Transcript PowerPoint
Understanding Indirect Cost Rates: A Primer for Auditors Performing Single Audits
A Governmental Audit Quality Center Web Event
September 25, 2012
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Presenters Kim McCormick, CPA Partner Grant Thornton LLP & Alex Weekes, CPA Principal ML Weekes & Co., PC
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What we will cover
Single Audit Objectives Overview of Regulations Rate Proposals and Indirect Rate Example Factors Affecting Allowable Costs Types of Rates General Risk Areas for Indirect Costs Rate Agreements
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Single Audit Objectives
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Single Audit Objectives
Part 3 of OMB A-133 Compliance Supplement (Allowable Costs/Cost Principles)
Compliance Internal Controls over Compliance
State, Local and Indian Tribal Governments Educational Institutions Non-Profit Organizations
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Single Audit Objectives
Compliance:
Indirect rates are applied consistent with rate agreement AND agency/program limitations - Need to understand current agreement and program-specific cost limitations Indirect rates are applied consistent with appropriate base (e.g., MTDC) Actual billings reflect approved rate Indirect costs pools reflect allowable costs Governmental Audit Quality Center 9
Single Audit Objectives
Internal Controls over Compliance:
Look to Part 6 of Compliance Supplement Control Objectives-
To provide reasonable assurance that Federal awards are expended only for allowable activities and that the costs of goods and services charged to Federal awards are allowable and in accordance with the applicable cost principles.
5 COSO buckets Control activity examples Governmental Audit Quality Center 10
Overview of Regulations
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Cost Principles
Federal Rules & Cost Principles
Not-For-Profits (OMB A-122 now 2 CFR Part 230) Hospitals (OASC-3) Colleges and Universities (OMB A-21 now 2 CFR Part 220) State and Local Governments (OMB A-87 now 2 CFR Part 225) Commercial Entities (Federal Acquisition Regulations – FAR Part 31) Governmental Audit Quality Center 12
Administrative and Audit
Federal Rules & Cost Principles
Administrative Requirement (OMB Circular A-110 now 2 CFR Part 215) Applies to All Entities OMB Circular A-133 – Audit Requirements Governmental Audit Quality Center 13
OMB Circular A-87
“…establishes Principles and standards for determining costs for federal awards carried out through grants, cost reimbursement contracts, and other agreements with state and local governments and federally recognized Indian tribal governments”
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OMB Circular A-122
“This circular establishes Principles for determining cost of grants, contracts, and other agreements with non-profit organizations ……the principles are designed to provide that the federal government bear its fair share of costs except where restricted or prohibited by law”
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Applicability
“Shall be used by all federal agencies in determining costs of work performed …. under grants, cooperative agreements, cost reimbursement contracts, and other contracts in which costs are used in pricing, administration, or settlement.”
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Rate Proposals and Indirect Rate Example
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What is Cost Allocation?
Accomplished through an annual cost allocation plan
Concept recognizing operating programs should pay for the general fund support received – Causal and beneficial relationship between cost incurred and benefits received Document identifying and distributing State and Local indirect (administrative, support, overhead) costs to benefiting departments/divisions/programs/final cost objectives Governmental Audit Quality Center 18
Types of Cost Allocation Plans
A-87
Used to recover costs from federal grants and programs Prepared in accordance with OMB Circular A-87
Full Cost
Used to allocate indirect costs to enterprise operations, departments and final cost objectives Can be used to recover indirect costs in non-federally funded programs and departments Unallowable costs per A-87 are not considered Governmental Audit Quality Center 19
OMB Circular A-122 Section C – “Indirect Costs”
Direct Allocation Method: “Joint Costs, such as depreciation, rental costs,
operation & maintenance of facilities, telephone expenses, and the like are pro-rated individually as direct costs to each category and to each award or other activity using a base most appropriate to the particular cost being pro-rated
.”
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Cost Allocation Plans
Directly Allocated Costs
Occupancy Property Insurance Professional Liability Ins.
Information Technology
Common Allocation Bases
Sq. ft. of programs Cost of programs Sq. ft. of programs Cost of property per dept.
# of staff with prof. degrees # computers # personnel Hours spent per dept.
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Cost Allocation Plans (cont’d)
Directly Allocated Costs
Human Resources Internal Audit Maintenance Services Grant & Contract Adm.
Common Allocation Bases
# of employees Payroll dollars # of employees Hours worked per dept.
Sq. ft. of programs Actual charges Revenue of grants & K’s Cost of programs % of salary charged direct Governmental Audit Quality Center 22
Cost Allocation Goals
Try to keep it as simple as possible Measurements should be based on relative benefits received Be able to replicate the process Your accounting system structure and capabilities should be considered
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Direct Costs
Costs that can be specifically identified with a particular cost objective
Program Salaries Materials specific to award Travel Equipment Other minor direct items Governmental Audit Quality Center 24
Indirect Costs Terms
Indirect Costs
Overhead, Administrative and Facilities
Overhead Costs (are directly associated with programs)
Facilities, Program Supervision, Equipment
Administrative Costs (benefit the entire organization)
Accounting, Finance, IT, Facilities for Administration
Facilities and Administrative Costs (F&A)
All of the above Governmental Audit Quality Center 25
Indirect Costs Terms
Cost Objective
“A function, organizational subdivision, contract, grant, or other activity for which cost data are needed and for which costs are incurred”
Indirect costs are allocated to “Final Cost Objectives” and Final Cost Objectives will incur direct costs and be allocated indirect costs (i.e. grants and contracts)
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Indirect Costs
“Indirect Costs are costs that are incurred for common or joint objectives, and therefore cannot be readily and specifically identified with a particular project or activity.”
Indirect costs generally include:
• • • • Operations and Maintenance Depreciation and Use Allowance Administration Costs Legal, Accounting, Finance, HR, IT - Administrative Governmental Audit Quality Center 27
Simplified Method – Indirect Cost Rate
Expressed as a percentage Ratio between indirect and direct costs Simply stated if the indirect cost rate is 40%:
For every $1.00 spent on sponsored activities (direct) 40 cents of indirect costs are incurred
Establishes a fair and equitable way to allocate costs to projects, grants, contracts, etc.
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How Do We Get a Rate?
Indirect Cost Rate Proposal is submitted to Cognizant Federal Agency (generally agency with most funding) Proposal & documentation are reviewed Negotiated Indirect Cost Rate Agreement (NICRA) is executed Outlined in Appendix E of OMB Circular A-87
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Allocation Methods
Simple Method
– Used when major functions benefit from indirect costs in the same degree
Multiple Allocation Base Method
– When organization has several major functions which benefit from its indirect costs in varying degrees (e.g. clinical vs. research, instruction, other sponsored activity)
Direct Allocation Method
– When programs are charged for all costs directly
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Simplified Method
Modified Total Direct Cost Salary & Wage Pro’s & Con’s to both
S&W (higher rate, but not recovery) MTDC (most organizations use this base) Governmental Audit Quality Center 31
Indirect Cost Rate Example
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Modified Total Direct Cost
Includes S&W, Benefits, Materials, Supplies, Services, Travel Excludes (typically)
Subcontract Costs (usually over $25k) Capital Equipment Purchases Other Distorting Items Governmental Audit Quality Center 33
MTDC Example
Simple example of one project’s MTDC: Total Direct Costs in our budget:
Salaries/benefits: Supplies: Subcontract: Capital Equipment:
$ 210,000
$ 95,000 $ 5,000 $ 100,000 $ 10,000
Modified Total Direct Costs:
= $210,000 - $10,000 - $75,000 (subcontract) = $125,000 MTDC (apply IDC) Governmental Audit Quality Center 34
Factors Affecting Allowable Costs
Allowable, Allocable and Reasonable Governmental Audit Quality Center 35
Determining Chargeable Costs
REASONABLE ALLOCABLE Ordinary and necessary Support operation Contribute to performance Tied to cost objective, contract, service Proportional to benefits ALLOWABLE Allowability determined by OMB guidelines & grant provisions
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Factors Affecting Allowability
General Criteria:
Be reasonable for the performance of the award and be allocable thereto under these principles; Conform to any limitations or exclusions set forth in these principles or in the award as to the types or amount of cost items; 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 included as a cost or used to meet cost sharing or matching requirements of any other federally financed program in either the current or a prior period; and Be adequately documented.
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Unallowable Costs
Entertainment Contributions to Reserve Funds Cost of Elected Officials Donations & Contributions Investment Management Fees Lobbying Bad Debt Expense
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Types of Rates
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Types of Indirect Rates Types of Rates
Provisional Fixed Rates with Carry-Forward Predetermined Governmental Audit Quality Center 40
Rate Types
Provisional Rate “A provisional indirect cost rate is a temporary
rate established for a given period of time to permit funding and reporting of indirect costs pending establishment of a final rate for that period
.”
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Provisional Rate
The following rules apply when a provisional indirect cost rate or a rate applicable to an earlier period is used to calculate the reimbursement of indirect costs on a financial status report.
Such indirect costs must be adjusted downward, if appropriate, when a new lower permanent rate (i.e., final or predetermined) is established. They may also be adjusted upward (based on a higher rate) at the grantee's request, but not to exceed the unobligated balance of the grant.
If the grantee fails to establish a permanent rate, any indirect costs previously reimbursed based on the provisional or earlier permanent rate shall be disallowed.” Governmental Audit Quality Center 42
Rate Types
Predetermined Rate “A predetermined indirect cost rate is a
permanent rate established for a specific future period based on an estimate of the costs for that period. Except under very unusual circumstances, this type of rate is not subject to
adjustment…”
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Rate Types
Predetermined Rates - Continued “Predetermined rates are established when there is a
reasonable assurance, based on experience and a reliable estimate of the organizations costs, that the predetermined rate will approximate the
organization’s actual rate.”
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Rate Types
Predetermined Rates - Continued “Predetermined rates can be used only when an
organization conducts activities solely under grants. It cannot be used if an organization performs work only on contracts or performs under both grants and contracts.”
This applies to direct federal contracts only.
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Rate Types
Fixed Rates “an indirect cost rate which has the same
characteristics as a predetermined rate, except that the difference between the estimated costs and the actual costs of the period covered by the rate is carried forward as an adjustment to the rate computation of a subsequent period
.”
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Carry-forward
Carry-forward provision
Negotiated Fixed Rate - 2012 Direct Cost Base – 2012 Actual indirect Costs - 2012 Indirect Cost Recovery – 2012 40% $10,000,000 $ 4,200,000 $ 4,000,000 Actual Rate - 2012 42% Under-recovery $ 200,000*
*
Carry-forward is 2 years forward (2014 in this scenario).
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Carry-forward
Carry-forward
Actual Indirect Costs - 2014 Carry-Forward from - 2012 Indirect Costs - 2014 Direct Cost Base - 2014 Rate with Carry-forward Rate without Carry-forward $ 4,500,000 $ 200,000 $ 4,700,000 $10,000,000 47% 45% Governmental Audit Quality Center 48
General Risk Areas
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General Risk Areas
Key areas of Risk include:
Predetermined and fixed rates carry lowest compliance risk - Rates cannot change; therefore program costs for prior years not subject to adjustment - For fixed rates must determine if current year indirect costs and carry-forward are correctly identified Provisional rates carry risk that changes in base or pool may have material impact on programmatic costs Governmental Audit Quality Center 50
General Risk Areas
Key areas of Audit Risk include (cont’d):
Consistency in applying rate to correct base Consistent treatment of costs (no “double dipping”) Inadequate documentation / Unsupported costs Timeliness of preparing and submitting rate proposals (6 months after year end) Expired Rate Agreements Governmental Audit Quality Center 51
Rate Agreement
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Rate Agreement Predetermined
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Rate Agreement - Provisional
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Rate Agreement – Fixed CF Provision
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Questions ?????
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