Nonprofit & Government Times Q1 2020

pharmaceuticals is generally estimated using prices published in professional reference materials such as Thomson Reuters “Red Book,” an industry-recognized information and pricing reference guide for prescrip- tion and over-the-counter drug products in the United States. However, different pricing models exist, and organizations have to choose a model to estimate the fair value of pharmaceutical contributions. “Red Book” contains the Average Wholesale Price (AWP), Wholesale Acquisition Cost (WAC), Direct Price (DP), Suggested Retail Price (SRP) and Federal Upper Limit (FUL). AWP, WAC and FUL are the most common pricing models used by NFPs. AWP is the average price for medications offered at the wholesale level. WAC is an estimate of the manufacturer’s list price for a drug to wholesalers or direct purchasers but does not include discounts or rebates. FUL is the maximum reimbursement amount allowed for certain drugs under Medicare. Pricing under AWP is the highest, followed by WAC and FUL. There are several alliances of pharmaceutical com- panies and NFPs, such as Partnership for Quality Medical Donations (PQMD), Accord and others that have attempted to establish guidelines for the valuation of donated pharmaceuticals. Because the practice followed for the valuation of contributed pharmaceuticals can vary, in some cases, it has been questionable and controversial. For instance, the state of California has sued several charities over pharmaceutical valuation methodologies in which the state took the position that the principal or most advantageous market is the foreign market where the beneficiaries are, rather than the U.S. market where the pharmaceuticals are mostly transacted. The California legislature went so far as to establish their own GAAP on valuation of contributed phar- maceuticals, which was vetoed by the Governor. • Collection Items Examples of collection items are pictures, antiques, stamps, coins, manuscripts, etc. that are protected, preserved and held for public exhibition, education or research or in furtherance of public service rather than financial gain. When an NFP receives an in-kind contribution of collection items, whether to record a contribution depends on the NFP’s accounting policy on collection. In general, if the accounting policy is to

capitalize collections, the NFP records an asset with corresponding credit to a contribution. However, if the policy is not to capitalize collections, then a contribution is not recorded. • Donated Stock The fair value of donated stock is recorded as a con- tribution on the date on which the donation is made known to the NFP at its value on that date. If there is a change in the fair value of the stock on the date on which the NFP receives the stock, the fair value orig- inally recorded needs to be adjusted to reflect the fair value on the date of receipt. When the NFP sells the donated stock later, a gain or loss on sale would be recorded, which is the difference between the sale price and fair value already recorded. Under ASC 230-45-21A, when an NFP converts donated stock nearly immediately into cash, then the sale proceeds must be considered as an operating activity for cash flow purposes. However, if the donated stock is restricted for a long-term purpose, then the proceeds from the sale of the donated stock are considered as a financing activity for cash flow purposes. • Bargain Purchase A contribution may occur as part of an exchange transaction. For example, an NFP land trust com- pensates a resort to set aside part of its land from development. The appraised value of the land is $3 million, but the resort agrees to accept only $1 million from the NFP. That difference between $3 million and $1 million is considered a contribution. • Guarantees Because of an NFP’s credit history or financial standing, it may have difficulty obtaining a loan or line of credit from a financial institution. In such a situation, the financial institution might receive a guarantee for the NFP’s loan from an unaffiliated for-profit or not-for-profit, without the NFP providing commensurate consideration. In a transaction like this, the NFP has received an intangible contribution, which is the difference between the stated interest on the loan agreement and the market interest rate that would have been charged if the NFP had entered into the loan without a guarantee. The NFP records an interest expense for the differ- ential with a corresponding credit to contribution. There is also a conditional contribution attributable FIRST QUARTER, 2020 Nonprofit & Government Times 16

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