When taking an annual snapshot at the end of a fiscal year, several factors can distort a realistic picture of Direct Relief’s (or any nonprofit organization) financial health and activities. One is the timing of donations being received and the expenditure of those donations, whether in the form of cash or in-kind medical products.
Donations—including those received to conduct specific activities—are recorded as revenue when they are received or promised, even if the activities are to be conducted in a future year. The in-kind product donations are also recorded in inventory upon receipt. Direct Relief’s policy is to distribute products at the earliest practicable date, consistent with sound programmatic principles. While the distribution often occurs in the same fiscal year of receipt, it may occur in the following fiscal year. An expense is recorded and inventory is reduced when the products are shipped to partners.
In Fiscal Year 2016, Direct Relief received less value in product donations than it shipped out to its partner network. When the fiscal year ended, the product inventories that had been “spent” were reported as a decrease in net assets or a “deficit.” The opposite was true in Fiscal Year 2015, when the value of product donations exceeded the humanitarian aid distributed during the year. That resulted in an increase in net assets (or net operating “income”) for that year.
For Fiscal Year 2016, the organization reported a change in net assets of ($114.5) million. As described above, this was driven by a lower value of donated product received, $750 million, than value of product distributed, $760.3 million (and disposals of expired products valued at $110.2 million) and is purely a function of the timing of the receipts from donor companies and shipments sent out to Direct Relief’s healthcare partner network.