Another post a guest wrote for nonprofitupdate.info. Here’s the link: http://nonprofitupdate.info/2013/07/29/giks-more-difficult-for-small-npos-and-why-accurate-valuations-are-so-tough-to-come-by/
Valuing gifts-in-kind is not an easy task. Nor is it quick.
There are not-for-profit organizations that appear to be aggressive with GIKs valuations — a quick internet search will reveal that truth. Not convinced? Ask the IRS for their opinion. Then there are others that take whatever value they can find because they lack the capability — they don’t have the know-how.
This post was written with smaller organizations in mind as they usually do not have the expertise, capacity, and staffing to the extent of their larger brethren.
To record GIKs, it seems there are three choices for management (and, by extension, the auditors) on reporting values:
Accept the donor’s stated value,
Don’t record a thing since it appears to be an overstatement, or
Do your homework and come up with a new amount
Hmmm…Choices. Looks like we need to create some methodologies to make a decision!
The first option: I have seen some donor-provided valuations for certain donated goods that seem unusually high, perhaps absurd. Have you?
For the second item, it may be ok to not record, but what if the amounts are actually substantial? I can think of a few risks here.
The third point is the most difficult as management and the auditors must have the time, energy, desire, and knowledge to advocate an accurate measurement. Countless hours could be spent here.
You have to take into consideration fair value measurements, the exit price, where the goods are ordered/picked up, where they will be shipped to (different country, free/costly shipping), expiration dates of products, how much it would cost to acquire those goods in whatever city/state/province/country they will be used in, etc. Pretty simple stuff, huh?
Moreover, unless the organization receives only one or two different products or those are the only substantial GIKs, pricing will have to be examined for many items. This chews up more time.
Then, after careful research has been done, you will have a range of estimates to choose from. You have to pick one.
Do you pick the highest, the lowest, the average, the most common occurrence, the 85th percentile? When you pick one, why did you pick it? What’s your justification?
(Sideline thought: Now, I can imagine management and auditors getting a little squeamish, can’t you? After all, we love being able to pin down numbers because it makes us more comfortable. Something that is grey, or vague, or ambiguous, or questionable worries us, keeps us up at night, and makes us wonder.)
Time for action! A decision must be made, so, which one do you pick?
Let’s listen in as the VP Finance/CFO/controller/head bookkeeper/HR manager (that’s usually one person, not five, by the way) thinks about what to do:
“I like the donor stated amount…but, it does seem a little high. What’s the likelihood of someone questioning us?
“Do we have time to review the facts and figures? If I do that, what other projects will be neglected? I’ve got so many deadlines this week. Gotta’ get back to the attorney this afternoon for the next step since we decided yesterday it’s time to fire that guy.
“Let’s see what I could do with those three options. What will happen?
“Purely by the amount of work, I want to take the donor’s number. It’s the quickest and easiest. But…then we need to consider the dangers because the donor is biased to overstate, so much media attention has been calling attention to overstatement, and the media, rating agencies, and attorney generals are all watching.
“So maybe zero is the safe bet. But if the amount is large, then it truly understates revenues. And program expenses. That is also incorrect. And that bothers me somehow.
“OK, fine. The donor number flunks the smell test and the dollars are too big to ignore.
“Looks like a mountain of work. I’ll pull together my own figures and estimate the total.
“Wait! Do we really want to get into all that work for these few GIKs, after all?
“Maybe I should stick with the donor’s number or write it all off, after all.
“But still there’s going to be more later this year and next.
“There’s so many factors, like supply/demand, expiration dates, shipping costs, geography of where the goods came from, and where they will be used that have such a big impact on prices of GIKs from one year to the next. How can I stay on top of all those valuations? How can I get consistently reasonable and accurate figures from a process so complex and difficult?
“And how do I explain it to the auditors?
“Maybe I can just get close enough.
“Maybe we should only accept cars, boats, and RVs? Maybe small things like old computers that don’t have much of a value. Forget the rest of it. That’s simple and easy, right?
Valuation is even more difficult for small organizations.
Originally published at www.jeffreybeaumont.com.