I. General Comments:
The purpose of this document is to establish guidelines for the acquisition of general purpose equipment within the framework of the legal requirements and government rules that control acquisition of equipment. These guidelines also outline the internal process of approving general purpose equipment, accounting for it within the UCAR accounting system, and suggest some possibilities for funding/financing the purchase.
II. Definitions:
Equipment: Equipment is defined as tangible nonexpendable personal property charged directly to the award with an acquisition cost of $5,000 or more per unit or system and a minimum useful life of one year or more. However, lower limits may be established if so specified in a sponsor agreement.
General Purpose Equipment: General purpose equipment means equipment which is usable for other than research, scientific or technical activities, whether or not special modifications are needed to make them suitable for a particular purpose. It follows therefore, that equipment purchased by chargeback or indirect cost pool centers is general purpose equipment and these guidelines apply.
Special Purpose Equipment: Special purpose equipment means equipment which is usable only for research, scientific or technical activities. Capital expenditures for special purpose equipment are allowable as a direct cost. It follows therefore, that equipment used for "direct" or "program" purposes, should be purchased as a direct cost.
III. Special Requirements:
A. A-122 Regulations that Govern Equipment Purchases are as follows:
Under OMB A-122, UCAR can elect to be reimbursed as an indirect cost for the use of buildings, other capital improvements, and equipment through use allowances or depreciation. UCAR has adopted the depreciation method described below because it allows for more flexibility and assets costs are recovered by the UCAR General Fund in a shorter period.
When the depreciation method is followed, the period of useful life established in each case for usable capital assets must take into consideration such factors as type of construction, nature of the equipment used, technological developments in the particular program area, and the renewal and replacement policies followed for the individual items or classes of assets involved. The method of depreciation used to assign the cost of an asset to accounting periods shall reflect the pattern of consumption of the asset during its useful life.
In the absence of clear evidence indicating that the expected consumption of the asset will be significantly greater or lesser in the early portions of its useful life than in the later portions, the straight-line method shall be presumed to be the appropriate method. Depreciation methods once used shall not be changed unless approved in advance by the cognizant audit agency.
When the depreciation method is used for buildings, a building's shell may be segregated from each building component (e.g., plumbing system, heating, and air conditioning system, etc.) and each item depreciated over its estimated useful life; or the entire building (i.e., the shell and all components) may be treated as a single asset and depreciated over a single useful life.
Debt Financing
The interest on debt incurred to acquire or replace capital assets is allowable under certain circumstances which include a favorable lease/purchase analysis, a limit on the interest rate, an offsetting of certain investment earnings against interest costs, and a needs assessment which might require pre-approval. This allows UCAR to incur debt for the purpose of acquiring general purpose equipment.
B. GAAP Rules
The general rule under Generally Accepted Accounting Principles (GAAP) is if the expenditure substantially extends the life of the equipment or is a substantial upgrade, then capitalize it. The cost of the replaced equipment must be removed from the property records.
IV. Procedures
A. General Rule
Circular OMB A-122 encourages nonprofits to acquire, either by lease or purchase, assets in the manner that would be least expensive. Therefore, general purpose equipment (indirect cost pool equipment) will generally be acquired or replaced by borrowing money from a third party (bank) or through a lease arrangement, whichever is most cost effective. The UCAR Assistant Treasurer will conduct a purchase/lease analysis to determine which is the more cost effective method of acquisition. This analysis is not required by A-122 unless the equipment acquisition cost (total lease cost or purchase price) is greater than $500,000. However, UCAR procedure will be to perform this analysis for all acquisitions greater than $50,000. Interest incurred and the allowable depreciation will then be reimbursed by the indirect cost pools to the UCAR Plant Fund. Each equipment acquisition will be approved in advance by the UCAR Cost Accounting Committee. Ultimate spending approval will be given at the President's Council. See flowchart for decision steps.
B. Accounting Procedures for General Rule
Purchase/Debt Incurred
The asset will be capitalized and debt recorded as incurred to pay for the acquisition. Account keys are established for the purpose of tracking asset acquisitions and replacements.
For accounting control, a Plant Fund has been established within UCAR's General Fund to track these purchases. Equipment purchased using specified account keys will be accounted for in the UCAR Plant Fund as equipment to be reimbursed through depreciation charges and associated interest charges to the indirect cost pools. Account key 000502 is used to record the transfer of the asset from the General Fund to the Plant Fund.
For debt arrangements over $1 million, special rules from A-122 apply which require nonprofit organizations to prepare a cumulative report on monthly cash flows including inflows and outflows.
Lease
Lease costs are an allowable expense given that the lease is an arms-length transaction and is reasonable for market conditions and value of property leased. An arms-length lease is one in which one party to the lease agreement is not able to control or substantially influence the actions of the other. Leases with related parties are not allowable.
Rental costs under leases which are required to be treated as capital leases under Generally Accepted Accounting Principles (GAAP), are allowable only up to the amount that would be allowed had the organization purchased the property on the date the lease agreement was executed, i.e., to the amount that minimally would pay for depreciation or use allowances, maintenance, taxes, and insurance. Interest costs related to capitalized leases are allowable to the extent they meet criteria in A-122. Unallowable costs include amounts paid for profit, management fees, and taxes that would not have been incurred had the organization purchased the facility.
C. Recording Depreciation
The depreciation and accumulated depreciation will be originally accounted for in the Plant Fund. The depreciable life of the asset is determined by referencing IRS asset life tables and by reviewing the type of construction, nature of the equipment used, technological developments in the particular program area, and the renewal and replacement policies followed for the individual items or classes of assets involved. UCAR generally uses the straight line method. The Plant Fund will transfer the depreciation to the corresponding General Fund equipment account key as noted above. The depreciation expense will then be transferred to the appropriate indirect cost pool. The purpose of the second transfer is to provide a fund balance that shows the net affect of the equipment purchases versus depreciation recovered.
D. Asset Disposal
Once equipment is fully depreciated, UCAR may negotiate a use allowance in certain situations with the NSF. Any gain or loss on disposal, retirement or other disposition is retained as credits or charges to the indirect cost pool in which the depreciation was included. The gain or loss to be included as a credit or charge is the difference between the amount realized on the property and the undepreciated basis of the property.
E. Effect on UCAR Debt
Acquisition of general purpose equipment will require funding through debt financing. Planning for the acquisitions of equipment by consolidating purchases and being aware of the interest rates is essential. As much advance notice as is possible should be given for equipment acquisitions.
VI. Exceptions and Other Possible Funding Sources
Other options exist for acquiring general purpose equipment which should be considered. Accounting procedures would have to be established for each option independently. Two options to be considered are as follows:
A. Request a Special Allocation of Funds from NSF as an Exception
OMB Circular A-122 specifically prohibits general purpose equipment from being direct charged against an award without prior approval of the awarding agency. UCAR's justification for a special allotment of funds could be to acquire building space or equipment at the lowest cost to the federal government, to accommodate special needs mandated by the government, or to deal with catastrophic or emergency situations. The UCAR Contracts Office will initiate special allotment exception requests after appropriate approvals through the respective entity Director's Offices.
B. Maintenance and Repair
Costs incurred for necessary maintenance, repair, or upkeep of buildings and equipment which neither add to the permanent value of the property nor appreciably prolong its intended life, but keep it in an efficient operating condition, are allowable as direct or indirect costs.
C. Use of UCAR General Fund
The general rule regarding purchase of general purpose will be to finance that purchase with debt. However, in certain circumstances, General Fund monies may be requested and used to purchase general purpose equipment or land associated with the acquistion of buildings.
