AERDO's GIK Affinity Group's Letter to Financial Accounting Standards Board

February 26, 2008

Financial Accounting Standards Board
Valuation Research Group

To Whom It May Concern:

We have been evaluating SFAS No. 157 – Fair Value Measurements in order to understand its applicability to Non-Profit Organizations (NPO’s). We appreciate the FASB’s efforts through this statement to provide needed guidance to standardize the process for measuring fair value and remove some of the inconsistencies in applying GAAP. However, we are concerned about applying this statement to gifts in kind (GIK) due to the nature of the transaction and the intended use of the goods. As key organizations in the international relief industry, we at World Vision, World Concern, MAP International, Medical Teams International, International Aid, Food for the Hungry, World Emergency Relief, Humanitarian International Services Group, Global Assistance, Convoy of Hope, Blessings International, Agathos Foundation International, CrossLink International, and Operation Blessing International want to raise our concerns to you and to request guidance as it relates to this standard’s applicability to GIK. Last year our organizations cumulatively received over one billion dollars in GIK to aid beneficiaries through our domestic and international programs.

SFAS No. 157 was plainly written with financial instruments in mind. There is no specific guidance related to GIK within the statement. The Board observed that certain accounting pronouncements, including SFAS 116, Accounting for Certain Contributions Received and Contributions Made, permit practicability exceptions to fair value measurements. Because the board decided for practical reasons not to address these inconsistencies, it is critical that the standard’s application related to GIK be addressed prior to the statement becoming effective. Otherwise, the interpretation of this standard may vary widely, resulting in incomparable financial statements across the non-profit industry.

Following are our concerns in applying SFAS No. 157 to GIK:

Fair Value is defined by the statement as “the price that would be received to sell an asset…in an orderly transaction between market participants at the measurement date.” The three areas addressed by this statement which appear specifically challenging to apply to GIK are: 1) Market Participants, 2) The Principal (or Most Advantageous) Market and 3) Inputs to Valuation Techniques.

Market Participants

Definition - The use of the GIK procured by our organizations is to aid the poorest of the poor. In the International context, the market participants are those whom our organizations are working to benefit. These “market participants” by-and-large are not able to transact for the
asset, which is why our organizations are seeking to aid these individuals in the first place. Therefore, in the context of aid to the poorest of the poor, there are, by definition no “market participants.”

The Principal (or Most Advantageous) Market

Definition - GIK is regularly obtained under IRC 170(e)(3) restrictions, which specifically prohibits our organizations from selling the assets. With these restrictions in place, there is no “market in which the reporting entity would sell the asset,” or “assumption that the transaction to sell the asset” can even take place. Furthermore, the donor often prohibits GIK distributions in certain geographic locations due to quality or market protection concerns. If the above presumption may be overcome that there are no defined market participants, these IRS restrictions make it illegal to exchange GIK in most markets.

Entity-specific measurement – In the statement’s appendix, section C32 emphasizes that a fair value measurement is a market-based measurement, not an entity-specific measurement. Because of the nature of GIK transactions and the restrictions imposed thereon, NPO entities may have different principal markets than for-profit entities, resulting in NPO’s measuring identical assets differently than for-profit entities whose goods are legally saleable. The resulting fair value measurements become entity specific, a direct conflict with the intent of the standard.

Market impact by NPO community - Certain goods, such as medicines, are by-and-large not available through legitimate commercial sources in third-world markets. The NPO community has stepped in to provide these goods to beneficiaries. This large provision of donated goods may effectively create the market with the greatest volume and level of activity for the assets from a use perspective. It may also affect the international market’s pricing of the commercial goods, thereby not giving an accurate market value for goods in an exchange transaction.

Inputs to Valuation Techniques

Fair Value Hierarchy - Throughout the standard, there is a reference to the “reporting entity” – “the market in which the reporting entity would sell the asset,” and “market participants with whom the reporting entity would transact in that market.” Level 3 inputs refer instead to a market participant, not specifically the “reporting entity” - “the exit price from the perspective of a market participant that holds the asset.” Because of the issues identified above related to GIK, it would be difficult, if not legally prohibited, for a NPO to identify a market that meets the standard. However, outside of restricted GIK transactions for NPOs, a market participant could measure the fair value for the goods. It may be most practical to apply Level 3 inputs to GIK, and require additional disclosures about the unobservable inputs used by the NPO’s to measure the fair value.

Bulk discounts - The standard is not clear whether discounts based on quantity would be applied to retail prices of assets acquired in bulk. According to level 1 inputs, “the quoted price shall not be adjusted because of the size of the position relative to trading volume.” Our organizations follow AERDO Interagency GIK standards (www.aerdo.net), which require GIK to be valued at wholesale prices. The AERDO Interagency GIK standards are considered the industry standard and are endorsed by Interaction.

Conclusion

The culmination of these issues makes it difficult to apply the standard to GIK in the absence of further guidance. The FASB may want to consider exempting GIK transactions under SFAS No. 116 - Accounting for Certain Contributions Received and Contributions Made from SFAS No. 157. Alternatively, it may conclude that NPO’s should use Level 3 inputs to apply to SFAS No. 116. Whatever the guidance may be, we request the opportunity to comment on any exposure draft or Statement of Position the FASB releases related to this standard’s implementation.

Sincerely,