Presentation on theme: "A Governmental Audit Quality Center Web Event September 25, 2012"— Presentation transcript:
1 A Governmental Audit Quality Center Web Event September 25, 2012 Understanding Indirect Cost Rates: A Primer for Auditors Performing Single AuditsA Governmental Audit Quality Center Web EventSeptember 25, 2012
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3 Administrative NotesWe encourage you to submit your technical questions – please limit your questions to the content of today’s programYou can submit your questions at any time during this Web event by clicking on the “Q &A” tab on the bottom of your screen.You can also download slides in PDF or PowerPoint by clicking on “Handouts” tabThis event is being recorded and will be posted in an archived format to the GAQC Web site
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5 PresentersKim McCormick, CPA Partner Grant Thornton LLP & Alex Weekes, CPA Principal ML Weekes & Co., PC
6 What we will cover Single Audit Objectives Overview of Regulations Rate Proposals and Indirect Rate ExampleFactors Affecting Allowable CostsTypes of RatesGeneral Risk Areas for Indirect CostsRate Agreements
8 Single Audit Objectives Part 3 of OMB A-133 Compliance Supplement (Allowable Costs/Cost Principles)ComplianceInternal Controls over ComplianceState, Local and Indian Tribal GovernmentsEducational InstitutionsNon-Profit Organizations
9 Single Audit Objectives Compliance:Indirect rates are applied consistent with rate agreement AND agency/program limitationsNeed to understand current agreement and program-specific cost limitationsIndirect rates are applied consistent with appropriate base (e.g., MTDC)Actual billings reflect approved rateIndirect costs pools reflect allowable costsVerify against billings and cost reporting formsWas most current applicable rate usedCould lead to over recovery or duplicate recovery
10 Single Audit Objectives Internal Controls over Compliance:Look to Part 6 of Compliance SupplementControl 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 bucketsControl activity examplesAccountability provided for charges and costs between Federal and non-Federal activities.• Process in place for timely updating of procedures for changes in activities allowed and cost principles.• Computations checked for accuracy.• Supporting documentation compared to list of allowable and unallowable expenditures.• Adjustments to unallowable costs made where appropriate and follow-up action taken to determine the cause.• Adequate segregation of duties in review and authorization of costs.• Accountability for authorization is fixed in an individual who is knowledgeable of the requirements
12 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)
13 Administrative and Audit Federal Rules & Cost PrinciplesAdministrative Requirement (OMB Circular A-110 now 2 CFR Part 215) Applies to All EntitiesOMB Circular A-133 – Audit Requirements
14 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”
15 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”
16 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.”
18 What is Cost Allocation? Accomplished through an annual cost allocation planConcept recognizing operating programs should pay for the general fund support received – Causal and beneficial relationship between cost incurred and benefits receivedDocument identifying and distributing State and Local indirect (administrative, support, overhead) costs to benefiting departments/divisions/programs/final cost objectives
19 Types of Cost Allocation Plans Used to recover costs from federal grants and programsPrepared in accordance with OMB Circular A-87Full CostUsed to allocate indirect costs to enterprise operations, departments and final cost objectivesCan be used to recover indirect costs in non-federally funded programs and departmentsUnallowable costs per A-87 are not considered
20 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.”
21 Directly Allocated Costs Common Allocation Bases Cost Allocation PlansDirectly Allocated CostsCommon Allocation BasesOccupancySq. ft. of programsCost of programsProperty InsuranceCost of property per dept.Professional Liability Ins.# of staff with prof. degreesInformation Technology# computers# personnelHours spent per dept.
22 Cost Allocation Plans (cont’d) Directly Allocated CostsCommon Allocation BasesHuman Resources# of employeesPayroll dollarsInternal AuditHours worked per dept.Maintenance ServicesSq. ft. of programsActual chargesGrant & Contract Adm.Revenue of grants & K’sCost of programs% of salary charged direct
23 Cost Allocation Goals Try to keep it as simple as possible Measurements should be based on relative benefits receivedBe able to replicate the processYour accounting system structure and capabilities should be considered
24 Direct CostsCosts that can be specifically identified with a particular cost objectiveProgram SalariesMaterials specific to awardTravelEquipmentOther minor direct items
25 Indirect Costs Terms Indirect Costs Overhead, Administrative and FacilitiesOverhead Costs (are directly associated with programs)Facilities, Program Supervision, EquipmentAdministrative Costs (benefit the entire organization)Accounting, Finance, IT, Facilities for AdministrationFacilities and Administrative Costs (F&A)All of the above
26 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)
27 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 MaintenanceDepreciation and Use AllowanceAdministration CostsLegal, Accounting, Finance, HR, IT - Administrative
28 Simplified Method – Indirect Cost Rate Expressed as a percentageRatio between indirect and direct costsSimply stated if the indirect cost rate is 40%:For every $1.00 spent on sponsored activities (direct)40 cents of indirect costs are incurredEstablishes a fair and equitable way to allocate costs to projects, grants, contracts, etc.
29 How Do We Get a Rate?Indirect Cost Rate Proposal is submitted to Cognizant Federal Agency (generally agency with most funding)Proposal & documentation are reviewedNegotiated Indirect Cost Rate Agreement (NICRA) is executedOutlined in Appendix E of OMB Circular A-87
30 Allocation MethodsSimple Method – Used when major functions benefit from indirect costs in the same degreeMultiple 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
31 Simplified Method Modified Total Direct Cost Salary & Wage Pro’s & Con’s to bothS&W (higher rate, but not recovery)MTDC (most organizations use this base)
33 Modified Total Direct Cost Includes S&W, Benefits, Materials, Supplies, Services, TravelExcludes (typically)Subcontract Costs (usually over $25k)Capital Equipment PurchasesOther Distorting Items
34 MTDC Example Simple example of one project’s MTDC: Total Direct Costs in our budget: $ 210,000Salaries/benefits: $ ,000Supplies: $ ,000Subcontract: $ 100,000Capital Equipment: $ ,000Modified Total Direct Costs:= $210,000 - $10,000 - $75,000 (subcontract)= $125,000 MTDC (apply IDC)
35 Factors Affecting Allowable Costs Allowable, Allocable and Reasonable
36 Determining Chargeable Costs Ordinary and necessarySupport operationContribute to performanceTied to cost objective, contract, serviceProportional to benefitsAllowability determined by OMB guidelines & grant provisionsREASONABLEALLOCABLEALLOWABLE
37 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; andBe adequately documented.
38 Unallowable Costs Entertainment Contributions to Reserve Funds Cost of Elected OfficialsDonations & ContributionsInvestment Management FeesLobbyingBad Debt Expense
40 Types of Indirect Rates Types of RatesProvisionalFixed Rates with Carry-ForwardPredetermined
41 Rate TypesProvisional 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.”
42 Provisional RateThe 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.”
43 Rate TypesPredetermined 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…”
44 Predetermined Rates - Continued Rate TypesPredetermined 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.”
45 Predetermined Rates - Continued Rate TypesPredetermined 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.
46 Rate TypesFixed 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.”
47 Carry-forward Carry-forward provision Negotiated Fixed Rate - 2012 40% Direct Cost Base – $10,000,000Actual indirect Costs $ 4,200,000Indirect Cost Recovery – $ 4,000,000Actual Rate %Under-recovery $ ,000**Carry-forward is 2 years forward (2014 in this scenario).
48 Carry-forward Carry-forward Actual Indirect Costs - 2014 $ 4,500,000 Carry-Forward from $ ,000Indirect Costs $ 4,700,000Direct Cost Base $10,000,000Rate with Carry-forward %Rate without Carry-forward %
50 General Risk Areas Key areas of Risk include: Predetermined and fixed rates carry lowest compliance riskRates cannot change; therefore program costs for prior years not subject to adjustmentFor fixed rates must determine if current year indirect costs and carry-forward are correctly identifiedProvisional rates carry risk that changes in base or pool may have material impact on programmatic costs
51 General Risk Areas Key areas of Audit Risk include (cont’d): Consistency in applying rate to correct baseConsistent treatment of costs (no “double dipping”)Inadequate documentation / Unsupported costsTimeliness of preparing and submitting rate proposals (6 months after year end)Expired Rate Agreements
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