Bill and Melinda Gates Foundation: Accounting Treatment

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Table of Contents

Introduction
Accounting Period in Review
Allocation of Common Costs
Usefulness of Restated Statement
References

Introduction

This paper will discuss accounting treatment of common costs presented in the financial statements of Bill and Melinda Gates Foundation. Bill and Melinda Gates Foundation (B&MGF) based in Seattle, Washington is the fourth largest privately operated foundation established by William H. Gates and Melinda French Gates in 2000, after merger of two independent foundations led by Mr. Gates, with an initial capital endowment of US$126 million which grew to US$2bn in the first two years. It was later joined by Warren Buffet in 2006 who offered 10million Berkshire Hathaway Class B shares worth approximately US$35 billion in 2006 spread over multiple years through annual contributions of US$1.5bn. The foundation has been recognized as association of the second most generous philanthropists in America (Answers.com, 2006). The foundation operates three programs namely Global Health Program, Global Development Program and United States Program. The objectives through different programs are to help the poorest with the enduring challenges of food, health and education. Various initiatives have been undertaken in different countries to support the local population and uplift standards of life. In particular these include agricultural development, financial services for the poor, health care & insurance programs, education & global libraries, housing and HIV research (B&MGF, 2007). The foundation has proved to be a successful one with assets reaching up to US$38bn and still continuing to grow. With new CEO coming in as Mr. Jeff Raikes joins the foundation, it aims to build upon the works and same charisma of ex-CEO Ms. Patty Stonesifer.

Accounting Period in Review

The accounting period in review is the financial year of 2007 ending 31 December 2007 which has been reported in the foundation’s annual report 2007.

Allocation of Common Costs

The B&MGF consists of two separate legal and audited entities – Bill & Melinda Gates Foundation (‘Foundation’) and Bill & Melinda Gates Trust (‘Trust’). The earlier distribute money to grantees and the later manages the endowment assets. Because of the nature of the business and transaction between the two entities a consolidated financial statement is prepared which uses a basis for allocating common costs to each entity. We will consider such items in reference to B&MGF and form a basis for their allocation:

Grants Expenses: These include expenses to fund foundations operations and other direct charitable expenses, operating expenses and capital and program-related investments. All such expenses are summed off to indicate the aggregate expenses of the foundation’s programs.
Direct Charitable Expenses: These include fees paid for consultation required for the foundation’s programs. All such expenses are summed off to indicate the aggregate expenses of the foundation’s programs.

The foundation has three separate programs as mentioned above. The annual report does not provide how the above cost is incurred and recorded for each of the three programs. Furthermore, direct charitable expenses are not prorated to each program. The financial statement is prepared to provide a simple and clear understanding of its users and therefore cumulative common costs are presented. However, the financial statement of each entity respectively should indicate the information regarding costs allocated to each individual program.

We can recast the Combined Statements of Activities for the year ending Dec 31, 2007 as follows. Allocation of grants other than cash basis is allocated on % basis.

	TRUST	FOUNDATION		ELIMINATION ADJUSTMENTS	TOTAL COMBINED Dec 31, 2007
CHANGE IN NET ASSETS REVENUES AND GAINS
Contributions	$3,127,756.00		$1,579.00	$0.00	$3,129,335.00
Investment income, net	$4,950,789.00		$2,232.00	$0.00	$4,953,021.00
Total Revenues and Gains	$8,078,545.00		$3,811.00	$0.00	$8,082,356.00
EXPENSES
Grants	$2,327,300.00		$3,048,299.00	($2,327,300.00)	$3,048,299.00
Cash Basis
Global Health		$1,220,008.00
Global Development		$308,041.00
United States		$483,626.00
		$2,011,675.00
Other basis:	Actual Fig. not available. Prorated on the % basis of cash basis grants
Global Health		$414,883.70
Global Development		$104,754.39
United States		$164,464.94
		$1,036,624.00
Direct charitable expenses	$0.00		$41,842.00	$0.00	$41,842.00
Global Health	Actual Fig. not available. Prorated on the % basis of cash basis grants	$16,746.25
Global Development		$4,228.28
United States		$6,638.42
Program and administrative expenses	$466.00		$222,682.00	$0.00	$223,148.00
Global Health	Actual Fig. not available. Prorated on the % basis of cash basis grants	$89,123.09
Global Development		$22,502.77
United States		$35,329.48
Federal excise and other taxes	$61,010.00		$36.00	$0.00	$61,046.00
Total Expenses	$2,388,776.00		$3,312,859.00	($2,327,300.00)	$3,374,335.00

Changes in Net Assets before Beneficial Interest	$5,689,769.00		($3,309,048.00)	$2,327,300.00	$4,708,021.00
Change in beneficial interest in the Bill & Melinda Gates Foundation Trust:
Contributions from the Bill & Melinda Gates Foundation Trust	$0.00		$2,327,300.00	($2,327,300.00)	$0.00
Increase in net assets due to beneficial interest in Bill & Melinda Gates Foundation Trust	$0.00		$9,088,800.00	($9,088,800.00)	$0.00
Transfer of net liabilities to Bill & Melinda Gates Foundation	$3,399,031.00		($3,399,031.00)	$0.00	$0.00
Change in net assets	$9,088,800.00		$4,708,021.00	($9,088,800.00)	$4,708,021.00
Unrestricted net assets, beginning of year	$29,564,176.00		$29,652,516.00	($29,564,176.00)	$29,652,516.00
Unrestricted Net Assets, End of Year	$38,652,976.00		$34,360,537.00	($38,652,976.00)	$34,360,537.00

Usefulness of Restated Statement

The restated financial statement allows its user to understand the projects carried by each program in terms of their achievement and costs allocated to each project. This allows a better understanding of how endowment funds are allocated and utilized. The performance of each project / division under each program could become more assessable and very much skepticism which pertains to the accountability of such charities can be overcome. Furthermore users of financial statements become more aware when deciding their contribution based on this vital information.

References

Answers.com. (2006). Hoover’s Profile: Bill and Melinda Gates Foundation. 2008. Web.

B&MGF. (2007). Bill and Melinda Gates Foundation – Annual Report. Web.

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Bill and Melinda Gates Foundation: Accounting Treatment

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