Aid Distribution Programs: Good for Nonprofits, Donors, and the Poor
Effective and Efficient Charity
There is no shortage of good in this world: good will, good ideas, and good people. This is fortunate because there is also no shortage of poverty, disease, war, and corruption, all of which can rob a person of the right to health, happiness, and human dignity. Charity exists in response to these realities: the good in people addressing the needs of others.
There are many ways to address the variety of needs that exist in this world, each with its own merit. When it comes to helping those in need, charities must be effective. Charities must be efficient. They must figure out how to make the money they raise from their donors go as far as possible and have as big of an impact as possible.
Direct cash support is one way for a charity to spend funds raised from donors. Money is what makes the world go around and can address a plethora of needs such as funding research, paying medical bills, and digging wells (among many other things). There are some advancements that can only be addressed by direct cash contributions. Cash programs typically provide $1 of impact for every $1 spent. Sounds good, doesn’t it? But what if a charity could also put money to use in a way where every $1 spent produced $100 worth of impact?
Enter: Aid Distribution Programs.
What is an Aid Distribution Program?
Simply stated, an Aid Distribution Program is a charitable effort that delivers the good and usable excess from one market to cover the deficiencies of another.
The modern world overflows with abundance that could alleviate the suffering of the less fortunate, if only it could get to them. Aid Distribution Programs are the answer.
When created, managed, and implemented properly, Aid Distribution Programs are capable of providing hundreds of millions of dollars’ worth of valuable, practical aid to those in need, while preventing perfectly viable, usable lifesaving and life-enhancing items from ending up in landfills.
Dr. Matthew Wazara, a pediatric surgeon in Zimbabwe, shared a story that illustrates this point perfectly. Dr. Wazara was preparing to operate on a boy who had an impacted bowel. After scrubbing his hands in prep for surgery, he asked the nurse to get him a pair of surgical gloves. With the lack of antibiotics, barrier protection such as surgical gloves was important to reduce the risk of infection. The nurse checked all the supply closets in the hospital – no gloves. The nurse called over to the nearest hospital, which was about four hours away – no gloves to spare. Early the next day they set out to buy surgical gloves from their supply store. No gloves. On the third day after the surgery was scheduled, Dr. Wazara had finally received surgical gloves and performed the operation.
The inventory turnover rate in today’s hospitals, medical clinics, and manufacturing plants is surprisingly large. High value, high utility product, entirely without defect, is removed or discarded to make room for new incoming supplies. If modern society nonprofits could devise a global distribution program to redistribute this excess product to the rest of the world, perhaps situations similar to Dr. Wazara’s could become a thing of the past.
Aid Distribution Program vs Gift in Kind
Historically, Aid Distribution Programs have been referred to as Gift-in-Kind (GIK) programs. Are Aid Distribution Programs different from Gift in Kind (GIK) Programs? The short and simple answer is yes.
Why? Namely because a gift in kind is not a program at all, it is an accounting term for a type of charitable gift.
A gift in kind, also referred to as in-kind donation, is a kind of charitable giving in which, instead of giving donations of cash to buy needed goods and services, the goods and services themselves are given.
At the October 2016 NAAG/NASCO (National Association of Attorney Generals/National Association of State Charities Officials) Annual Meeting, the following insight into their view and understanding on gift in kind donations was given:
“What are gifts-in-kind donations? Gifts-in-kind (GIK) are noncash donations made to a charity. Common examples of GIK are food, clothing, prescription drugs, equipment, and medical supplies. Individuals and businesses donate products to charities, which in turn give the products directly to those in need, or to other charities for redistribution. Certain types of charities, such as thrift stores and international relief organizations, may receive significant amounts of GIK. When used, and reported as intended, GIK can be an important part of a charity's programs. Worthy causes get needed supplies, donors may get a deduction, and items that might otherwise be discarded are put to good use.”
Over the past few decades the nonprofit and regulatory industries have used the term “gift in kind”, a term representing a single component of Aid Distribution Programs, to describe the Aid Distribution Program itself. The unfortunate repercussion of this narrow framing is that the positive impact of the program can get overshadowed, and even lost in the shuffle of the issues surrounding donated goods. Reframing Aid Distribution Programs in light of their ultimate impact lays the foundation for charities, regulators, and the public to properly understand the benefits this type of program brings to the world.
Aid Distribution Programs: Good for Donors
Donors are the lifeblood of charities. Charities are a venue through which a donor’s intent can be realized. Donors have the money, charities have the means; a beautiful symbiotic relationship.
Aid Distribution Programs allow donors to see their financial gift amplified to a greater impact than the value of the cash donation given. Donors can be encouraged knowing that their financial gift can be multiplied in a way that reaches a greater multitude of those in need.
Due to the nature of Aid Distribution Programs, donors can see direct correlations between their financial gift and tangible, real impact for those in need.
Mother Joan Clare Chin Loy, founder of the Compassionate Franciscan Sisters of the Poor is a tiny woman who carries one of the largest hearts. Sister Joan ran a ministry in the Philippines that cared for those living in the slums of Naga City. Sister Joan once gave a presentation that started with the image of a young boy, no clothes, covered with a cloth, that they had found lying in the gutters. He was bone thin and on the verge of death. Sister Joan and her nuns brought the boy to their facility, gave him food that was donated from an American charity, clothes that were donated from an American charity, and medicines that were donated from an American charity. These were all items that she didn’t have the money to obtain on her own. She concluded her presentation by showing a photo of that same boy 6 months later. He was smiling from ear to ear, healthy, well fed, and enrolled in school.
The rescue of this young child can be traced all the way back to the donor. Donors can feel good and share in the satisfaction of knowing they were a part of the real, tangible impact of saving this child’s life.
Aid Distribution Programs: Good for Nonprofits
As the steward of a donor’s trust and finances, charities carry the weight and responsibility to produce effective and efficient aid for those they seek to serve.
While direct cash aid will always be necessary, it may not always be the most effective or efficient option.
In the charity’s effort to maximize their donor’s financial trust, Aid Distribution Programs provide something that cash programs cannot: leverage.
Leverage is a strategic advantage. It is the power to act efficiently. It is the ability to accomplish results beyond normal ability. Using the financial gifts of donors, Aid Distribution Programs leverage cash to provide items from one market to cover the deficiencies of another at a fraction of the value of the items sent.
To see the leverage and advantage an Aid Distribution Program can provide, consider the following:
Charity A raises $1 million in cash from donors to address the needs of those suffering from cancer. For the sake of this example, let’s assume that 50% of the money is used for administrative and fundraising purposes leaving $500,000 for programs. $150,000 is given to research institutes to find a cure for cancer, $150,000 is distributed to individuals to pay medical bills, and $200,000 is spent to buy needed items for those suffering from cancer. Each of these programs has a 1:1 return on investment (ROI).
Charity B also raises $1,000,000 in cash from donors to address the needs of those suffering from cancer. Like charity A, 50% of this money is used for administrative and fundraising purposes, $150,000 is given to research institutes to find a cure for cancer, and $150,000 is distributed to individuals to pay medical bills. However, Charity B has an Aid Distribution Program and leverages the remaining $200,000 to pay the costs to receive, ship, and distribute large quantities of donated medicines and medical supplies, through partnering hospitals to aid those suffering from cancer generating $10,000,000 worth of impact. The ROI for the Aid Distribution Program clearly stands out.
Aid Distribution Programs not only provide items to those in need at a fraction of the cost of their value, but may even provide items that are unavailable for purchase in that immediate or surrounding market. Through an Aid Distribution Program, a charity is able to leverage its donor’s financial gift and maximize the charitable impact for those in need.
Aid Distribution Programs: Good for the Poor
There are a few distinct advantages that Aid Distribution Programs have by directly providing the goods needed over cash grant programs that require the purchase of goods.
In many third world markets, the availability of needed items can be scarce or even non-existent – indicative of why the people are in need in the first place. A cash grant program in this instance would not be helpful since the items that are needed are not available. By providing the needed goods through an Aid Distribution Program, the recipients gain an immediate benefit by receiving what they need.
Another advantage of Aid Distribution Programs is that they can provide items to those in need for less than what they could be purchased in their local market. Pastor Luis Morales, the founder and president of Hearts of Life wrote in August, 2016, “For the past three years my foundation, Hearts of Life, has been investing a lot of time and work in El Salvador by providing free health care and medicines through the country’s major Hospitals. Many of the hospitals are in constant and desperate need and the government does not have the resources to provide for them. In El Salvador, there are thousands of people who do not have the resources to access health care, let alone medicines. Recently we brought three containers of pharmaceuticals into El Salvador. We have had medical outreaches that, within the first week, helped more than five thousand people. All of this was possible thanks to the help from all the U.S. charities. Many hospitals benefited from these shipments. We wouldn’t have been able to accomplish this without the help of all the charities in the U.S. that continuously provide all these medicines.”
Those who work directly with the poor understand the value of being able to hand them what they need. Only very rarely when working with the poor is cash handed out. Rather, the cash is used to buy needed items which are then handed out. Aid Distribution Programs cut to the chase and simplify the process.
Aid Distribution Program: The Basics
When set up, implemented, and run properly, Aid Distribution Programs are capable of providing hundreds of millions of dollars’ worth of valuable and lifesaving aid to the world. Investing the time and resources to properly organize an Aid Distribution Program will help save time and resources during audit and oversight inquiries.
In the same way that charities must establish internal controls for the receipt, accounting, and distribution of cash, they must also establish internal controls for the receipt of in-kind donations, the accounting of their value, and how they are distributed and used. Governing agencies want to see that charities with an Aid Distribution Program have policies in place that ensure the individual donor’s cash gift is being used according to the donor’s intent and in accordance with all relevant regulations.
In-Kind Donation Acceptance Policy: Charities must determine the nature (pharmaceutical, medical supply, hygiene, etc.), scope (disease only, disease and surrounding conditions, disease and general welfare, etc.), and limitations (expiry date, product condition, distribution market capacity, etc.) of in-kind gifts that will help fulfill their charitable purposes.
In-Kind Valuation Policy: Charities must determine how to apply accounting guidelines established for fair market valuation of donated goods. Ultimately, only the charity can establish the value they account for in their financial statements and therefore must provide substantive evidence for the value assigned. It is advisable to develop this policy with the input of a certified public accountant.
In-Kind Distribution Oversight Policy: This policy lays out the steps the charity will take to ensure that the in-kind gifts are distributed in a manner that fulfills the tax-exempt purpose of the charity.
Establish a Network
Moving goods from industry to those in need requires a lot of moving parts. Establishing a network with the right people and organizations can help a charity fulfill its Aid Distribution Program goals.
In-kind Donors: A charity that wishes to distribute aid to those in need must establish relationships with corporate or nonprofit donors. These donors must have access to items that fit with the charities’ Donation Acceptance Policy.
Program Partners: If a charity does not have a direct presence in the location where the goods are being distributed, they need to develop a relationship with a partnering organization that will distribute the goods in accordance with the charity’s tax-exempt purposes.
Logistics: Having a good working relationship with a logistics company is essential. If the distribution area is outside of the United States, charities have the option to work directly with the carrier, whether ocean or air freight, or with a freight forwarder that can often times secure better rates with the carrier due to bulk shipping rates. If the distribution area is within the US, charities can work directly with trucking companies.
Accounting: Find a CPA who understands the accounting guidelines for in-kind donations.
There are many layers of regulation that govern nonprofits and their activities. As a not-for-profit, public corporation with tax-exemption implications, charities draw a unique level and scope of regulatory governance by state and federal regulators. The Internal Revenue Service is the federal agency responsible for the collection of taxes, enforcement of tax laws, and approving the tax-exempt status for charities. Charities must file annual reports on their finances and activities to the IRS for review and for the continuation of their tax-exempt status. The Federal Trade Commission administers antitrust and consumer protection legislation to prevent business practices which are deceptive or unfair to consumers. In order for donors to make an informed decision on whether or not to support a particular charity, they must be given true and accurate information from the charity on its activities. The FTC ensures that charities are not providing deceptive information to donors.
In addition to federal regulation, each of the fifty states has its own set of regulations for charities. Each state has a department or office assigned to the responsibility of consumer protection and charitable solicitation oversight. If legal investigation or pursuit is required, the office of the state’s Attorney General becomes involved. Additionally, the Attorneys General from all fifty states have formed the National Association of Attorneys General (NAAG). Within the NAAG, a special committee has been established to assist attorneys general with charitable registration and enforcement issues. Another regulatory group associated with the NAAG is the National Association of State Charity Officials (NASCO), which is responsible for state oversight of charitable organizations and charitable solicitation in the U.S.
To assist charities with their regulatory responsibilities, the accounting industry provides critical oversight and controls support. Certified public accountants, governed by the American Institute of Certified Public Accountants, perform audits, or official examinations, of charities’ financial accounts. These audits provide third-party scrutiny of a charity’s finances and are submitted to regulators with the charity’s year-end reporting.
These many layers of regulation both serve to protect the donor and ensure that charities are properly spending tax-exempt donor funds. Without regulatory oversight, the good will of people can be taken advantage of and those in desperate situations may not get the help they need.
Potential Misuses of Gift in Kind Donations and How to Avoid Them
State and federal regulators play a crucial role in protecting donors and ensuring that reported charitable activities are legitimate, accurate, and serve their tax-exempt purposes. While the charity community as a whole is not interested in fraud, this doesn’t prevent unscrupulous people from entering the charity community.
While charity regulators recognize that Aid Distribution Programs are a beneficial and worthy pursuit for charities, they are cognizant of possible deceptions and misuses of the gift in kind donation component by fraud-minded individuals.
As stated at the October 2016 NAAG/NASCO Annual Meeting:
“A charity may report the fair value of GIK it receives as donated revenue, and the value of the GIK it distributes as a program service expense if it meets certain criteria used by the IRS. What's the problem? The potential for deception lies in how charities report GIK in their financial statements.”
At the same meeting, state regulators identified three situations in which deceptive reporting practices are most likely to occur. The points listed below are issues that regulators and auditors key in on when reviewing a nonprofit’s Aid Distribution Program. In order for a charity to properly claim and account for its Aid Distribution Program, these issues should be documented and available for auditors, regulators, and the public.
Overvaluation of Donated Goods
The overvaluation of donated goods has long been a concern of regulators. Because the value of donated goods is accounted for as both revenue and program expense, there are opportunities to misrepresent a charity’s financial situation and programmatic impact.
Problem: The overvaluation of donated goods deceives donors and regulators by making the charity’s revenue and charitable impact appear greater than they are.
Solution: Establish and follow an In-Kind Valuation Policy. The Generally Accepted Accounting Principles (GAAP), in conjunction with guidance from the Financial Accounting Standards Board (FASB), provides the established and accepted principles for determining the fair market value of donated goods. FASB issued standard 157, now codified as ASC 820, to define fair value, establish a framework for measuring fair value, and expand disclosures about fair value measurements. This policy should be reviewed by a certified public accountant for reasonableness and approved by the charity’s board of directors.
Another potential misuse of an in-kind donation is when a charity takes financial credit for the in-kind donation value despite the fact that the charity never actually owned, controlled, or used the in-kind goods. This scenario can typically occur when a charity acts as a middleman, or a “pass-through” organization to move goods from one organization to another.
Problem: The charity takes credit for revenue it did not receive and for program services it did not provide.
Solution: Establish and follow an In-Kind Donation Acceptance Policy with a clear ownership and control mandate. There are two primary criteria that must be met for a charity to prove it is not a pass-through entity: Ownership and Control. If a charity cannot prove ownership and control over donated items, yet tries to claim participation in the receipt and/or distribution of goods, then that charity is viewed as a pass-through agency and should not account for the value of the donated goods, either as revenue or as program services. Ownership can be demonstrated by taking physical possession, or by documenting constructive possession, and by showing risk of loss. Control, also known as variance power, can be demonstrated by the charity’s directing and/or redirecting the destination, choosing the consignee, and determining the use of the goods.
The types of goods a charity receives as a donation should further the tax-exempt goals of the charity. If a charity receives and distributes items that are unrelated to the need(s) the charity exists to address, not only are their donors’ funds being misused, but the charity is not fulfilling its purpose.
Problem: Receiving and distributing donated goods that are unrelated to the charity’s mission or purpose.
Solution: Establish and follow an In-Kind Donation Acceptance Policy with a compliance mandate. Every charity that receives donated goods should 1.) have a clear understanding how donated items fit into their efforts to accomplish their mission; 2.) compile a list of the types of items that will help those they intend to serve; and 3.) have an internal audit system in place to ensure non-compliant items are not being accepted.
Even with the potential misuse of donated goods, the October 2016 NAAG/NASCO Annual Meeting concluded by stating, “Do all charities use gifts-in-kind this way? No. Many charities report GIK donations correctly and use their GIK programs to provide important assistance.”
Aid Distribution Programs: A Powerful Way to Serve the World
The needs of our world are as varied as the people in need. There is no magical solution that can solve every problem. It is incumbent on charities to find and pursue the best approaches to helping those in need. Aid Distribution Programs offer a powerful way to leverage money into a multiplied impact by receiving donations of needed goods and distributing them directly to those in need. The potential magnitude of this extraordinary program can change villages, towns, cities, and even nations.
Aid Distribution Programs: a life-saving charitable effort that rescues the good and usable excess from one market to cover the deficiencies of another.
Now that makes for effective and efficient charity.
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