plus those that have been in the news over the last eight years or so, plus those on the record as being opposed to AB 1181, I looked up their most recent 990 on their website. For a few of the charities there wasn’t a 990 visible (or at least I couldn’t find it) so I pulled the most recent 990 from the California Registry of Charitable Trusts.

Data tabulated below is:

  • total revenue from 990 Part I line 12,
  • non-cash donations from 990 Part VIII line 1g (referred to as gifts-in-kind or GIK), and
  • disclosed amount of drugs and medical supplies on Schedule M line 20.

Amounts are converted to millions, then rounded.

Last column in the table is the dollar amount of drugs & medical supplies divided by total revenue. A higher percentage shows larger portion of income from donated meds, and thus a higher likelihood AB 1181 will have a bigger impact on the financials.

Only charities with over $20 million of donated meds and supplies are listed; charities below that level are excluded.

Summary of results

Table below includes 17 charities. Another 17 whose volume of donated meds is below $20M each are not listed.

I think there may be another dozen charities with donated meds in this sector. As I come across additional names and look up their 990s, this table will be updated.

For the not-for-profit organizations (NFP) listed, total revenue is about $8.9 billion, total donated items are about $8.1 billion, and donated drugs and supplies are about $7.5 billion.

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No GAAP violation but charitable solicitations are misleading – – Preliminary Decision issued for appeal of California AG’s Cease & Desist Order against MAP International, Food for the Poor, and Catholic Medical Mission Board.

August 30, 2019, 8:13 am

Image courtesy of Adobe Stock.

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

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Proposed delay in effective date for two accounting changes affecting charities.

August 17, 2019, 9:29 am

Image courtesy of Adobe Stock.

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

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Senate Appropriations committee to hold hearing on AB 1181 on August 19.

August 9, 2019, 5:00 am

Sacramento Capitol Building in California. Image courtesy of Adobe Stock.

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.

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FASB working group looking at GIK valuation issue

June 18, 2019, 10:26 am

Committee meeting. Image courtesy of Adobe Stock.

Yesterday I watched a webcast from FASB providing an update on Private Company Council and Not-for-Profit organization accounting issues  By the way, there are a couple of nice accounting options in the PCC world that have been extended to the NFP world. (Yeah, yeah, pray for me since I sort of enjoy those kinds of discussions.)

One of the speakers mentioned FASB has formed a working group to look at the issue of valuation of GIK, especially donated pharmaceuticals.

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Recap of known state and federal interest in medical GIK

December 7, 2018, 9:29 am

Superior court facade in downtown Los Angeles, California. Image courtesy of Adobe Stock.

There are a number of state and federal actions visible for financial reporting by charities. Focus of the efforts currently is valuation of GIK and the impact of those valuations on fund raising appeals. Perhaps a recap of those efforts will provide some helpful context to the charity community.

Update: End of this post describes the change in accounting over the last seven years in terms of how to value meds that legally may not be distributed in the U.S.  Hint: a 180 degree change.

Today is the 9th day of out of 15 days scheduled for hearings on the California AG’s cease and desist order (C&DO) for MAP International (MAP), Food for the Poor (FftP), and Catholic Medical Mission Board (CMMB).

Here is the list of publicly visible Attorneys General who are focusing on financial statements of the large medical GIK charities:

California:

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