Depreciation Expense, Reserve
Funds & Capital Planning for
Recharge Units
Celia Maddox
February 28, 2012
Agenda
What is depreciation?
Campus Perspective
How do you calculate recharge depreciation?
How does depreciation relate to recharge rates?
How and when to record recharge depreciation
Reserves-Rules and Uses
Budgeting and F&A Impacts
The Capital Plan
Case Study
Agenda
What is depreciation?
Campus Perspective
How do you calculate depreciation?
How does depreciation relate to rates?
How and when to record depreciation
Reserves-Rules and Uses
Budgeting and F&A impacts
The Capital Plan
Case Study
What is depreciation?
―Depreciation‖ is an accounting term that
spreads a capital asset’s cost over its
estimated useful life.
– Acknowledges periodic wear and tear
– Not a cash based entry
What is depreciation?
What does depreciation accomplish?
– Assigns purchase costs over a period of time so
that each year of operation bears only a share of
the total purchase price.
For recharge entities, aligns users with an appropriate
share of equipment costs.
– The depreciation entries create a renewal and
replacement fund which finances the unit’s capital
plan.
What is depreciation?
Compare these two expenses for an analytical
recharge facility:
The facility has a DNA sequencing machine
that costs about $500,000 and is expected to
last about 7 years.
The facility uses solvents to process the DNA
samples. They are constantly replenished,
one $10 gallon lasting about 1 week.
Expense v. Depreciation
(assume 30 users every year…)
Expense
FY08 FY09 FY10 FY11 FY12 FY13 FY14
DNA Machine $500,000 0 0 0 0 0 0
Solvents 520 520 520 520 520 520 520
Total Cost $500,520 520 520 520 520 520 520
Rate $16,684 17 17 17 17 17 17
Depreciate
DNA Machine $71,429 71,429 71,429 71,429 71,429 71,429 71,429
Solvents 520 520 520 520 520 520 520
Total Cost $71,949 71,949 71,949 71,949 71,949 71,949 71,949
Rate $2,398 2,398 2,398 2,398 2,398 2,398 2,398
Agenda
What is depreciation?
Campus Perspective
How do you calculate depreciation?
How does depreciation relate to rates?
How and when to record depreciation
Reserves-Rules and Uses
Budgeting and F&A impacts
The Capital Plan
Case Study
Campus Perspective
GASB 34/35: Basic Financial Statements
and Management Discussion and Analysis—
for Public Colleges and Universities
In 2000, the federal government began to
require colleges and universities to record
depreciation to their financial statements, like
all other entities do. UCB started to record
depreciation in FY01-02.
Campus Perspective
The university’s capital assets are:
– Real Estate and Land: capitalized but not
depreciated.
– Infrastructure: includes utilities systems,
telephone and data systems, landscaping,
roadways, parking lots, lighting systems etc.
– Buildings and Improvements: includes fixed
equipment & leasehold improvements.
Campus Perspective
The university’s capital assets are:
– Moveable Equipment-includes software
– Library Materials and Collections: includes Rare
Books and Collections (capitalized but not
depreciated)
– Special Collections: capitalized but not
depreciated
– Intangible assets: goodwill, patents , IP
– Construction in Progress (CIP)
Campus Perspective
Maybe show a picture of campus financial
schedules where capital acquisitions are
backed out
Then show an example of UC statements
where assets are listed.
Campus Perspective
How does recharge depreciation impact
campus?
– It shouldn’t, when recorded properly!
– When identified in campus systems, avoids
charging the government twice: one through
indirect costs and once through recharge direct
costs.
Agenda
What is depreciation?
Campus Perspective
How do you calculate depreciation?
How does depreciation relate to rates?
How and when to record depreciation
Reserves-Rules and Uses
Budgeting and F&A impacts
The Capital Plan
Case Study
How do you calculate depreciation?
First, determine what your depreciable
assets are.
– Identify the inventorial equipment
Use BETS to help
– Non inventorial equipment will not be depreciated,
but should be expensed.
Q: Are buildings and structures inventorial
equipment?
How do you calculate depreciation?
Next, determine if your depreciable assets
are available for depreciation.
– Is the item used in the delivery of recharge goods
or services? If so, looking good!
– What if the item is only partially used in the
delivery of goods or services? Then only the
proportion used in the delivery of recharge
services can be depreciated.
THEN………………..
How do you calculate depreciation?
Examine the fund source that ultimately paid
for original acquisition
– Federal funds
– Private contract and grant funds
– Recharge operations fund
– Cost sharing to a sponsored program
How do you calculate depreciation?
Are leased equipment depreciable assets?
– Operational leases are expensed.
– Capital leases are treated like any other capital
asset.
Include in the depreciation schedule and charge the
lease to the reserve fund
Can short cut the accounting if the depreciation is about
equal to the lease payments
Use of Equipment v. Depreciation
Using a piece of equipment that is
unavailable for depreciation in the delivery of
a recharge service might be permissible—
recovery of the cost in rates, however, is not.
– Check terms and conditions of fund sources used
to purchase the items.
Use of Equipment v. Depreciation
Using a piece of equipment that has been
purchased with federal funds for the delivery
of services to an activity that uses non-
registry stem cell lines is NEVER allowed!
– Even when no depreciation cost is claimed in the
rate
– Non-registry stem cell researchers must identify
themselves to recharge centers
HINT: management project code
How do you calculate depreciation?
Recharge units uses a basic, straight-line
calculation:
(Acquisition & Installation Cost)-Salvage Value* = depreciation amount
Estimated Useful Life
*Salvage value or trade-in value
How do you calculate depreciation?
Collect data for depreciable assets in a
depreciation schedule:
– Start with the previous year’s actuals!
– Use BETS to reconcile the schedule and to
identify any new acquisitions.
– For rate development, can include assets
expected to be purchased –should refer back to
the unit’s capital plan.
– Evaluate useful lives against UCOP useful life
table.
How do you calculate depreciation?
For general ledger entries:
– Modify the schedule to reflect what actually
happened.
Remove anticipated acquisitions.
Make adjustments for useful lives.
How do you calculate depreciation?
What happens when there is a difference
between the depreciation used to calculate
rates and what actually happened?
– Always record what actually happened. If the rate
included costs that never happened, any resulting
surplus would be rolled into future rates.
– Be sure to adjust next year’s depreciation value
for rate development.
– Be sure to update BETS!
How do you calculate depreciation?
What happens if I forget to include some
assets on the rate development, or we
purchase more than we anticipated?
– Always record what actually happened. Any
resulting deficit will be rolled into future rates.
– If mid-year, can recalculate depreciation and
change rates.
– Be sure to update BETS!
How do you calculate depreciation?
What happens when I dispose of an asset
before its useful life is up?
– Always record what actually happened. You can
only include depreciation expense in rates for
assets in use! You’ll want to ―write off‖ the
remaining equipment value and any resulting
deficit would be rolled into future rates.
– Be sure to ―true up‖ your depreciation schedule.
– If mid-year, can recalculate depreciation and
change rates.
– Be sure to update BETS!
How do you calculate depreciation?
What happens if I purchase inventorial items
from my recharge operations fund?
– It would be double counting to expense an
inventorial item to a recharge operations fund
AND depreciate the asset. The acquisition will
have to be moved to an alternate fund source.
How do you calculate depreciation?
What happens if I buy an asset for the
recharge center but later transfer it to
another part of the organization?
– Always record what actually happened. Only
items in use by the recharge operation can be
depreciated. Future depreciation expense for
assets not in use cannot be included in rates.
– If purchased with rechg reserve funds, will part of
the acquisition cost need to be transferred?
– Be sure to update your depreciation schedule.
– Be sure to remove the ―recharge‖ flag in BETS!
How do you calculate depreciation?
What happens if I buy an asset for use in the
recharge center and later it is used as cost sharing
for a federal grant?
– Always record what actually happened. The remaining
useful life cannot be claimed in the rate development.
– Modify the depreciation schedule to reflect the change.
– If purchased with rechg reserve funds, will part of the
acquisition cost need to be transferred?
– Make sure the asset is still available for use by the recharge
unit.
– Be sure to update BETS!
How do you calculate depreciation?
What happens if my experience says the
useful life is different from the UCOP tables?
– Be sure to notify General Accounting
(gao@berkeley.edu) and request an addition or
modification to UCOP’s tables.
– Complete the form and route to GAO:
http://controller.berkeley.edu/recharge/Policies/depreciation.htm
– In some circumstances, use your experience and
document on the self certification form.
How do you calculate depreciation?
What if I do not include a salvage or trade-in
value in my depreciation schedule, but I’ve
sold the asset for $500!
– Always record what actually happened.
Recalculate the depreciation and make an
adjusting entry. Any resulting surplus can be
rolled into next year’s rates.
How do you calculate depreciation?
What if my recharge unit contributes to the
upgrade of a building component or system
like the roof or the fire sprinkler system?
– Is the asset that is being upgraded available for
depreciation?
Generally, building systems are campus assets
depreciation for which is not included in recharge rates.
Agenda
What is depreciation?
Campus Perspective
How do you calculate depreciation?
How does depreciation relate to rates?
How and when to record depreciation
Reserves-Rules and Uses
Budgeting and F&A impacts
The Capital Plan
Case Study
How does depreciation relate to rates?
Once the depreciation amount is quantified, it
becomes an element of cost for the recharge
unit and is incorporated into recharge rates.
– Thus, some portion of every dollar received in
recharge income is attributable to depreciation.
How does depreciation relate to rates?
Show the depreciation cost as a line item in
the rate development sheet.
– It should reconcile with the depreciation schedule
and should have something to do with the unit’s
capital plan.
– Identify depreciation to different lines of business.
Are all assets used in each rate? Or are some assets
specific to some rates?
Agenda
What is depreciation?
Campus Perspective
How do you calculate depreciation?
How does depreciation relate to rates?
How and when to record depreciation
Reserves-Rules and Uses
Budgeting and F&A impacts
The Capital Plan
Case Study
How to record depreciation
• Two part transaction
• Financial-actually transfers $$ to the reserve fund.
• Budgetary-if you use standards BAIRS reports
you won’t ― see‖ the transaction unless the
budgetary entries are done.
How to record depreciation
Depreciation Financial Journal
Acct Fund Org Prog Desc DR CR
54251 6XXXX Yours Yours Depr Exp. FYXX-XX $6,150
54252 6XXXX Yours Yours Depr Contra Exp $6,150
34039 6XXXX Yours - Inter Fund Bal Transfer $6,150
34039 76XXX Yours - Inter Fund Bal Transfer $6,150
23502 6XXXX - - Interfund Bal* $6,150
23502 76XXX - - Interfund Bal* $6,150
*these two entries will be automatically generated by the system
If used to track recharge activity, include project and flex codes on lines one and two only.
How to record depreciation
Depreciation Budgetary Journal
Acct Fund Org Prog Desc DR CR
54200 6XXXX Yours Yours Depr Exp. FYXX-XX $6,150
39000 6XXXX 00800 - Inter Fund Bal Transfer $6,150
54200 76XXX Yours Yours Depr Exp. FYXX-XX $6,150
39000 76XXX 00800 - Inter Fund Bal Transfer $6,150
If used to track recharge activity, include project and flex codes on lines one and three only.
Preparing the budgetary entries assures that the depreciation cost shows on standard BAIRS
reports.
How to record depreciation
Beware of the signs!
Always record your actuals.
Use example in recharge policy document to guide
you through the entries.
Remember the contra entries! If they are omitted, it
will be in conflict with campus depreciation.
Transactions involve orgs and accounts you may not
be able to ―see‖ or are not familiar with.
– Central orgs and liability accounts.
How to record depreciation
Do I have to record depreciation?
– If you include the depreciation cost in rates, you
must record depreciation. If you don’t you’ll be
using revenue attributable to depreciation for
operations, and that requires approval.
– If you don’t include in rates, then you don’t have
to record depreciation.
How to record depreciation
How do I record depreciation related to a
lease?
– Operational leases are expensed
– Leased capital assets are treated like any other
capital asset
Include on the depreciation schedule and charge the
lease payments to the reserve fund.
If lease payments are about equal to the depreciation,
can charge lease payment directly to the operations
fund.
– Be careful! How would this short cut impact your capital
plan?
When to record depreciation
When should I record depreciation?
– Ideally, often!
– Especially important if material for your unit; only
leads to better financial reports.
– At least annually. The more often it is performed
the more routine it becomes and perhaps the
fewer errors.
When to record depreciation
What if the recharge unit’s volume for the
year isn’t what the rate predicted? Can’t I
adjust the depreciation expense so the unit
will avoid a surplus/deficit?
– Always record what actually happened. Will the
volume change impact the depreciation expense?
If not, record the depreciation expense as calculated
and any resulting surplus or deficit can be rolled into
rates.
If so, recalculate depreciation expense and determine if
a new asset category needs to be established.
Agenda
What is depreciation?
Campus Perspective
How do you calculate depreciation?
How does depreciation relate to rates?
How to record depreciation
Reserves-Rules and Uses
Budgeting and F&A impacts
The Capital Plan
Case Study
Reserves-Rules and Uses
What is a reserve fund?
– Renewal and replacement of assets on which
depreciation is based
The whole idea is to put $$ aside to pay for replacement
items.
– Make sure the reserve fund in the 76XXX range.
Use of any other fund range for the replacement
items will misstate costs on the campus’ financial
schedules.
Reserves-Rules and Uses
What can the reserve fund be used for?
Proceed Proceed with Caution Needs Permission
Replacement of like assets X
within the same
recharge unit
Replacement of similar X
assets within the same
recharge unit
Business Expansion- new Ask Control Unit
assets
Recharge Unit Operational Ask Control Unit
Expenses
Recharge Unit Deficit Through deficit waiver process, ask
Recovery Budget Office
Expenses for another Ask Control Unit
unrelated entity
Reserves-Rules and Uses
If I use the reserve for operational expenses,
for non-capital items, or for other unrelated
activities are there consequences?
– Yes! Becomes a permanent subsidy to the
recharge center.
– Diminishes funds available to finance the unit’s
capital plan.
How sympathetic will the Control Unit or Campus be to
requests for equipment funds down the road?
Reserves-Rules and Uses
Monitor your reserves!
– Pull reports at least quarterly by account code.
Are all expenses allowable?
Are all expenses for use by the recharge center that
created the reserve?
Is the reserve balance sufficient to cover the unit’s
capital plan?
If used for an unconventional purpose, are the proper
approvals in place?
Does the balance in the fund tie to the capital plan?
Reserves-Rules and Uses
My closed recharge unit has a reserve
balance. What are the rules for using these
funds?
– First claim is to fund any operating shortfalls.
– After that, becomes unrestricted funds to the
department.
Agenda
What is depreciation?
Campus Perspective
How do you calculate depreciation?
How does depreciation relate to rates?
How to record depreciation
Reserves-Rules and Uses
Budgeting and F&A impacts
The Capital Plan
Case Study
Budgeting and F&A Impacts
What is F&A?
– Campus indirect costs or overhead
What does my recharge unit have to do with
F&A?
– Recharge center expense and revenue must be
accounted for properly to assure proper treatment
in the F&A proposal to the government.
BETS
Feds review balances
– Surpluses are viewed as overcharging
Budgeting and F&A Impacts
Why do I have to budget?
– Budgets are a management tool by which the
unit’s performance can be measured.
– Use the rate development to inform the budget.
– OP uses budgets as the campus’ representation
of its plan. When revenues fall short or exceed
the budget (or the expectation), OP starts asking
questions.
Can impact allocations to campus
Agenda
What is depreciation?
Campus Perspective
How do you calculate depreciation?
How does depreciation relate to rates?
How to record depreciation
Reserves-Rules and Uses
Budgeting and F&A impacts
The Capital Plan
Case Study
The Capital Plan
Depreciation Amount Rates
The Capital Plan
Useful Lives Reserve Contribution
Replacement Cycle
The Capital Plan
Why do I need one?
– Helps to forecast expense –informs the
depreciation schedule.
– Allows unit to forecast for needs-can identify
funding shortfalls in advance.
– Allows management to make strategic decisions
regarding capital acquisitions & the available
funding.
– Establishes a replacement cycle for assets which
contributes to the unit’s long term health.
The Capital Plan
How does a capital plan tie to the reserve
fund?
– Shows annual contribution to the reserve fund
over time
– Helps to identify the potential for and timing of
shortfalls
The Capital Plan
When should I prepare a capital plan?
– As often and business needs demand, but at least
annually.
– At the start of a new recharge unit
Helps to quantify start up needs
– When a change in the business model is
anticipated e.g., a technological change happens,
services are added or removed.
– As assets are acquired, disposed or transferred.
The Capital Plan
How far out should a capital plan go?
– As far out as is reasonable for the type of
business.
As far as the average life cycle for your assets or as far
out as the longest life cycle.
Further out, the less reliable the out years are.
Too short and you may not have enough time to
properly position the unit.
The Capital Plan
What should go into a capital plan go?
– The inventorial equipment needs of the recharge
unit.
Talk with service providers.
Look at current compliment of equipment—when was it
acquired and when will it be due for replacement?
What is the technological environment?
Are there new services on the horizon?
Are there major changes in the way we delivery services
on the horizon?
Is the University’s definition of ―inventorial equipment‖
due to change?
The Capital Plan
What should go into a capital plan?
– What about other capital needs like building
repair or renovation?
Capital Plan Example
See handouts
The Capital Plan
What happens when my capital plan doesn’t
match with my funding?
When need is greater than funding:
– Leases-Capital v. Operational
– Loans (3rd party)
– Subsidies & Gifts
– Is the unit fiscally viable; should it continue?
The Capital Plan
What happens when my capital plan doesn’t
match with my funding?
When need is greater than funding (con’t):
– Are campus loans OK?
Campus ―loans‖ are not like 3rd party ―loans.
Cannot include campus imposed interest in rates.
Not really a loan; more like allowed to go into deficit and
recover over a period of time (must file a deficit waiver).
The Capital Plan
What happens when my capital plan doesn’t
match with my funding?
When funding is greater than the need:
– Invest back into the unit
Expansion of Services
Fund price increases (subsidy)
Save for a rainy day!
Q: Is it OK to use for an unrelated purpose?
Agenda
What is depreciation?
Campus Perspective
How do you calculate depreciation?
How does depreciation relate to rates?
How to record depreciation
Reserves-Rules and Uses
Budgeting & F&A impacts
The Capital Plan
Case Study
Case Study
Case A
Case B
Case C
Case D
References and Contacts
Questions can always be directed to:
recharge@berkeley.edu
Recharge Policy
http://controller.berkeley.edu/recharge/Policies/Rechargepolicy.pdf
Recharge Web FAQs
http://controller.berkeley.edu/recharge/Policies/depreciation.htm
General Accounting: gao@berkeley.edu