Depreciation Guidelines for Recharge Accounts
Expensing the total cost of equipment in the year of purchase is not in accordance with Generally Accepted Accounting Principles (GAAP) which requires the cost of an asset to be spread over its expected useful life. (source: January 12, 1994, DHHS, Office of Inspector General Audit Report)
OMB Circular A-21 allows universities to be compensated for the use of their equipment through depreciation or use allowance. It specifically states that charges for the use of specialized services should be designed to recover not more than the aggregate cost of the services. Including a markup in the billing rates to accumulate a reserve in excess of equipment depreciation for equipment replacement and additions results in an overstatement of costs. The university may not charge recharge services users more than the actual costs incurred. (source: January 12, 1994, DHHS, Office of Inspector General Audit Report)
Frequently Asked Questions
Can a recharge activity purchase an item with current reserves and collect money over the useful life of the equipment to repurchase the item at the end of the useful life?
Yes. The assignment of a depreciation charge during the useful life will permit the recharge center to have sufficient funds at the end of the useful life for purchase of a replacement piece of equipment.
Can a recharge activity lease a piece of equipment and charge the lease payments to the recharge operating fund?
For capital leases, lease payments can be allocated to the recharge operating fund provided that the amount of the lease payments is roughly equal to the amount of depreciation that could have been charged for the same period and the University has title to the asset. For operational leases, the lease payments should be allocated to the recharge operating fund.
Can a recharge unit assign a piece of existing equipment, purchased with federal funds, to the recharge activity and depreciate the value of the equipment over the useful life of the equipment?
No. If the equipment was originally bought on federal funds, the recharge unit cannot depreciate the value of equipment and assign the respective costs to the recharge fund.
Can a recharge unit assign a piece of existing equipment, purchased with non-federal funds, to the recharge activity and depreciate the value of the equipment over the useful life of the equipment?
If the equipment was originally bought on non-federal funds, you can make the assignment and the subsequent depreciation. If the equipment is used only part of the time for recharge activities and the remainder of the time for non-recharge activities, only that percentage of the equipment time on the recharge activity should be assigned to the recharge unit.
What determines whether or not an item can be assigned as equipment with depreciation allocated to a recharge account?
The University definition for equipment must be met. Presently the item must have a purchase price of at least $5,000 and a useful life of more than a year. The item must be used in the recharge activity to have its charges assigned to the respective fund.
Can you elect to expense a piece of equipment in the year of purchase?
No. The equipment purchased for use in a recharge activity must be charged out to that activity through annual depreciation charges over the useful life of the equipment or financed through a capital lease.
Where can I find information regarding the useful life of a piece of equipment?
The useful life tables are prepared by the Office of the President and can be found here. Useful lives can also be found in the campus equipment inventory tracking system, BETS. To request a new classification of equipment with new useful lives, complete the Equipment Useful Life Update Form and submit to firstname.lastname@example.org.
Where do I find funding to purchase equipment for assignment to a recharge activity?
The University operating policies require the department to purchase the initial equipment for the newly established recharge activity. If it is an ongoing recharge activity and the amount of the equipment purchase is small, you can finance the purchase from amounts in the recharge accounts current reserves. If it is an ongoing recharge activity and the amount of the equipment purchase is substantial, you should finance the purchase through a capital lease or seek outside seed money from other sources.