Workshop Reminders:

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Workshop Reminders

• Please pick up workshop handouts and a workshop
  evaluation from the table by the entrance to the
  room.
• If you are seeking CEU or CLE credit, have your
  attendance form initialed at the end of the
  workshop by the course representative.
• If you are seeking CPE credit, have your
  attendance form initialed by the course
  representative at the beginning and end of the
  workshop and also if you arrive late, if you
  leave early, and if you later return.
• Please note that this workshop is being recorded.
• Dont forget to turn off your cell phone.
• Please take the time to complete the evaluation
  form and place it on the table near the doorway
  as you leave. We appreciate your input.

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Key Cost Principles
CAPLAW National Training Conference
Presented by Carr, Riggs Ingram, LLC J. Michael
Maddox, CPA, CFE www.cricpa.com

• June 16 , 2008

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AGENDA

• Welcome and Introductions
• Relationships Among Standards
• History of Cost Circulars
• Overview of OMB Curcular A-110
• Overview of OMB Circular A-122
• Specific Cost Analyses
• Impact of Unallowable Costs
• Questions

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OBJECIVES

• Further understanding of
• Applicable cost circulars
• Interrelationship of cost circulars
• Key cost concepts associated with select items of
  cost

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Relationships Among Circulars
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• Applicable Standards
• OMB Circular A-122
• Cost Principles for Non-Profit Organizations
• OMB Circular A-110
• Uniform Administrative Requirements
• OMB Circular A-133
• Audits of States, Local Governments and
  Non-Profit Organizations

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• OMB Circular A-110
• 8/25/1994 (59 FR 43760)
• Amended/Revised numerous times
• Most recent signficant revision 5/10/04
• Moved to 2 CFR Part 215 effective 8/31/05

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• OMB Circular A-122
• Issued 6/27/1980
• Amended/Revised numerous times
• Most recent signficant revision 5/10/04
• Moved to 2 CFR Part 230 effective 8/31/05

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Outline of A-110

• OMB Circular A-110
• Subpart A General
• Subpart B Pre-Award Requirements
• Subpart C - Post-Award Requirements
• Subpart D After-the-Award Requirements

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• Subpart C Post Award Requirements
• Financial and Program Management
• Property Standards
• Procurement Standards
• Reports and Records

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Outline of A-110

• OMB Circular A-110 Subpart C, par 27 states
• allowability of costs incurred by non-profit
  organizations is determined in accordance with
  the provisions of OMB Circular A-122

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Outline of A-122

• OMB Circular A-122
• Body of Circular, sets forth
• Purpose
• Applicability
• Definitions
• Other Housekeeping Items
• Attachment A General Principles
• Attachment B Selected Items of Cost
• Attachment C Non-Profit Organizations Not
  Subject To This Circular (Specific Listed
  Entities)

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Outline of A-122 Attachment A

• OMB Circular A-122 Attachment A
• Basic Considerations
• Including Factors Affecting Allowability of
  Costs
• Direct Costs
• Indirect
• Allocation of Indirect Cost and Determination of
  Indirect Cost Rates
• Negotiation and Approval of Indirect Cost Rates

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A-122, Attachment A, Section A, Par 2

• Factors Affecting Allowability of Costs
• In order to be allowable costs MUST
• Be reasonable for the performance of the award
  and allocable thereto under these principles
• Conform to any limitations or exclusions set
  forth in these principles or in the award (i.e.
  Attachment B or award terms)
• Be consistent with policies and procedures that
  apply uniformly to both federally-financed and
  other activities of the organization
• Be accorded consistent treatment
• Be determined in accordance with generally
  accepted accounting principles (GAAP)
• Not be used to meet cost sharing or matching
  requirements
• Be adequately documented

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• Reasonable Costs
• Prudent person rule would not exceed cost that
  would be incurred by a prudent person under the
  same circumstances
• Considerations include
• Is the cost the type generally recognized as
  ordinary and necessary for the operation of the
  organization or performance of the award?
• Restraints or requirements imposed by factors
  such as sound business practices, arms length
  bargaining, Federal and State laws and
  regulations, and terms and conditions of the
  award.
• Did the individuals concerned act with prudence
  in the circumstances considering their
  responsibilities to the organization, its
  members, employees and clients, the public at
  large and the Federal Government?
• Did we deviate significantly from our established
  practices which may unjustifiably increase the
  award costs?

16

• Allocable Costs
• Costs are allocable in accordance with relative
  benefits received.
• Allocable to Federal award if treated
  consistently with other costs for same purpose
  and if it
• Is incurred specifically for the award (direct
  costs)
• Benefits both the award and other work and can be
  distributed in reasonable proporation to the
  benefits received (cost allocation)
• Is necessary to overal operation of the
  organization, although a direct relationship to
  any particular cost objective cannot be shown
  (indirect cost)

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• Analysis of Allowability of Specific Types of
  Costs

18

• Acquisition of Real Property and Equipment

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Issues To Be Considered

• Lease vs. Purchase Analysis
• Allocability of Cost
• Who/what programs will use facilities
• Cost Recovery Period
• Depreciation/Use allowances
• Financing Options
• Will interest cost be allowable?
• Proper Procurement
• Equipment
• Construction Costs

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Lease vs. Purchase Analysis

• Required by paragraph 44(2) of OMB Circular A-110
• Also required by Circular A-122 paragraph 23.A(2)
  where applicable
• Analysis should be on net present value basis
• Discount rate should be Agencys anticipated
  financing rate
• No higher than arms-length rate agency could
  obtain from unrelated third party lender
• Analysis should compare NPV of total
  acquisition/capital lease costs under capital
  leases with NPV of total operating lease costs

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Lease vs. Purchase Analysis

• Total costs of acquired property should include
• Estimated purchase price plus
• NPV of anticipated operating and maintenance
  costs (including taxes) not included in debt
  financing less
• NPV of any estimated salvage value at end of
  period
• Total costs of property held under capital leases
  should include
• NPV of lease payments plus
• NPV of any purchase option at end of lease plus
• NPV of operating and maintenance costs less
• NPV of any credits to be applied at end of lease

22
Lease vs. Purchase Analysis

• Total costs of operating lease agreements should
  include
• NPV of leasing comparable facilities
• At Fair market rates
• Renewable over anticipated period of use
• NPV of any operating and maintenance cost
  expected to be incurred by organization directly

23
Allocability of Costs

• A-122 Attachment A sets forth general
  allocability standards
• Who will occupy/use facilities?
• Rents received from third party lessors must
  reduce costs allocated to federal grants
• Unoccupied/Unused portions of facilities may be
  unallowed
• Attachment B, paragraph 21 addresses idle
  facilities and idle capacity costs
• Idle Facilities completely unused
• Idle Capacity partially unused (vacant portions
  of buildings or equipment used at less than full
  capacity)
• Definition of facilities in standards includes
  real property and equipment

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Allocability of Costs

• Idle facilities costs unallowable with certain
  exceptions
• Where necessary to meet fluctuations in workload
• Necessary costs when acquired but became
  unnecessary due changes in program requirements
  and certain other unforeseeable circumstances
• Under these circumstances, allowable for
  reasonable period depending on initiative taken
  to sell, lease, use or dispose of facilities
• Idle capacity costs
• Typically allowable as indirect costs if in
  normal course of doing business
• Capacity must have been reasonably anticipated to
  be necessary
• Must attempt to mitigate loss through use on
  other awards, subletting, etc.
• Widespread Idle Capacity throughout and
  organization or among group of similar assets may
  be considered Idle Facilities cost

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Cost Recovery

• Governed by OMB A-122, Attachment B, Paragraph 11
• Establishes two options for cost recovery
• Depreciation
• Use Allowance
• Both based on acquisition cost or FMV at time of
  donation excluding
• Land cost
• Cost originally borne by Federal government
• Cost previously claimed as non-federal share
• Generally, cannot use different method within a
  class of assets (buildings, computer equipment,
  furniture and fixtures)
• Both must be supported by adequate property
  records as defined at OMB Circular A-110
  paragraph 34

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Cost Recovery

• Depreciation
• Calculated over expected useful life of asset
• Straight-line method presumed to be appropriate
• Clear evidence of different pattern of use can
  overcome this presumption
• Method cannot be changed without prior approval
• Cost segregation required
• Segregates building components (plumbing,
  lighting, HVAC systems) from total building costs
  for purposes of depreciating
• Not allowed if asset would be viewed as fully
  depreciated
• Reasonable use allowance may be negotiated in
  this case

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Cost Recovery

• Use allowance
• Building and improvements calculated at annual
  rate of 2 of acquisition costs
• 50 year recovery period
• Method cannot be changed without prior approval
• Equipment costs computed at rate not to exceed 6
  2/3
• Cost segregation not allowed
• Imbedded components such as plumbing, HVAC, etc.
  calculated at 2 with building
• Equipment used as furnishings or decorations and
  not permanently attached can be segregated
  (dishwashers, kitchen equipment, carpet, etc.)

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Financing

• How will acquisition be financed?
• Equity financing
• Agency funded
• Debt financing
• External financing
• Must consider allowability of interest to be paid
  on debt
• Allowability of Interest
• Addressed at OMB Circular A-122, paragraph 23

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Financing

• Interest Allowable if
• Acquired after September 29, 1995
• Not allowable on re-acquired property
• Facilities acquisitions over 10 million where
  Fed participation is expected to be at least 40
• Require Needs Justification
• Must consider allowability of interest to be paid
  on debt
• Facilities acquisitions over 500,000
• Require lease/purchase analysis
• Actual interest cost cannot exceed fair market
  rate available from unrelated third party
• Investment earnings on bond or loan principle
  must be used to offset interest costs
• Interest on excess cashflows
• Applies to debt in excess of 1 million where
  organization doesnt make initial equity
  contribution of at least 25
• Calculated on allowable costs in excess of debt
  service
• Calculated at three month T-bill rate
• Reduces allowable interest cost for period

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Procurement

• Requirements set forth in OMB Circular A-110
  paragraph __.40 thru __.48
• Organization develops own policies
• Minimum Standards
• Avoid purchase of unnecessary items
• Lease vs. Purchase analysis, where applicable
• Clear and concise solicitations
• Efforts should be made to use small business,
  minority owned or women owned businesses, where
  possible.
• No cost-plus or percentage-of-costs contracts
• Contract only with responsible bidders
• Cost price/analysis should be documented
• Low cost not only consideration

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Q Is the cost of cellular telephones provided to
employees an allowable cost to my grant?
32

• Considerations
• Is this specific type of cost addressed in A-122
  Attachment B?
• How are requirements of A-122 Attachment A
  applicable?

33

• Considerations
• Is this specific type of cost addressed in A-122
  Attachment B?
• Yes Attachment B, Item 7 addresses
  Communication Costs. It states
• Costs incurred for telephone services, local and
  long distance telephone calls, telegrams,
  radiograms, postage and the like are allowable.

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• Considerations
• How are requirements of A-122 Attachment A
  applicable?
• First consideration would be who uses the phone
  and why.
• Although provided for in Attachment B, costs must
  still satisfy requirements related to
• Is the cost reasonable for performance to the
  award?
• Is the award allocable to the award?
• Is the cost adequately documented

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• Conclusion
• Head Start counselor using phone while making
  home visits
• May meet reasonableness test
• May be allocable to award
• Could still be unallowable if adequate
  documentation of use not maintained.
• LIHEAP Intake Specialist
• Probably fails reasonableness test as employee is
  typically in fixed location

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Q Is merit pay an allowable cost?
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• Source OMB Circular A-122, Attachment B, Item
  8(j)
• Guidance Incentive compensation is allowable to
  the extent
• overall compensation is determined to be
  reasonable and
• such costs are paid or accrued pursuant to an
  agreement entered into in good faith between the
  organization and the employes before the services
  were rendered, or pursuant to an established plan
  followed so consistently as to imply an agreement
  to make such payment

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SoAttachment B says merit pay is allowableso is
it?
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• Lets look back at Attachment A
• Reasonableness of overall compensation covered in
  Attachment B
• Is it allocable to my award?
• Is it adequately documented?

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Time and Effort Reporting
41
All salaries and wages charged to grants must be
supported by signed timesheets Exceptions State
, Local and Indian Tribal Governments must comply
with requirements of OMB A-87 Educational
Institutions must comply with requirements of OMB
A-21
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• OMB A-122 requires that timesheets must
• Reflect an after-the-fact distribution of the
  employees actual activity
• Intended to prevent photocopying a timesheet each
  new period with same allocations.
• Account for the total activity of each employee
• Be prepared at least monthly and coincide with
  one or more pay periods
• Be signed by the employee or supervisor having
  first hand knowledge

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• Vermont Slauson Economic Development Corporation
• ACF disallowed 89,581 due to failure to
  adequately document personnel costs
• DHHS Departmental Appeals Board heard case
  (Docket No. A-04-108, Decision No. 1955)
• Decision disallowance sustained
• Grantee did not satisfy burden of documenting
  allowability, including allocability, of costs
  charged to federal grants
• Grantee provided quarterly reports to auditors
  and appeals board containing insufficient detail

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(No Transcript)
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Another Significant Consideration

• Section 205 of the FY 2005 HHS appropriations
  bill (ACYF-PI-HS-05-01 issued 3/3/2005)
• Limits compensation of individuals, either as
  direct or indirect cost, to a rate not in Excess
  of Executive Level II pay (162,100 per year for
  2005)
• Applies to total compensation (salary and
  benefits)
• Is prorated if employees compensation is charged
  to multiple grants
• Effectively establishes cap for base salary used
  to determine non-federal matching funds also.

46
IRS Executive Compensation Issues

• IRS is increasing Scrutiny and Enforcement Focus
  on Nonprofit Executive Compensation
• 2006 Form 990 required more info to be reported
  on compensation and who sets compensation
• Legislation in 2006 required more stringent
  definitions of disqualified persons or those in
  a position to exercise substantial influence over
  an exempt organization
• 2006 also provided for increased penalties for
  those who participate in excess benefit
  transactions (a financial transaction that
  exceeds market rate)
• IRS released a draft list of Good Governance
  Practices for 501(c)(3) Organizations on February
  7, 2007 that states
• Charities should generally not compensate board
  members except for reimbursement of direct
  expenses
• Charities may pay reasonable compensation to
  officers and staff

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• To avoid IRS related pitfalls
• Set compensation in advance using appropriate
  comparability data
• Make sure that no one involved in setting
  salaries has a conflict of interest
• Document, document, document
• all decisions on compensation
• Avoid penalties by reporting all economic
  benefits to officers, directors, and key
  employees on Form 990.

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Fund Raising vs. Bid and Proposal Costs

• Fund Raising Costs Salaries, consultant fees,
  printing, postage, travel, etc. associated with
  seeking donations of funds for non-specific
  purposes from private institutions or individuals
• Specifically addressed in Attachment B, item 17
• Unallowable
• Typically paid from proceeds of
• Bid and Proposal Costs Salaries, consultant
  fees, printing, postage, travel, etc. associated
  with proposals and applications to perform
  specific tasks for renumeration under Federal and
  non-federal grants/contracts
• Not addressed in Attachment B
• Are reasonable and meet prudent person test
  (ordinary and necessary)
• Are allocable to programs
• Typically charged to indirect cost pool

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Transactions with Affiliates

• Key Concepts
• The cost of goods and services delivered from an
  affiliate must exclude any profit component.
• Conversely, if the non-profit provides services
  to an affiliate, a credit must be applied to the
  appropriate cost center, whether direct or
  indirect.

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Transactions with Affiliates

• Criteria
• Attachment A, Paragraph A.2.a requires costs be
  reasonable for performance of award
• Attachment A, Par A.3 invoke the prudent person
  standard
• Attachment A, Paragraph A.5 requires that any
  applicable credits (receipts or reduction of
  expenditures which operate to reduce expense
  items allocable to awards as direct or indirect
  cost) be applied as either a cost reduction or
  refund.
• Attachment B, Paragraph 43(c) state that rental
  costs under less-than-arms-length leases are
  allowable only up to the amount that would be
  allowed had title to the property vested in the
  non-profit organization.

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Transactions with Affiliates

• Practical Guidance
• Rental costs charged to grants and/or indirect
  cost pool for buildings owned by for-profit
  affiliates cannot exceed actual costs to the
  affiliate (depreciation/use allowance as defined
  in Attachment B Par. 11, maintenance, taxes and
  insurance)
• Materials, supplies and services purchased from
  affiliates must be charged at affiliates cost,
  with no profit component included
• Proceeds form services provided by the grantee to
  the affiliate must be used to reduce related
  costs allocable to awards as direct or indirect
  costs (even if affiliate doesnt pay for them)

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• Is the cost of accrued annual leave allowable
  under OMB Circular A-122?
• In most instances, yes.
• Under A-122, cost charged to grants/contracts
  must be determined in accordance with GAAP. (OMB
  Circular A-122, Attachment A, Part A., paragraph
  2.e.
• GAAP requires recording of accrued leave if
• Employers obligation relating to employees
  rights to receive compensation for future
  absences is attributable to employees services
  already rendered
• The obligation relates to rights that vest or
  accumulate
• Payment of the compensation is probable
• The amount can be reasonably estimated
• Does not result in increased costs, but allows
  for recognition of costs in the proper accounting
  period

FAQs obtained from www.dol.gov/oasam/programs/boc/
costdeterminationguide/sec4/htm
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• Indirect Costs

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• Two types of costs
• Direct Costs
• Costs that can be identified specifically with a
  particular project relatively easily and with a
  high degree of accuracy
• Indirect Costs
• Costs that are incurred for common or joint
  objectives
• a.k.a. Facilities and Administrative Costs

Both can be programmatic or administrative
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Characteristics of Two Types of Costs

• Direct Costs
• Easily identified to a cost objective
• Head Start teacher salaries
• LIHEAP client benefits
• CACFP Food Costs
• Typically benefit one program
• Can be charged directly to applicable cost
  objective
• Indirect Costs
• Not easily identified to a particular cost
  objective
• Fiscal officer salaries
• Cost of IT systems
• Facilities costs
• Typically benefit more than one program
• Must be allocated to various benefiting programs

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Direct Costs
Indirect Costs
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Common Indirect Cost Problems

• Cost of Unallowable Activities
• Must not be charged to indirect cost pool
• Must be treated as direct costs (charged to
  separate final cost objectives) and allocated an
  equitable portion of indirect cost. (OMB A-122,
  Attachment A, paragraphs B.3 and B.4)

58
Common Indirect Cost Problems

• Credits
• Failure to reduce total costs incurred (both
  direct costs of a specific program or indirect
  costs) by credits applicable to those costs.
• Fees for conferences
• Building rental programs
• Insurance credits or adustments
• Data processing and office services performed for
  others
• (OMB Circular A-122, Attachment A, Paragraph A.5)

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Impact of Unallowable Costs

• How do unallowable costs impact my organization?
• Can deplete organizations unrestricted fund
  balances
• Unallowable costs must be treated as direct costs
  (charged to separate final cost objectives) and
  allocated an equitable share of indirect costs
  (OMB Circular A-122, Attachment A, paragraphs B.3
  and B.4)
• Effectively reduces amount of indirect cost that
  can be recoveredfurther depleting unrestricted
  funds

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QUESTIONS???