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Crackdown May Stop Charities From Inflating Cost of Donations

Aug. 21, 2019, 10:35 PM

U.S. standard setters may tighten accounting rules that state regulators say offer too much leeway for charities to dupe donors.

The Financial Accounting Standards Board voted unanimously Aug. 21 to examine how charities account for noncash donations and come up with guidance so they don’t inflate their worth.

Ideas include requiring not-for-profit groups to offer more details about the valuation methods they use to measure noncash gifts or having them break down gifts by type—like donations of food versus drugs—or the geographic region where these gifts get used. FASB also could consider making charities break out details about noncash gifts through new line items or subtotals in their financial statements.

The board made no promises about the path it would take. FASB plans to reconvene in October to discuss next steps.

We want that objective to focus on increasing the transparency around non-financial gifts in kind,” FASB Chairman Russell Golden said.

Inflated Values

The issue appeared on FASB’s radar in July 2018, when the National Association of State Charities Officials wrote a letter to the board raising concerns about not-for-profit groups inflating the value of donated drugs that cannot be sold inside the U.S.

Some charities are “publicly reporting the pharmaceutical donations using very high values for drugs sold in the U.S. instead of reporting the actual purchase price,” the regulators wrote.

This leads to inflated revenues on not-for-profit group financial statements, they said, which makes groups’ expense-to-revenue ratios more favorable—and misleading.

The regulators referenced a 2015 Federal Trade Commission complaint against a network of four cancer charities that the regulator said bilked donors out of $187 million and enriched its overpaid executives.

The charities hid their high fundraising and administrative costs in part through a complex accounting scheme involving the shipment of pharmaceuticals and other goods to developing countries, the FTC said.

The charities paid shipping costs and broker’s fees to ship containers of drugs to organizations in countries like Ghana, Guatemala, and Honduras, but they reported the full value of the shipments as if the prescription medicine had been donated to and distributed by them.

These values added up. As a result of the beefed-up revenues, the charities “deceived donors about its overall size, the resources it devoted to its programs, and how efficiently it used donors’ contributions,” FTC said.

“This had the effect of making defendants appear to be larger and more efficient with donors’ dollars than they actually were, deceiving the donating public,” the FTC said.

Accounting Guidance

Not-for-profit groups are required to recognize gifts in kind at fair value—the price to buy or sell an asset or transfer a liability in an orderly transaction.

U.S. accounting guidelines require businesses and organizations to use the principal market when determining the fair value amount. When there is no principal market, they must use the “most advantageous” market.

Drug makers often donate pharmaceuticals that cannot be sold in the U.S., often because of competitive or market reasons. The guidance on valuing pharmaceuticals with these restrictions can get tricky.

The fair value accounting literature doesn’t specifically address restrictions on geographic distribution and how that could affect determining the principal or most advantageous market, according to FASB background materials.

While most questions involve valuing pharmaceuticals, FASB’s research will examine other types of non-cash gifts, board members said.

“I would focus on the things that are very clear and we could deal with in short order,” FASB Vice Chairman James Kroeker said.

To contact the reporter on this story: Nicola M. White in Washington at nwhite@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Steven Marcy at smarcy@bloombergtax.com