CharityWatch has a new ally in the battle against the inconsistent and potentially misleading nature of “gifts-in-kind” (GIK) reporting by charities. The State of California is legislating a bill aimed at promoting transparency in the reporting and fair valuation of GIK, or non-cash donations, such as pharmaceuticals, medical supplies, food and clothing.
CharityWatch has been a longtime critic of some of the valuation and financial reporting practices charities use when they receive and distribute GIK. Accounting rules present very general guidance on how charities are required to value GIK. This can result in different charities assigning widely different values to the same types of GIK. The dollar value a charity assigns to its GIK transactions gets mixed together with its cash contributions and expenses on a charity’s financial reports. This mixing of cash and non-cash transactions often makes a charity appear to be larger and more efficient in its program spending than it actually is, in addition to allowing excessive fundraising costs to be concealed. CharityWatch has reported on instances of inflated program percentages involving GIK being touted by charities that include Aid for Starving Children (ASC), Food For The Poor and Wounded Warrior Project.
There have also been numerous cases of charities significantly inflating the value of GIK relative to fair market value. Overvaluation of pharmaceuticals, in particular, can occur under current, loose accounting rules since drugs in the developing world can be purchased at a fraction of the cost of their price in the United States. For example, a March 2018 complaint filed by the California Attorney General accused The National Cancer Coalition (NCC) of “vastly” overvaluing in-kind pharmaceuticals that were distributed internationally. A sample of the alleged overvaluations by NCC were as high as over six times the true fair market value of the pharmaceuticals at applicable international prices, according to the complaint. In an August 2011 report, CharityWatch criticized Feed the Children (FTC) for its outrageous valuation of in-kind deworming pills in its fiscal 2009 financial reporting. The inflated valuation was at least 24.9 times the price of the in-kind deworming pills FTC reported in fiscal 2010.
The inconsistencies in and possible overvaluation of reported GIK by charities makes it difficult to compare the financial efficiency of one charity to the next. Furthermore, many charities do not receive any GIK, and therefore, their reported contributions and expenses consist of only cash transactions. As a result, an unlevel playing field can be created when charities with little to no GIK transactions are evaluated against charities that rely heavily on GIK.
Given the above, CharityWatch supports California’s effort “to ensure transparency in the reporting and valuation of non-cash donations to protect donors, and to promote a level playing field among charities operating in California,” as the attorney general described in a May 30th, 2019 press release announcing the filing of a lawsuit against ASC for misleading solicitations and inflated GIK reporting. California Assembly Bill 1181, which was introduced by State Assembly Member Monique Limón (D-Santa Barbara) in February 2019, “would require charities operating in California to consider donor restrictions in valuing their non-cash donations,” according to the May 2019 press release. More specifically, if a charity receives GIK that are restricted by the donor from being used in the United States, the bill requires the charity to value the GIK using the fair value of the end recipient market. If necessary, a reasonable estimate of the end recipient market value may be used, or if the end recipient market is unknown upon initial receipt of the contribution, the bill requires the GIK to be valued using only those markets in which the contribution is reasonably likely to be distributed or used.
AB 1181 passed the California State Assembly on May 13th, 2019 by a vote of 69 to 1 and has advanced to the Senate. The bill was last amended on June 28th, 2019 and on July 10th, was re-referred to the Committee on Appropriations, with a hearing date scheduled for August 12th. Even though the bill overwhelmingly passed the State Assembly, it has its fair share of critics, including the California Society of CPAs and the Financial Accounting Foundation (FAF). FAF is responsible for the oversight, administration, financing and appointment of the Financial Accounting Standards Board (FASB) and Governmental Accounting Standards Board (GASB), which collectively establish and improve U.S. Generally Accepted Accounting Principles (GAAP). Many charities rated by CharityWatch, including Top-Rated Charities such as CARE USA, Catholic Relief Services, Direct Relief, Mercy Corps, Samaritan’s Purse, and World Vision, oppose the bill.
The concerns about AB 1181 generally relate to how it would contradict GAAP and undermine uniform national accounting and valuation standards, in addition to imposing new burdens on nonprofits. For example, in an April 2019 letter to Assembly Member Limón, the President & CEO of FAF, Teresa S. Polley, wrote:
[P]assage of AB 1181 would create separate, unique ‘California standards’ for nonprofits … By itself, that fosters confusion and imposes extra costs on everyone throughout the financial reporting ecosystem, including nonprofit donors who will have to master two sets of financial reports versus the single set now.
Even considering such short term burdens, CharityWatch believes that a universal change in GIK valuation and reporting needs to start somewhere, and California may be an ideal place for that to happen. With a populous state such as California leading the way, other states could follow, which may ultimately lead to the creation and establishment of new national accounting standards for GIK. “Recognizing the need to address the complex fair value questions raised by the Attorney General’s office in California,” a “Gifts-In-Kind Working Group” has already been created by FASB, according to Polley’s letter. She notes that after the FASB staff completes its research, “the Working Group is expected to serve as a primary resource in connection with any project the FASB might add to its technical agenda concerning GIKs [sic].”
Neither the requirements in AB 1181 nor any potential changes that may occur to GAAP with respect to the valuation of GIK would affect CharityWatch’s ratings since we adjust out the value of GIK received and distributed as part of our analysis of a charity’s financial efficiency. This helps donors to understand how efficiently their cash donations are being raised and spent by charities, and allows donors to better compare charities on an apples to apples basis. CharityWatch, however, is unique in this way. We are the only major watchdog organization that provides donors with charity program percentages and fundraising ratios that exclude the value of GIK. Therefore, we recognize that the current GIK reporting practices by charities can lead to plenty of potentially misleading information being reported by others, including by some charities themselves. The passage of AB 1181 would start to minimize that potential, which should be good news to donors – and to all who want to see a fair and level playing field when it comes to comparing the financial efficiency of charities.