In our ongoing series on Gifts-in-kind (GIK), today’s post covers financial topics - what influence overhead calculations have on organizational decisions and what standards of accounting we comply with in valuing donated resources.
The influence of overhead rate calculations on organizational decisions
All donated resources, including GIK, cash contributions, and government grants impact overhead rates. World Vision’s primary reason for acquiring GIK is to meet programmatic needs. Our earlier post about how GIK is a resource aligned within a larger community development program illustrates this. However, as an organization, we must prepare organizational plans to meet all of our obligations and provide balance in our financial portfolio. For this reason when we prepare our annual budget, all resource streams are part of the process, including GIK. Some of the factors that influence the amount of GIK included in the organizational budget are:
•The requests we have received from World Vision’s National Offices, or partner organizations (such as national health and educational ministries, partner community-based agencies),
•The feasibility of obtaining requested goods as in-kind donations from corporations,
•Current organizational priorities and strategies, for example the 7-11 strategy referenced in an earlier post.
World Vision uses a “top-down meets bottom-up” approach to budgeting. This means organizational goals are set based on an overarching strategic plan to improve and expand our programs’ effectiveness. Simultaneously, divisional budgets are created to support the overarching strategic plan. Finally, variances between the two approaches are resolved as we align the information to create a final budget.
Our GIK department managers budget for operational GIK freight and support expenses based on field requests. We use the field requests to create operational plans, which detail the products to be sent to each country each quarter. Then, based on historical values by product type, we forecast the revenue we would recognize for the GIK donations needed to fulfill our shipment plan.
Because our “bottom-up” budgets are based on programmatic needs, the budget is not about how much revenue we should get to impact our overhead rate. Rather the budget presents the amount of expected revenue we will get if we are able to fulfill the budgeted field requests.
While our strategy is to integrate GIK into our programs and use it to compliment the cash and food resources we use, we understand individual donors may want to better understand how we use their cash donations and the impact they have. Each year Larry Probus, World Vision’s CFO, describes this relationship and our commitment to financial stewardship through a video hosted on World Vision’s website. This video helps illuminate the numbers and metrics of our mission. Because resources such as GIK and food commodities impact overhead, we provide information about the narrow view of what cash alone provides as well as the broad view that cash can be multiplied to provide more than its value in cash, goods and food commodities. This video also illustrates multiple viewpoints ― metrics with and without GIK’s impact on overhead.
Standards for accounting for GIK and fair value
World Vision is required to comply with U.S. Generally Accepted Accounting Principles (GAAP) for financial reporting purposes. These accounting standards  require us to record the fair value of any contributions received, including GIK. World Vision complies with IRS regulations on the annually filed Form 990 . We also voluntarily comply with standards that mirror GAAP from Accord  (previously AERDO), and InterAction .
In addition to stating that contributions be reported at fair value, U.S. accounting standards define fair value as the price which would be received to sell an asset (the GIK) in its principal market; the market with the highest volume; or most advantageous market; the market that maximizes the amount that would be received (Accounting Standards Codification [ASC] 820-10-35-2). When an asset is acquired in an exchange transaction, the transaction price represents the price paid to acquire the asset (an “entry” price). In contrast, the fair value of the asset represents the price that would be received to sell the asset (an “exit” price). Conceptually, entry prices and exit prices are different (ASC 820-10-30-2).
Our valuation methodology
World Vision looks at the markets available for valuation, the characteristics of the item being valued, and the available pricing sources when determining the fair value. For World Vision, because the market with the highest volume will differ depending on the goods, some GIK we receive is valued using U.S. market prices, and other GIK is valued using international market prices.
We generally have two methods for valuing GIK in accordance with GAAP – “Adjusted donor values” and “like-kind.”
1) Adjusted donor values
Adjusted donor values means the donor provided some information about value, typically a retail value. Because World Vision works with large quantities of GIK, we value contributions at wholesale values instead of retail values. If a donor provides a retail value, we reduce the retail value by a retail mark-down to bring the value down to a wholesale value.
2) Like-kind values
Often, donors do not provide any type of value for the donation. When no information is received, World Vision obtains value information for similar products and uses this to value the contribution at a wholesale value, also known as a “like-kind” value. To do this, we obtain the value for similar items from seven sources (typically retailers). We discount the retail values back to estimated wholesale values, remove the high and low values from the sample and average the remaining five values to determine the “like-kind” value that will be used to value the contribution.
(Note: GAAP guidance for valuing donations by World Vision differs from the IRS guidance for tax deductions by our donor. World Vision does not give input to our donors’ tax reporting)
Valuation of NFL apparel
For apparel, we consider the U.S. market to be the principle market according to GAAP because we believe the U.S. has the highest volume of apparel sales. Therefore, we use U.S. market prices to value apparel, including shirts. While it is true that the NFL restricts the sale of the donated items in the U.S., that is considered to be a characteristic and restriction on the entity, and does not affect the characteristics, usefulness, or valuation of the apparel.
World Vision’s financial statements are audited annually. This audit is performed in accordance with U.S. auditing standards, in order to obtain reasonable assurance about whether our financial statements are free of material misstatements. Our most recent audit is dated December 13, 2010 and we received a clean opinion and no audit findings.
World Vision takes great care in reviewing accounting standards and applying them to our work. We believe that our methods are in accordance with GAAP and other applicable standards, and are continually analyzing our accounting practices to ensure compliance.
In analyzing and debating issues like overhead and the calculations of fair market value, much of the conversation really points to the need to discuss standards and industry-wide methodologies, rather than the application of existing standards by individual organizations. World Vision already participates in many of those industry-wide conversations and welcomes additional participants into those discussions.
Read other blog posts in this discussion GIK and development programming, The financial costs and benefits of sending a shirt overseas, Basic overview of World Vision’s strategy and structure and our U.S. GIK operations, and Response to GIK discussion.
 ASC 958-605 “Revenue Recognition,” ASC 820-10 “Fair Value Measurements and Disclosures”
 IRS Publication 561 “Determining the Value of Donated Property”
 Standard #3 “Valuation Recording Practices” - AERDO Interagency Gift-in-Kind Standards
 Standard 7.12 “Material (Gift-in-kind) Assistance” - InterAction PVO Standards