California Assembly Bill 1181 (AB 1181), introduced by Assembly Member Monique Limón (D – Santa Barbara) on February 21, 2019, generally provides for valuation of a noncash contribution received by a charitable organization that is restricted by the donor from being used domestically based on its fair market value in the foreign country where it is ultimately distributed rather than its fair market value in the U.S. AB 1181 passed the Assembly on May 13 by a vote of 69 to 1 and now head to the Senate.

The Key Proposed Statutory Provisions

Section 17510.5 of the Business and Professions Code

(a) The financial records of a soliciting organization shall be maintained on the basis of generally accepted accounting principles as defined by the American Institute of Certified Public Accountants, the Governmental Accounting Standards Board, or the established by the Financial Accounting Standards Board.

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(c) Notwithstanding subdivision (a), if a noncash contribution received by a charitable organization is restricted by the donor so that it cannot be used in the United States, the contribution shall be valued using the fair value of the end recipient market or a reasonable estimate thereof if the end recipient market value cannot be ascertained following a reasonable inquiry. If the end recipient market is unknown when the noncash contribution is received, the charitable organization shall value the contribution using only those markets in which the contribution is reasonably likely to be distributed or used, taking all facts and circumstances into consideration, and which are consistent with any restrictions, including donor restrictions, and with its mission and charitable purpose.

(d) For the purposes of this section:
(1) “End recipient market” means the market in the country where the noncash contribution is to be ultimately distributed.
(2) “Fair value” means the price that the receiving charitable organization would receive if it sold the noncash contribution.

Rationale for Bill

According to its author:

AB 1181 addresses reported practices by some charities that grossly inflate the value of their publicly reported revenue and program expense, especially with respect to in-kind donations of pharmaceutical drugs. Overvaluation of the gifts-in-kind leads to an inflated total revenue for the charity which makes the charity appear more successful and efficient to the public and potential donors. An inflated revenue, in turn, can serve as a basis to hide excessive fundraising and administrative costs because these expenses would now appear smaller in comparison to the inflated total revenue. Inflated reports may also increase the charity’s ranking by charity watchdogs. This type of accounting practice is manipulative, misleading, and inconsistent with state law that safeguards transparency, fair reporting, and ensure a level playing field for honest charities that report accurate data to the Attorney General’s Registry of Charitable Trusts.

The California Attorney General, sponsor of the bill, adds:

Pharmaceutical donations to charities are particularly susceptible to overvaluation abuse because their value on the international market can be pennies on the dollar compared to their market value in the United States (U.S.). Thus, charities benefit from reporting pharmaceutical gift-in-kind donations at the higher U.S. market value even when such drugs will not be used for charitable programs in the U.S. … In those circumstances, the charity should not be valuing their pharmaceutical gifts-in-kind using U.S. prices.

According to The Nonprofit Times, “[t]he bill was borne out of recent cases that Attorney General Xavier Becerra brought against charities for allegedly overvaluing GIK. The AG’s Office issued cease-and-desist orders against Food For the Poor, Catholic Medical Mission Board and MAP International.”

The GAAP Problem

A major concern raised by AB 1181 is whether such requirement is contrary to generally accepted accounting principles (GAAP) as established by the Financial Accounting Standards Board (FASB). If it is, this would require affected charities to report one set of financials to California and another set to the IRS and other states. No longer would nonprofits have the benefit of using a single, national set of accounting standards. Moreover, other states might follow California’s lead in creating their own standards, and we could be headed down a very slippery slope towards unnecessary administrative burdens adversely impacting the sector.

The California Society of Certified Public Accountants (CalCPA) opposes this bill as written because it believes that the bill conflicts with GAAP.

The language of AB 1181 would undermine uniform national accounting and valuation standards by essentially allowing California to set its own accounting standards and procedures that significantly deviate from those that are accepted and universally utilized throughout the United States. […] Charities would need to maintain two separate financial and accounting records: one that is non-GAAP [generally accepted accounting principles] for California purposes and one that complies with GAAP for federal and other state’s purposes. Two sets of financial and accounting records would create consumer confusion and significantly increase the complexity and cost of preparing and maintaining records for charitable organizations.

The Valuation Problem

One major problem that has not been addressed by the bill is how a nonprofit will value the noncash contribution for purposes of timely reporting if the end recipient market has yet to be determined or if there will be many end recipient markets where the contributions will be ultimately distributed. The costs and complexities associated with determining the fair value of contributed products in several markets, particularly in rural areas, could also chill distribution to certain regions where there is no commercial market, but there is a dire need, for such goods. You can read a more detailed description of these problems in Charles M. Watkins’ letter to Assembly Member Limón dated March 21, 2019.