Changing the Capitalization Threshold for Equipment: Implementation Plan

Questions and Answers

General

1. What is the change?

The University of California currently defines equipment as articles of non-expendable tangible personal property having a life of more than one year, and an acquisition cost of $1,500 or more per unit. Effective July 1, 2004, the acquisition cost threshold will be increased to $5,000.

(See questions 5, Indirect Cost Application and Financial Statements for exceptions.)

2. Are any other asset categories affected by this change?

Yes. Any asset category with a current capitalization threshold of $1,500, such as software, will also use the $5,000 threshold beginning July 1, 2004. The group purchase threshold for non-inventorial items at the medical centers is raised from $10,000 to $15,000.

3. Does the change apply to all types of equipment, such as fabricated equipment, furniture, art, special collections, etc.?

Yes. The new threshold will apply to all equipment items.

4. Why is the change needed?

There are two primary reasons for the change. One is to reduce the administrative costs of recording and tracking items of equipment. The reduction is needed, especially in these times of budgetary constraint. The second, and more compelling reason, is that by eliminating the requirement to record and track relatively low valued items, more attention and effort can be given to safeguarding the remaining, higher valued items. This should enhance the University’s overall control and stewardship of its assets and promote our compliance with external regulations and University policy and procedures. The University remains fully committed to the proper stewardship over all of its assets, regardless of its capitalization threshold.

5. What are the key points of the implementation plan?

The basic elements of the implementation plan are summarized as follows. For more detailed guidance or application to specific circumstances, see the rest of the questions and answers or contact the UCOP functional area representative listed at the end of this document.

Transaction Processing:

Effective July 1, 2004, all transactions of equipment items received on or after July 1, 2004 will be processed using the new threshold of $5,000.

Two new object codes must be established and used to record expenditures for any items with a useful life greater than one year with a unit cost of $200 through $1,499, and $1,500 through $4,999. The codes will be used to apply the indirect costs at the $1,500 threshold through June 30, 2006; to gather data required by the UC Budget Office for equipment funding by the State; and to calculate the additional capitalization for the phased-in implementation process required for financial reporting. Campuses must take steps to ensure the proper use of these codes. Improper use of these codes may result in reduced funding by the State and may also result in audit comments or findings.

Indirect Cost Application:

During FY 2004–05 and FY 2005–06, indirect cost charges on extramurally funded projects will be applied using the same equipment threshold ($1,500) as in FY 2003–04.

Beginning July 1, 2006, indirect costs will be applied to expenditures for items costing less than $5,000, for items received on or after July 1, 2006.

Contracts and Grants — Proposal Budgets:

Proposal budgets with projected expenditures for equipment items to be received on or after July 1, 2006 must budget for indirect costs at the new threshold. Since it may be difficult to precisely forecast the beginning date of projects and delivery dates for purchased equipment items, campuses may wish to establish a cut-off date, such as December 31, 2005, after which all project proposals submitted must prepare project budgets at the $5,000 threshold. In any case, indirect costs will be applied at the $5,000 threshold for all items received on or after July 1, 2006, without regard to the threshold used in preparing the project budget.

Equipment Management:

Effective July 1, 2004, newly received items with unit value of less than $5,000 shall not be tagged, tracked, or physically inventoried, unless the items are considered to be “theft sensitive” or otherwise required to be physically inventoried as explained in question 16.

Effective July 1, 2004, previously received items of equipment with unit acquisition value below $5000 will be exempt from physical inventory unless otherwise required (see question 16).

After July 1, 2004, but before December 31, 2004, campuses should delete the records of fully depreciated items with unit acquisition values below $5,000 from their inventory as described under EFA Files (immediately below) and in question 11. This process will occur annually until all items below $5,000 currently on the inventory have been fully depreciated and removed from the inventory.

EFA Files:

Beginning December 31, 2004, the EFA100 files should not contain the records of fully depreciated items with unit acquisition values below $5,000, acquired before July 1, 2004. The process of removing these items from the inventory is further described in question 11. Also beginning December 31, 2004, the EFA 100 files should not contain the records of non-capitalized items with unit acquisition values below $5,000. See question 17 for more information regarding the EFA100 file.

Medical Centers:

Effective July 1, 2004, the medical centers shall implement the new $5,000 threshold and the use of the two new object codes to record expenditures for items with a useful life greater than one year with a unit cost of $200 through $1,499 (optional), and $1,500 through $4,999 (required). See question 24 for more information.

Effective July 1, 2004, the “bundled purchase” threshold for non-inventorial equipment as described in the Accounting Manual, Chapter P-415-2, IV.B.1, shall be increased to $15,000 from $10,000.

(Also see Financial Accounting and Financial Statements immediately below.)

Financial Accounting:

Effective July 1, 2004, only items with unit acquisition value of $5,000 or more per unit will be capitalized. Items capitalized in previous years, with unit acquisition value below $5,000 shall remain capitalized until they are fully depreciated or disposed of. The process to write-off fully depreciated items below $5,000 is further described in question 11.

Financial Statements:

The threshold change will be reported in the University’s audited financial statements (consolidated statements and individual medical center statements) beginning in the fiscal year ending June 30, 2005. Since Generally Accepted Accounting Principles (GAAP) do not allow the change to be made if the impact on the institution’s consolidated financial statements for the current period is material, UC must raise the threshold in steps to reduce the impact of the change. Thus the following thresholds will be used to prepare the University’s audited annual financial statements.

FY 2003–04: $1,500
FY 2004–05: $2,500 (To be finalized)
FY 2005–06: $2,850 (To be finalized)
FY 2006–07: $3,000 (To be finalized)
FY 2007–08: $3,300 (To be finalized)
FY 2008–09: $4,000 (To be finalized)
FY 2009–10: $5,000

This stepped phase-in process will be used only for the preparation of the University’s financial statements (and in the medical centers' monthly and year-end financial statements). The $5,000 threshold will be used for all other purposes beginning July 1, 2004 (exception for application of indirect costs to contracts and grants).

6. Will this change significantly affect the capitalization of costs associated with the purchase or construction of new buildings?

No. The amount of capitalized equipment in newly purchased or constructed buildings will be affected. However, according to UC policy (UC Accounting Manual, Chapter P-415-3, II.B.2), “all costs associated with the construction or purchase of new buildings and structures” are to be capitalized as part of the building value. Thus, while the total value of equipment capitalized may be less, the total value of the building will be more, and the total capitalized value of building and equipment will not be affected.

Implementation Date

7. Why can’t we implement all aspects of this change on July 1, 2004? Why must we delay implementation for grants and contracts?

Immediate implementation will reduce the administrative burden of tracking low-value items as soon as possible; however, a reasonable phase-in period is required for sponsored projects so that project budgets can be prepared to reflect the new threshold.

8. Must all campuses implement the change in the same way at the same time?

Yes. The University must maintain a uniform entity-wide capitalization policy to comply with Generally Accepted Accounting Principles (GAAP). In addition, because of the complex and interrelated requirements of plant accounting, extramural fund accounting, inventory management and proposal budgeting, the implementation plan must be uniform across all campuses. Specific implementation procedures may vary somewhat between campuses due to local systems differences; however, wide variations will increase the potential for audit findings in the transition years.

9. Must the medical centers implement the change in the same way at the same time?

Yes. As stated in question 8, the University must maintain a uniform entity-wide capitalization policy to comply with GAAP. However, medical centers will utilize the following phase-in thresholds and will not be subject to further adjustments in the thresholds at the end of the year.

FY 2003–04: $1,500
FY 2004–05: $2,500
FY 2005–06: $2,850
FY 2006–07: $3,000
FY 2007–08: $3,300
FY 2008–09: $4,000
FY 2009–10: $5,000

This will allow the medical centers to plan their operations and to prepare monthly financial reports that will reflect year-end results. Thus, it is possible that the campuses and the medical centers may have different thresholds for financial reporting purposes during the transition years.

10. What determines the treatment of an equipment item during the transition in FY 2004–05: the date of the purchase order; the date of receipt; or the date of payment?

The date the equipment item is received determines how it will be treated. Items costing less than $5,000 that are received on or after July 1, 2004 must be coded as supplies and materials using one of the two new object codes described in question 24. Receival date is an existing data element in the equipment inventory system and is also contained in the EFA 100 file.

Equipment Management

11. Why can’t the items acquired before July 1, 2004, with unit acquisition values below $5,000 be removed from the inventory?

UCOP Financial Management in consultation with the University’s auditor (PricewaterhouseCoopers - PwC) has determined that under GAAP, it is appropriate to adopt this change prospectively, rather than retroactively. Thus, it is necessary to keep the records of the previously acquired items with unit values below $5,000 on the books until they are either disposed of, or fully depreciated. The process for removing these items from the inventory after they have been fully depreciated is described below:

a. After July 1, 2004, but before September 30, 2004, UCOP will provide a list of fully depreciated items with unit acquisition values below $5,000 to the campuses. See question 12 for more information.

b. Campuses should write-off the items identified by UCOP and remove them from the inventory and the plant ledger. The write-off should be recorded as a disposal, without proceeds. The write-off must be completed before December 31, 2004 and reflected in the EFA100 file to be submitted in February 2005.

The write-off of medical center equipment items must be coordinated with the campus and medical center so that the inventory and ledger balances of the campus and the medical center can be reconciled. In cases where the medical center records show that items identified by UCOP for write-off have not yet been fully depreciated according to local records, these items should not be written-off, but kept on the medical center and campus inventory and ledgers until written-off by the medical center.

c. This process will be repeated in each subsequent year for all items with unit values below $5,000 that have been fully depreciated.

12. What will the annual write-off list of property numbers look like and what will campuses be expected to do with it?

Each year UCOP will provide a list to campuses of items that are not necessary to report on future EFA100 files. The UCOP list will include the following: capitalized depreciable items of equipment with an acquisition value below $5,000 that were fully depreciated as of the prior Fiscal Year; non-capitalized equipment, art and collections with an acquisition cost below $5,000; capitalized phase-in entries using the K9906 equipment classification code that were fully depreciated as of the prior Fiscal Year; and capitalized equipment with an acquisition cost below $5,000 that has an invalid equipment classification code and is considered to be beyond its useful life. UCOP will provide the list as a single column of property numbers in fixed ASCII format.

Campuses are not required to delete the items in the UCOP-provided list, and there will be no reconciliation process involving the listed items (except as noted in the following paragraph for medical center campuses). As in prior years, we will continue to rely on the reconciliation as of December 31 between the EFA100 and the General Ledger. There may be valid reasons to retain some UCOP-listed items on the ledger, inventory and EFA100 file that UCOP would not be aware of at the time the list is created (e.g. recent add-on value exceeding $5,000). However, when the campus does delete items from the inventory based on the UCOP-provided list, coordination between Equipment Management and Plant Accounting is required so that the value of any items that were previously capitalized is written off at the same time as they are purged from the inventory.

Equipment management and plant accounting at medical center campuses must coordinate the write-off process with the medical center so that the inventory and ledger balances of the campus and the medical center can be reconciled.

13. Don’t federal regulations and University policy require that all items on the inventory be physically verified periodically?

Yes. As always, the University must ensure and exercise proper control and stewardship over its assets. Items on the equipment inventory must be physically verified periodically, at least once every two years, according to University policy and federal regulation.

The Compliance Supplement to the OMB Circular A-133, Audits of States, Local Governments, and Non-profit Organizations, defines equipment as follows:
Equipment means tangible nonexpendable property, including exempt property, charged directly to the award having a useful life of more than one year, and an acquisition cost of $5,000 or more per unit. However, consistent with a non-Federal entity’s policy, lower limits may be established.

The federal government sets the threshold at $5,000 subject to institutional policy that may be set at a lower level. By setting its threshold at $5,000, UC will be in compliance with the federal threshold. The items with unit value of less than $5,000 remaining on the inventory during the transition process should not affect the University’s compliance with inventory verification requirements.

Normally, the inventory will consist only of items valued at or above the established capitalization threshold. However, during the next several years, items with unit acquisition value below $5,000, will remain on the inventory due to the prospective nature of this threshold change. The physical verification requirement for these items is being waived to reduce the administrative burden associated with these relatively low value items.

The waiver is also consistent with the change in the threshold, where new items below $5,000 acquired after June 30, 2004 will not be capitalized or inventoried. This waiver is applicable only during the transition period. Over the next several years, all items with unit values below $5,000 will be permanently removed from the inventory when the items have been fully depreciated (also see question 16 for exceptions in physical verification).

14. What process should be used to remove (write-off) the fully depreciated assets (of items acquired before July 1, 2004, with unit acquisition value between $1,500 and $5,000)?

The write-off should be processed as a disposal, without proceeds.

15. We are expecting an ONR audit in FY 2004–05. How will this affect the audit?

The new equipment threshold of $5,000 will apply beginning July 1, 2004 for audit and physical verification purposes. BUS-29 will be reissued to reflect this change as soon as possible. ONR auditors conducting equipment audits should be advised of the change in the threshold.

16. What if the terms of a sponsored project define inventorial equipment to include items costing less than $5,000? Or if the campus is locally tracking items with unit acquisition values less than $5,000, such as “theft sensitive” items?

If the terms of a sponsored agreement define equipment at a value less than $5,000 and title vests in the University, such items should not be treated as inventorial equipment. If the terms of the sponsored agreement for such items provide for title to be retained by the sponsor, such items should be treated as inventorial equipment under the exception given in BUS-29, Section A, Paragraph VI.A. However, these items will not be reported in the annual EFA100 file.

Campus inventory systems facilitate University compliance with two sets of requirements. One set of custodial obligations pertains to equipment as defined by the University. The University also has custodial obligations for other property items, independent of the University’s definition of equipment. For example, the University is often contractually required to track and report property owned or loaned by an outside entity, regardless of the item’s cost. Campuses must meet both sets of obligations. This Q&A document is primarily concerned with the impact of the threshold change on the treatment of equipment. Other property items such as theft sensitive and sponsor owned items requiring special treatment are described in BUS-29, Section A.VI.A.

See question 21 for application of indirect costs in project budgets and for billings to sponsors.

Reporting Inventory to UCOP

17. When is the equipment inventory file due?

The EFA100 file is always due at UCOP on the 8th working day of February, and contains information reflecting the status as of December 31. The file for FY 2004–05 will be due February 10, 2005. The following chart provides a timetable of implementation steps that affect the EFA 100 file.

Date	Responsibility	Implementation Step Description
07/01/04	Campus	Begin to use the $5,000 threshold. Begin to use two new object codes: 8110: Items with useful life of more than one year and unit values of $200 - $1,499. 8120: Items with useful life of more than one year and unit values of $1,500 - $4,999.
09/30/04	OP	Provide campuses with list of fully depreciated items with unit acquisition values below $5,000.
01/31/05	Campus	Complete the capitalization process for items acquired on or before 12/31/04.
01/31/05	Campus	Complete the write-off process for fully depreciated items as identified by OP.
02/10/05	Campus	EFA 100 file is due at UCOP. The file should include the results of the capitalization and write-off process listed above.
07/29/05	OP	Provide campuses with additional equipment capitalization ($2,500 - $4,999) information.
08/05/05	Campus	Prepare journal entries to record the additional capitalization before the June Final ledger cut-off.
12/31/05	Campus	Include the additional capitalization (classification code K9906) in the campus inventory and in the EFA 100 file.

18. How is the EFA 100 file affected by the change in the threshold?

The EFA100 file will need to include the following at a minimum: (a) all capitalized depreciable equipment; (b) all capitalized non-depreciable art and collections; (c) all non-capitalized equipment, art and collections with an acquisition cost of $5,000 or more; and (d) capitalized phase-in entries using the K9906 equipment classification code. Each of these items are further described below:

(a) Capitalized depreciable equipment are items meeting the University’s definition of equipment which are not art and collections (equipment classification code is not H5000), and which are either UC-owned (title flag is Y) or non-UC-owned but Federally funded (title flag is N, fund source code is C, D, or E). Beginning July 1, 2004, new acquisitions in this category will be capitalized and inventoried only if the acquisition cost is $5,000 or more. Items above $5,000 are subject to physical verification. Items with acquisition value below $5,000 which were on the inventory as of June 30, 2004 will continue to be reported on the EFA100 file but do not require physical verification (there may be Federally-imposed verification items on Federally-owned items, however, as described in question 16).

(b) Capitalized non-depreciable art and collections are items meeting the University’s definition of equipment with equipment classification code H5000. To be capitalized the items must be either UC-owned (title flag is Y) or non-UC-owned but Federally funded (title flag is N, fund source code is C, D, or E). Beginning July 1, 2004, new acquisitions in this category will be capitalized and inventoried only if the acquisition value is $5,000 or more. Items above $5,000 are subject to physical verification. Items with acquisition value below $5,000 which were on the inventory as of June 30, 2004 will continue to be reported on the EFA100 file but do not require physical verification. Because these items do not depreciate over time, they will not appear on the UCOP-provided list of property numbers that can be written off. These items will not drop off the EFA100 and general ledger unless an actual disposal occurs.

(c) Non-capitalized equipment, art and collections with an acquisition value of $5,000 or more are items meeting the University’s definition of equipment but which are not capitalized because they are non-UC-owned and non-Federally-funded (title flag is N, fund source code is A, B, or G). These items do not depreciate because they are not capitalized; they will only drop off the EFA100 in the event of an actual disposal. Items above $5,000 are subject to physical verification. There is no need to include items in this category below $5,000 acquired before July 1, 2004 on the EFA100 file; however, such items may represent borrowed equipment for which the campus has accepted local inventorial responsibility.

(d) Capitalized phase-in entries using the K9906 equipment classification code are not actual items of equipment and therefore are not subject to physical verification regardless of acquisition cost. The campus will generate property numbers for these items. UCOP will be providing the amounts as well as the remaining information needed for completing the EFA100 record. Items in this category will first be included in the EFA100 file as of 12/31/05 (see question 26).

The following chart provides a comparison of the EFA file requirements for 12/31/03 and 12/31/04.

EFA Items	EFA 100 File at 12/31/03	EFA 100 File at 12/31/04
(a) All capitalized depreciable items of equipment	Items with unit values of $1,500 or more	(1) Items with unit values of $5,000 or more acquired on or after 7/1/04. (2) Items with unit values of $1,500 or more acquired before 7/01/04.
(b) All capitalized non-depreciable items of art and collections.	Items with unit values of $1,500 or more	(1) Items with unit values of $5,000 or more acquired on or after 7/01/04. (2) Items with unit values of $1,500 or more acquired before 7/01/04.
(c) All non-capitalized equipment, art, collections, theft sensitive, and other items	Items with unit values of $1,500 or more	(1) Items with unit values of $5,000 or more acquired after 7/01/04. (2) Items with unit values of $5,000 or more acquired before 7/01/04 (exclude items below $5,000).
(d) Additional capitalization for phase-in implementation (classification code K9906)	NA	12/31/04 EFA: NA 12/31/05 EFA: $2,500* - $4,999 12/31/06 EFA: $2,850* - $4,999 12/31/07 EFA: $3,000* - $4,999 12/31/08 EFA: $3,300* - $4,999 12/31/09 EFA: $4,000* - $4,999 12/31/10 EFA: None * to be finalized by UCOP Financial Management

Contracts and Grants

19. How should proposal budgets be prepared?

Expenditures for equipment items with unit cost of $1,500 or more, projected to be received before July 1, 2006 shall be included in the equipment portion of the project budget and will be excluded from the Modified Total Direct Cost (MTDC) base to which indirect cost rates are applied. Items costing less than $1,500 will be included in the materials and supplies budget category and included within the MTDC base for which indirect cost rates are applied.

Expenditures for equipment items with unit cost of $5,000 or more, projected to be received on or after July 1, 2006 will be included in the equipment portion of the project budget and will be excluded from the MTDC base to which indirect cost rates are applied. Items costing less than $5,000 will be included in the materials and supplies budget category and included within the MTDC base to which indirect cost rates are applied.

Since it may be difficult to precisely forecast the beginning date of projects and delivery dates for purchased equipment items, campuses may wish to establish a cut-off date, such as December 31, 2005, after which all project proposals submitted must prepare projects budgets at the $5,000 threshold. In any case, indirect costs will be applied at the $5,000 threshold for all expenditures for equipment items received on or after July 1, 2006, without regard to the threshold used in preparing the project budget.

20. How will the new threshold be applied to determine the amount of indirect costs to be charged to contracts and grants in FY 2004–05, 2005–06, and 2006–07?

The campus Extramural Fund Accounting Offices should apply indirect costs using the $1,500 threshold during FY 2004–05 and 2005–06 by using the new object code 8120 (see question 24). Beginning July 1, 2006, the $5,000 threshold will be used to assess indirect costs.

21. If the sponsor defines equipment using a lower threshold than the University, and takes title to equipment so defined, at what level will indirect costs be applied in the project budget? In the billings to the sponsor? And how should these items be treated for inventory purposes?

Beginning July 1, 2006, indirect costs will be applied to the University threshold of $5,000, not the sponsor’s lower value in project budgets and in billings to sponsors unless the sponsor specifically requires the application of indirect costs at the lower threshold. See question 16 for inventory treatment.

22. What will happen under State agreements?

No special treatment is required for awards received from State of California agencies. If individual state agreements define equipment using a lower threshold than $5,000, the provisions described in questions 13, 16 and 21 should be applied.

23. Can general office equipment now be purchased with federal funds, assuming that the item costs less than $5,000?

No (under ordinary circumstances). OMB Circular A-21 places restrictions on purchases of both general office equipment and general office supplies as direct charges.

Under unusual circumstances, items that would normally be considered general office supplies or general office equipment are necessary for the operation of a sponsored project. In such circumstances it is recommended that these items be specifically identified in the proposal budget, that the rationale for such items be provided, and that the budget documentation be retained so that it is clear to auditors that both the sponsor and the University were aware of the planned expenditure.

Financial Accounting Issues

24. What financial accounting changes will occur beginning in FY 2004–05?

Three financial accounting changes will occur beginning in FY 2004–05 as a result of the new definition of equipment.

First, two new object codes will be required in addition to the change in the definition of equipment.

Object Code 8110 shall be used for items with a useful life of more than one year and a unit value of $200 through $1,499. This new object code is needed to support the University’s request for state funds for instructional equipment replacement and capital programs. The implementation and use of this code by the campus is mandatory, but optional for medical centers since medical centers are not affected by the state equipment funding programs.
Object Code 8120 shall be used for items with a useful life of more than one year and a unit value of $1,500 through $4,999. This code will be used to exclude these expenditures from the assessment of indirect costs during FY 2004–05 and 2005–06. It will also be used to support the University’s request for state funds for instructional equipment replacement and capital programs and to calculate the amount of additional capitalization for the phase-in implementation process required for financial reporting. The implementation and use of this code by the campuses and medical centers is mandatory.
Existing object codes 9000 (inventorial equipment), 9100 (inventorial live stock), 9213 (capitalized standard office furniture), 9900 (purchased computer equipment), 9950 (office furniture/equipment) shall be used for items with a useful life of more than one year and a unit value of $5,000 or more. Acquisition of items with a unit value of $200 through $4,999 that fall into the above listed categories should be reported using the new object codes 8110 and 8120. Campuses may choose to create additional object codes for different category of items with acquisition costs below $5,000. However, such codes must be rolled-up into codes 8110 and 8120 when submitted to UCOP.

Second, entries will be made to write-off the acquisition value and accumulated depreciation of fully depreciated items (fully depreciated as of June 30, of the prior year) with unit values between $1,500 and $4,999 acquired and capitalized in previous years. The write-off of these items must also be reflected in the equipment inventory and in the next EFA100 file. This write-off shall be processed as a disposal, without proceeds. (Also see question 11 for additional information.)

Third, additional capitalization entries will be made at the end of the year to accommodate the phase-in implementation for financial reporting purposes (see question 26).

25. What additional financial accounting changes will occur in FY 2006–07?

Beginning July 1, 2006, Extramural Fund Accounting will assess indirect costs to contracts and grants at the $5,000 threshold.

Financial Statement Issues

26. Question 5 (Financial Statements) referred to the use of a stepped (phase-in) threshold change for financial statement purposes. Why is this necessary, and how will it be implemented?

UCOP Financial Management, in consultation with the University’s auditor (PwC) has concluded that the threshold change can be made only if the impact of the change is immaterial to the University’s annual consolidated financial statements. The University must implement the threshold change in six steps to comply with this requirement. Thus the financial statements for the University will reflect the following thresholds:

UCOP Financial Management will finalize the phase-in threshold amounts each year as described in a. below. However, medical centers will use the above listed thresholds without further adjustments at the end of the year (also see question 9).

The stepped process will be used for financial reporting in the University’s audited financial statements and the medical centers' monthly and year-end financial statements only; the $5,000 threshold will apply beginning July 1, 2004 for all other operational purposes (except contracts and grants).

This process will be implemented as follows:

For the fiscal year 2004–05:

a. Beginning in FY2004–05, UCOP Financial Management will review and analyze the total expenditures reported in object code 8120 (items with a useful life of more than one year and a unit acquisition value between $1,500 and $4,999) in the June Preliminary ledger and determine the amount of additional equipment capitalization to be recorded by the campuses and the medical centers. The phase in threshold level will be finalized as part of this process.

b. Campuses and medical centers will prepare journal entries for the June Final ledger submission to capitalize the amounts identified by UCOP Financial Management. Entries must also be made to eliminate capital expenditures from Current Funds by function, by fund source.

Investment in Plant:
Debit: Equipment
Credit: Investment in Plant Fund Balance

Current Funds:
Debit: Unexpended Balances
Credit: Expenditures by function by fund sources

Campuses and medical centers may choose to combine this entry with the year-end entry to eliminate capital expenditures from Current Funds. The total capital expenditures to be eliminated from Current Funds can be added to the additional capitalization amount identified by UCOP Financial Management, then distributed to functions, by fund source.

As a result of these entries, the financial statements will reflect a $2,500 threshold for FY 2004–05. UCOP Financial Management will determine the additional amount of capitalization based on the total expenditures reported in object code 8120 at year-end, and the analysis of specific equipment purchases in calendar year 2002 and 2003 as reported in the corporate EFA files.

c. Campuses and medical centers will also assign a property number to the value of additional capitalization as identified by UCOP Financial Management and add the item to their equipment inventory as a lump sum item with the equipment classification code K9906. The property number assigned to this item must be unique, and different for each year that this process is used.

For the fiscal year 2005–06 and beyond:

d. The item recorded in c above must be included in the next EFA100 file to be submitted to UCOP in February 2006.

e. UCOP will calculate the depreciation expense for this item as included in the EFA100 file, using an estimated average useful life of six years (average life of items in the currently inventory with unit values below $5,000). The campuses will then record the depreciation expense for this group of equipment as part of the annual depreciation process.

f. UCOP will continue to calculate the depreciation expense annually for this group of items for six years, until it has been fully depreciated. UCOP will instruct the campuses to write-off this item at the end of six years as described in question 11.

g. The process described in a through d above will be repeated each year until the phase-in is complete. The process described in e and f will be repeated each year until all items are fully depreciated.

Cost Accounting Issues

27. Should UC notify Medicare (United Government Services) of the threshold change?

UCOP Financial Management will coordinate with the medical centers to notify Medicare of the change.

28. How and when will facilities and administrative (F&A, indirect cost) rate agreements be revised to reflect the equipment threshold change?

UCOP Financial Management will discuss the change with the U.S. Health and Human Services, Division of Cost Allocation (DHHS-DCA).

In general, for campuses that do not have predetermined rates negotiated for periods beyond FY 2005–06, the next rate agreement will reflect the new equipment definition. No additional action will be needed.

For campuses that already have predetermined rates established for periods FY 2006–07 and beyond, we will request DHHS-DCA to reissue the agreements with the new equipment threshold, with no change to the negotiated rates, effective July 1, 2006.

29. How will this change affect the way F&A rate proposals are prepared?

The change will not affect the process used to prepare the F&A rate proposals. The depreciation expense information will continue to be maintained by UCOP Financial Management and provided to the campus F&A rate managers as necessary for all items included in the inventory. A reconciliation process will be developed to reconcile the depreciation expense reported in the financial statements to the depreciation expense included in the F&A rate proposal.

30. When preparing F&A rate proposals, would it be possible to group the expenditures recorded in object code 8120 in a facilities indirect cost pool so that these costs are not included in the capped administrative cost pools?

OMB Circular A-21, Section F.1. defines the facilities category of indirect costs as “depreciation and use allowance, interest on debt associated with certain buildings, equipment and capital improvements, operation and maintenance expenses, and library expenses.” It would be difficult to justify an additional facility indirect cost pool consisting of expenditures for non-capitalized expense items. Logical justification that can be developed to support this position will be considered for possible discussion with the federal government.

The threshold change will reduce the annual equipment depreciation expense. This decrease will reduce the calculated F&A rates and may result in somewhat lower rates to be negotiated with the federal government. While the final negotiated F&A rates may be slightly lower, these rates will be applied to a larger base of direct costs. In the long term, these two factors should offset the impact on the actual dollars of indirect costs recovered.

UCOP Financial Management will coordinate additional discussion of this and other F&A rate issues related to the change in the equipment threshold with the campus Indirect Cost Managers.

31. How and when will Cost Accounting Standards Disclosure Statements be revised to reflect the equipment threshold change?

An update to the Disclosure Statements will be required. UCOP Financial Management will develop the strategy and schedule for updating the Disclosure Statements in consultation with the campus controllers.

Further Information

32. If I have additional questions, whom should I contact?

Please contact the appropriate UCOP functional representative listed below:

Robert Baum, Corporate Systems, (510) 987‑0396, robert.baum@ucop.edu
Barbara Lester, Corporate Accounting, (510) 987‑0895, barbara.lester@ucop.edu
David Mears, Research Administration, (510) 987‑9838, david.mears@ucop.edu
Jorge Ohy, Costing Policy & Analysis, (510) 987‑9842, jorge.ohy@ucop.edu
Cathy O’Sullivan, Strategic Sourcing and Equipment Management, (510) 987‑0473, cathy.osullivan@ucop.edu
John Turek, Hospital Accounting, (510) 987‑0911, john.turek@ucop.edu

(Document source: UCOP Corporate Equipment and Facilites systems (EFA); see UCOP Procurement Services: Equipment Management)