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Announcement
Financial Information and Services
TO: Deans, Officers and Directors
FROM: William J. Hogan, Jr.
SUBJECT: INCREASE IN EQUIPMENT CAPITALIZATION THRESHOLD
DATE: August 1, 1996

The University's equipment capitalization threshold will be increased from $500 to $5,000 effective July 1, 1998 - the effective date of the University's next indirect cost rate agreement.

Background

On July 29, 1995, the Office of Management and Budget issued a memorandum entitled "Equipment Capitalization Threshold Waivers Under OMB Cost Principles Circulars for Universities and Non-Profit Organizations." That memorandum authorized Federal agencies with cost negotiation cognizance to increase the equipment capitalization threshold from $500 to $5,000. On May 8, 1996, OMB revised OMB Circular A-21's definition of equipment. A-21 now defines "equipment" as an article of nonexpendable, tangible personal property having a useful life of more than one year and an acquisition cost that equals or exceeds the lesser of the capitalization level established by the University for financial statement purposes, or $5,000.

OMB expects the higher capitalization level to produce administrative efficiencies by reducing significantly the accounting and record keeping requirements for grantees.

Benefits of Higher Capitalization Threshold

The major benefit of the higher capitalization threshold will be a significant reduction in the administrative effort of academic departments and the Comptroller's Office in maintaining and accounting for the University's equipment inventory. Further, for the past several years the OMB Circular A-133 Audit Report has cited control weaknesses in the management of the equipment inventory. The higher capitalization threshold will reduce University exposure with the Federal government in this area.

Based upon fiscal year 1995 data, the number of equipment transactions that the University would process on an annual basis would drop from 6,000 to 600, and the total number of records the University would have to maintain for equipment inventory accounting purposes would, as shown by the table below, decrease dramatically from 36,200 items to 5,600 items.

Capitalization
Number of Items
Threshold
in Inventory
Value
$500
36,200
$162,300,000
$5,000
5,600
$110,300,000

Implementation Issues

The higher equipment capitalization threshold will have an impact on the University's calculated indirect cost rate and may impact direct costs available to investigators on certain grants.

The University's calculated indirect cost rate will decrease by approximately one percentage point.

The indirect cost rate is calculated by dividing the indirect costs allocated to research by the MTDC (Modified Total Direct Cost) base. Eliminating depreciation on equipment items costing less than $5,000 will reduce the depreciation allocated to research as an indirect cost. Classifying equipment items costing less than $5,000 as "supplies" will increase the research MTDC base. Decreasing the indirect cost rate calculation's numerator and increasing its denominator will cause the calculated indirect cost rate to decrease approximately one point.

The impact of a higher capitalization threshold on individual grants will vary. Some grants will have more indirect costs to pay, others will have less. How much more or less will be determined by the specific composition of items costing greater than $500 but less than $5,000. For some investigators this may result in an increase in cost to grants, particularly if awarding agencies do not increase project funding to provide additional indirect costs. However, there are two factors that will help mitigate any negative consequences of the threshold change. The first factor is the two year transition period. The new equipment threshold will not be effective until July 1, 1998, which should provide time for investigators to adjust the timing of equipment procurements to minimize any initial impact of the change. Secondly, the threshold change will coincide with the University's next indirect cost rate agreement. In addition to the one point reduction in the indirect cost rate described above, recent revisions to OMB Circular A-21 will reduce the indirect cost rate even further from the current 53% level.

Implementation Steps

To implement the $5,000 capitalization threshold, the following steps will be completed:

    a. Revise the University's property accounting procedures so that equipment items costing less than $5,000 are not added to the equipment inventory. This can be done at any time, but will be done effective July 1, 1996 since the revisions will reduce administrative effort.

    b. Incorporate the higher capitalization threshold into the computation of the MTDC base for budgeting and charging of indirect costs effective July 1, 1998 - the effective date of the new indirect cost rate agreement period. Effective immediately, all proposals to awarding agencies (federal and non-federal) must reflect the $5,000 capitalization level in the proposal budgets. If a budgeted equipment acquisition will be made prior to July 1, 1998, then the $500 threshold applies and the equipment cost would be excluded from the MTDC base. For all equipment acquisitions after July 1, 1998, the $5,000 threshold will apply and all acquisitions costing less than $5000 must be included in the MTDC base.

    c. Budget all acquisitions after July 1, 1998 using the current indirect cost rate of 53%.