CFR Part 200 allows external interest costs to be included in the cost basis for development of recharge rates but does not allow for the recovery of internal interest. Interest will be credited to Recharge/Service Center operating accounts with a positive balance, but will not be credited to equipment reserve funds.
Inventory accounts should be established in accordance with UC policy (Business & Finance Bulletin BUS-54). Current policy indicates that these should be established "when the combined inventory value of new and unissued material in a department exceeds $50,000 at one or more locations on a campus or exceeds $50,000 at an off campus location."
A subsidy reflects costs that are not recovered through a recharge rate. The amount, funding source, and purpose of each subsidy must be disclosed. Subsidies are normally provided to keep the charge for a service lower than the full cost basis would require. Subsidies can be provided to cover general recharge expenses or may be used to cover specifically identified expenses. Subsidies may NOT be used to discriminate among recharge users without an acceptable justification. Subsidies can be provided in the form of:
- funds to support technical salaries and benefits of staff directly associated with the recharge activity
- funds for the purchase of equipment for use by the recharge activity
- funds to cover year-end deficits from the recharge activity operations
The above types of subsidies of recharge activities should be identified as part of the recharge activity. However, no subsidies should be included in the calculation of the recharge rate. The department should link the recharge account with the subsidy fund and record these subsidized expenses on the general ledger for a recharge activity. Only technical salaries and benefits of personnel directly related to the recharge activity should be included.
Capital Equipment, Depreciation, and Transfer to Reserve and Renewal Fund
Capital (inventorial) equipment items are standalone items with a useful life >1 year and value >$5,000. Capital equipment assigned to the recharge activity cannot be charged directly to a recharge account. The equipment should be depreciated and the depreciation expense should be included as a cost in the rate development and charged as expense to the recharge account, except as follows:
- Equipment funded by the Federal government or identified as cost sharing to a federal project.
- Equipment funded by an award under a private contract, where the contract is not completed. If the contract is complete and there is remaining life in the asset, the undepreciated balance remaining at the end of the life of the asset can included in the rate calculation. Example: asset has useful life of 5 years but 3 year life of the award, then asset may be depreciated for the remaining 2 years.
a. Equipment Purchases
There are only two possible ways for equipment to be purchased, through equipment reserve accounts that have accumulated via the depreciation mechanism or from institutional funds. Otherwise, an operating lease can be used to provide the necessary equipment. External loans or capital leases can be used to provide equipment; however, the debt repayment costs cannot be recovered fully through the recharge rate, only certain interest costs and depreciation of the equipment can be included in the rate. Given these limitations Deans’ offices may wish to modify their approach to subsidizing recharge centers by providing funding for equipment rather than salaries. An equipment reserve for recharge centers will be established with institutional funds that would be repaid through depreciation, similar to the working capital that has been available to some service enterprise units.
b. Depreciation Definition
Equipment cannot be fully expensed to the recharge operating fund in the year of acquisition. Depreciation will be on a straight-line basis, charged annually over the life of the equipment, unless it can be demonstrated that some other method is more appropriate. The life of the equipment normally should be based on the UCOP useful life table. Depreciation costs are to be included as a cost element for rate determination purposes.
Any inventorial equipment assigned to the activity will normally be depreciated, including gifted equipment or equipment purchased from unrestricted funds. Federally-funded equipment cannot be depreciated and cannot be included in the costs basis for internal customers. However, outside user rates can include the depreciation component in the rate. In this scenario, there would be two rates: 1) for internal customers (recharges) that does not include depreciation component in the rate; and 2) for external customers (income) that does include the depreciation component for federally funded equipment.
c. Recording Depreciation Expense - Transfer to Reserve and Renewal Fund
Recharge activities with depreciable equipment will contact General Accounting to request that depreciation expense be recorded via a financial journal (BAC) that will debit the recharge operating account and credit a reserve and renewal fund (76xxx). The request should be submitted to Accounting by June 30 to ensure it can be processed before the close of Period 12.
The following are the financial entries to record depreciation expense:
- Debit (-): KFS Account, recharge operating fund (6xxxx), Object code X500
- Credit (+): KFS Account, R&R fund (76390), Object code C050
d. Use of the Reserve and Renewal Account
Through the entries above, an equipment replacement reserve account is established. The equipment replacement reserve (account RRXXXXX) should be used to support the future replacement of expended assets needed for the recharge operation. Use of the equipment replacement reserve account for other recharge unit expenses is by exception only and subject to approval. Requests for alternate uses of equipment reserve funds may be sent to the appropriate Coordinating Point or Dean’s Office and should describe the proposed use of the reserve account, including the dollar amount to be used. The request should also discuss the unit’s future capital needs and how they will be met in the absence of a fully funded equipment replacement reserve. The Coordinating Point or Dean’s Office will approve or deny the request then forward to the Budget Office for review and approval.
A decommissioned recharge unit may use its equipment replacement reserve fund to offset any recharge operational deficit. Balances in the reserve fund beyond deficit coverage may be retained by the department.
Recharge activities will be operated on a no-gain/no-loss basis. Any surplus or deficit occurring in any one year will be corrected by adjustment of rates in the succeeding year to achieve a break-even balance at the succeeding year end. Every effort should be made to ensure that year-end surpluses or deficits do not exceed Two month of the recharging unit's expenses. The adjustment of rates will generally be based on estimates since actual performance data for the year will not be available prior to the development and publication of the succeeding year's recharge rates. In exceptional cases when such an adjustment would create a severe fluctuation in rates from one year to the next, achievement of a break-even balance can be extended for a reasonable period beyond the succeeding year upon approval by the Recharge Rate Review Committee.
As part of the annual recharge rate review, units that carry an unacceptable deficit are required to explain a deficit situation and corrective action that will be taken to eliminate it.
If a unit does not make discernible improvement on the deficit by the end of the 4th quarter following the annual review, the coordinating point will be notified at the end of July and the unit required to submit a deficit reduction plan by the end of August.
The deficit reduction plan must include a narrative and supporting financial analysis that details how the deficit will be reduced to acceptable limits by the end of the fiscal year.
If the deficit is not reduced to acceptable limits in that timeframe, the coordinating point must cover the deficit.
How to Close an Activity
Within 10 days of deciding to close a recharge operation, please email your Coordinating Point/Dean’s Office and the Recharge Committee (firstname.lastname@example.org), advising of your decision. In addition, please advise when the operation will close and how you intend to account for any remaining surplus or deficit. On receipt of this information, we will make all appropriate changes to the recharge web site.
When a recharge unit ceases to operate, the remaining balance must be treated as follows:
For surplus balances - If the surplus is > 1 months operating costs, the balance will be refunded back to the unit’s recharge customers on a pro-rata basis, within 30 days of closure. The refund will be allocated on the basis of charges made to these customers in the last 12 months. If the surplus < 1 months operating costs, the balance is retained by the sponsoring unit and moved to an appropriate account.
For deficit balances - If the unit closes with a deficit balance, the balance must be transferred financially to an appropriate account within the department. If it is not moved by the fiscal year’s end, the entire deficit balance will be subject to the terms of the deficit policy without the application of a tolerance. A decommissioned recharge unit may use its equipment replacement reserve fund to offset any recharge operational deficit. Balances in the reserve fund beyond deficit coverage may be retained by the department with central Budget Office approval.