Benefits of a Cost Allocation Plan

Benefits of a Cost Allocation PlanJasmine Markanday, MBA

President/OwnerPKS Grant Management & Accounting Solutions, LLC

Where to Find the Guidance

• 2 CFR Part 200 & 45 CFR Part 75 • Three appendices applicable to reviews of state, local &

tribal governments• Appendix V – State/Local Governmentwide Central Service Cost

Allocation Plans

• Appendix VI – Public Assistance Cost Allocation Plans

• Appendix VII – States and Local Government and Indian Tribe Indirect Cost Proposals

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Allocation/Indirect Terms

• Central Service Cost Allocation Plan or Cost Allocation Services Plan

• Commonly referred as State-Wide Cost Allocation Plan (SWCAP)

• Local-Wide Cost Allocation Plan (LOCAP)• Indirect Cost Rate

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Definitions

• Central Service Cost Allocation Plan

• Documentation developing billing rates based on the allowable costs of services on a centralized basis.

• Cost Allocation Plan

• Document that identifies and distributes allowable direct and indirect costs.

• Indirect Cost Rate

• Reasonable determination on proportion of indirect costs each program should be charged.

• the indirect costs are included in the numerator (pool) and the direct costs are included in the base (denominator).

• Indirect Cost Rate Proposal

• Documentation prepared by the cognizant agency to initiate its request for the establishment of an indirect cost rate.

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Why Create a Cost Allocation Plan

• To ensure central service costs can be• Identified • Assigned to benefiting activities on a reasonable &

consistent basis• Requirement by the government • Benefits your organization

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2 CFR 200 : Direct Costs vs. Indirect Costs

• §200.413 Direct Costs

• Direct costs are those costs that can be identified specifically with a particular final cost objective, meaning federal award, program or project

• Examples may include staff salaries, materials & supplies, equipment, contractual, travel etc.

• §200.56 Indirect Costs

• Indirect costs means those costs incurred for a common or joint purpose benefitting more than one cost objective, & are not readily assignable

• Examples may include: CEO & CFO, Procurement Office, Information Technology, Payroll & Human Resources Office etc.

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De Minimis 10% Rate

• §200.414 De Minimis 10% Rate

• Any non-federal entity that has never received a negotiated indirect cost rate, may elect to charge a de minimis rate of 10% of modified total direct costs (MTDC) which may be used indefinitely only if the grant budget exceeds $35 million

• Consistency in charging direct & indirect costs is required

• Consider developing a policy to use the de minimis 10% rate until you decide to negotiate a rate

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Major Local Governments

• Receive more than $100 million in direct federal funding

• Required to submit Local Governmentwide Central Service Cost Allocation Plans annually

• State or Local government that receives more than $35 million must submit indirect cost rate proposal

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Benefits of Negotiating a Rate

• Negotiated rate is usually between 25% to 40%

• Can be retroactive

• Acceptable by all federal agencies

• Can be used as a match on federal grants (requires pre-approval)

• Can apply to some foundation/private grant budgets (if allowable)

• Can use as cost-sharing on some foundation/private grants (if allowable)

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Example: 25% Rate vs. 10% De Minimis

• If your negotiated rate is 25%, federal grant budget $500,000 & the federal agency allows your negotiated rate

• =$500,000 x .25 is $125,000 will go toward indirect costs (Imagine what you can do with that money plus think if your rate is higher)

• Let’s say you use the 10% de minimis rate=$500,000 x .10 is $50,000 will go toward indirect costs

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Questions?

Updates on New & Proposed GASB GuidancePresenter: Amy Shreck

January 9, 2020

Implementation Dates

StandardEffective

June/Sept 30Effective

December 31

GASB 83, Certain Asset Retirement Obligations 2019 2019

GASB 84, Fiduciary Activities 2020 2019

GASB 87, Leases 2021 2020

GASB 88, Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements 2019 2019

GASB 89, Accounting for Interest Cost Incurred before the End of a Construction Period 2021 2020

GASB 90, Majority Equity Interests 2020 2019

GASB 91, Conduit Debt Obligations 2022 2021

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GASB 84Fiduciary Activities

Background

• What: The Board issued GASB 84 to clarify when a government has a fiduciary responsibility & is required to present fiduciary fund financial statements

• Why: Existing standards require reporting of fiduciary responsibilities but do not define what they are• Inconsistency on use of private-purpose trust funds & agency

funds• When: Effective for fiscal years beginning after December 15,

2018; early application encouraged

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Fiduciary Funds Flowchart

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Fiduciary Activities

Component Units• Postemployment benefit

arrangements• Not postemployment

benefit arrangements

Not Component Units• Postemployment benefit

arrangements that are not component units

• All other activities

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Component Unit Definition

• Organizations that are legally separate from the primary government & for which the elected officials of the primary government are financially accountable

• Misleading to exclude criteria

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Evaluating Potential Fiduciary Component Units

• Legally separate• Financial accountability criteria

• Test 1: Voting majority of board AND› Imposition of will or financial benefit or burden

• Test 2: Fiscally dependent • Misleading to exclude

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Fiduciary Component Units

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Legally separate entity

• Pension/OPEB plans administered through trusts under GASB 67/74 are legally separate entities for purposes of GASB 84 (IG Q&A)

Board composition

• Retirement benefits administered through trusts may not have a traditional board

Financial burden

• Primary government considered to have financial burden if legally obligated or has otherwise assumed obligation to make contributions to pension or OPEB plan

Implementation Guide 2019-2,Fiduciary Activities

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4.1. Q—Should a pension or OPEB plan that is administered through a trust that meets the criteria in paragraph 3 of Statements 67 and 74, as applicable, be considered legally separate from the employer and the plan administrator for financial reporting purposes?

A—Yes. For purposes of applying the criteria in paragraph 15 of Statement 14, paragraph 7 of Statement 84 states that such plans should be considered legally separate. In pension and OPEB plans that meet the criteria in Statement 67 or Statement 74, as applicable, (a) contributions to the plans are irrevocable, (b) plan assets are dedicated to providing pensions or OPEB to plan members in accordance with the benefit terms, and (c) plan assets are legally protected from the creditors of the employer and the plan administrator.


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4.7. Q—Pursuant to enabling state legislation, a city established a defined benefit pension plan through which the city provides pensions to its employees. The pension plan is administered through a trust that meets the criteria in paragraph 3 of Statement 67. Five of the seven members of the pension plan board are appointed by the city council, and two members are elected by the plan members. A provision in the enabling legislation imposes an obligation on the city to make contributions to the plan. The city has determined that it is not able to impose its will on the plan. Because the trust meets the criteria in paragraph 3 of Statement 67, the city cannot access the resources of the plan. Furthermore, the city is not obligated in any manner for debt of the plan. Should the plan be included as a component unit of the city?

4.7. A—Yes. Paragraph 7 of Statement 84 provides that the statutory obligation for the city to contribute to the plan constitutes a financial burden. Because the government also appoints a majority of the plan’s governing board, the criteria in paragraph 27b of Statement 14 is met and the government is financially accountable for the plan.


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4.11. Q—A city hires a contractor to construct a new city building. The contractor provides the city with a cash deposit to be held by the city as an assurance that the project will be completed on schedule and in accordance with the plans and specifications. If the contractor does not complete the project satisfactorily, the deposit will be forfeited to the city. If the contractor does complete the project satisfactorily, the city will refund the deposit. Should the city report the contractor deposit in a fiduciary fund?

A—No. Although the control criteria in paragraph 12 of Statement 84 are met because the city is holding the cash, the deposit is the result of an exchange transaction between the contractor and the city. The city is holding the cash for its own benefit and the criteria in paragraph 11c are not met. Therefore, the cash deposit and a related liability would bereported in the city’s governmental or enterprise fund financial statements.


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4.15. Q—A government uses a clearing account to accumulate resources from withholding of employee payroll deductions and accrued employer payroll taxes that will be submitted to the appropriate taxing bodies when due. Should the government report the clearing account in its fiduciary fund financial statements?

A—No. Although the government has control of the assets because it has custody of the cash withheld, the unremitted amounts in the clearing account are a liability of the government. When the deductions are withheld from an employee’s pay, the amounts withheld and accrued by the employer become a present obligation to sacrifice resources that the government has no discretion to avoid and, therefore, are liabilities of the government. As a result, the government is holding the amounts for its own benefit and the criteria in paragraph 11c of Statement 84 are not met.


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4.35. Q—A county government imposes an annual license fee of $1,500 pursuant to the county’s business licensing function. The county government enters into a revenue-sharing agreement with the state that results in the county retaining $1,350 from each license fee and remitting the remaining amount to the state. The fees to be remitted to the state are maintained in a separate county bank account. Should the state portion of the fees collected be considered own-source revenues of the county, as described in paragraph 13 of Statement 84?

A—Yes. The nature of that transaction is exchange or exchange-like resulting in the fees collected being the county’s own-source revenue, as discussed in paragraph 13 of Statement 84.


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4.38. Q—A county collects property taxes on behalf of the other tax-levying governments within its jurisdiction. The county collects a fee, equal to 1 percent of the amount billed, from the other governments to provide this service. The taxes are deposited into the county collector’s property tax distribution account, a custodial fund. Should the county report the fees in the custodial fund with the taxes collected?

A—No. The county is obligated to provide the collection service for which a fee is charged to the other taxing governments. The nature of that transaction is exchange or exchange-like, resulting in own-source revenues of the county. Paragraph 11b(1) of Statement 84 statesthat an activity is not fiduciary if the assets are derived from the government’s own-source revenues. Therefore, the county should report the fees in its governmental fund financial statements.

GASB 88Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements

Background

• Concerns raised about debt arrangements entered into by governments that could pose additional risks to their credit profile

• Inconsistency in disclosures; therefore, difficult to assess the risks

• Clarity needed as to which long-term liabilities constitute debt for disclosure purposes

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Definition of Debt

• Debt is defined as “… a liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established.”

• The definition excludes leases (except those that transfer ownership) & accounts payable

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Definition of Debt

• Fixed at the date the obligation is established• Variable rate debt & capital appreciation bonds still considered debt, because principal

amount is fixed

• Liabilities not in scope• Leases – covered in GASB Statement 87• Accounts payable

› May meet definition of debt, but are short-term in nature

• Contracts that require future performance› Employment contract for city manager

• Pension/OPEB, pollution remediation, landfills› Payments are not fixed when liability is recognized

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New Debt Disclosures

• Statement 88 requirements are in addition to previous required note disclosures for debt

• Debt-related items to be included in notes to financial statements (if applicable)

• Amount of unused lines of credit• Assets pledged as collateral for debt• Terms specified in debt agreements related to significant

› Subjective acceleration clauses› Events of default with finance-related consequences› Termination events with finance-related consequences

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New Debt Disclosures

• Information about direct borrowings & direct placements should be separate from other debt

• Changes in long-term debt• Repayment schedules• Assets pledged as collateral for debt• Events of default with finance-related consequences• Termination events with finance-related consequences• Subjective acceleration clauses

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Disclosure Examples

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Events of default with

finance‐related consequence

Subjective acceleration

clause

Amount of unused lines of

credit

The government’s outstanding notes from direct borrowings related to governmental activities of $225,000 contain a provision that in an event of default, outstanding amounts become immediately due if the government is unable to make payment

The government’s outstanding notes from direct placements related to business‐type activities of $275,000 contain a subjective acceleration clause that allows the lender to accelerate payment of the entire principal amount to become immediately due if the lender determines that a material adverse change occurs

The government has an unused line of credit in the amount of $2,000,000

Effective Date

• Effective for reporting periods beginning after June 15, 2018

• Earlier application is encouraged

• Applies to notes to financial statements of all periods presented

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GASB 89Accounting for Interest Cost Incurred before the End of a Construction Period

GASB 89

• Interest costs during construction be recognized as an expense, no longer capitalized as part of capital asset

• Effective for reporting periods beginning after December 15, 2019

• Earlier application encouraged

• Applied prospectively

• No restatement to remove prior amounts capitalized, even for CIP

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GASB 90Majority Equity Interests – an amendment of GASB Statements No. 14 and No. 61

Background

• Pre-GASB 90• Government’s intent in acquiring majority equity interest (MEI)

determines if reported as CU or investment• When entity was reported as a DPCU, the government also

recognized an asset of the government, measured using joint ventures accounting

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Equity Interest Definition

• New definition of equity interest• A financial interest in a legally separate organization• Represented by shares of stock or otherwise having an

explicit, measurable right to net resources of organization that is usually based on an “investment of financial or capital resources by a government

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Equity Interest

• A government has an explicit, measurable right to net resources of an entity if the

• Government has a present or future claim to net resources

• Government’s share is determinable

• Clarification• Excludes residual interests in assets that may revert to a government

upon dissolution of an entity

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Investment Determination

• Investment asset criteria• Government holds primarily for income or profit• Has a present service capacity based solely on ability to generate or be sold for

cash

• Example: public hospital (BTA) has two MEIs• A majority partnership interest in a real estate investment partnership is held in

an endowment fund – investment asset• A holding of 60 percent of the voting capital stock of medical imaging facility

providing services to patients – noninvestment asset

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Majority Equity Interest

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• Report as an asset, not a component unit• Measure using the equity method, except

use fair value if investment is held by a designated kind of government or fund

• Special-purpose government engaged only in fiduciary activities (pension/OPEB)

• Fiduciary fund• Endowment (term or permanent)• Permanent fund

• Report as a component unit• Blended or discrete – if blended, eliminate

asset & CU net position

• Full accrual – measure using equity method

• Modified accrual – report only current financial resource (payables & receivables between government & entity)

• Special rules for 100 percent acquired entity

Investment Not an Investment

Effective Date

• Effective for periods beginning after December 15, 2018• Retrospective application, except

• Paragraph 8 – measuring MEI in CU• Paragraph 9 – acquisition of 100 percent interest

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GASB 91Conduit Debt Obligations

Conduit Debt Obligation

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Issuer

• Debt obligation is not a parity bond or cross-collateralized with other debt

• Does not receive ultimate proceeds

• Not primarily obligated for debt service payments

Third-Party Obligor

• Ultimately received proceeds from issuance

• Primarily obligated for debt service payments

Not within the same financial reporting entity Debt Holder or Trustee


• Issuer• Does not recognize liability for conduit debt obligation• Additional or voluntary commitment to support debt service

should be evaluated for recognition annually• Limited commitment (maintain issue’s tax-exempt status

should be evaluated only if event or circumstance that causes issuer to consider supporting debt service payments occurs)

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Recognition of liability by Issuer to support debt service payments

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Qualitative factors indicate it is more likely than not that the issuer will support one or more debt service payments

More likely than not = more than 50 percent

Qualitative factor examples described in paragraph 13

Measure as discounted present value of best estimate of future payments to support debt service expected to be incurred

Effective Date

• Periods beginning after December 15, 2020• Earlier application is encouraged• Retroactive restatement for all prior periods presented

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BKD Thoughtware®

• Webinars, seminars & articles

• Many are CPE-eligible

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Amy Shreck, CPA | [email protected]

Tips & Tricks for Implementing GASB’s Lease GuidancePresenter: Amy Shreck

January 9, 2020

Definition of a Lease

A contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.

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Scope Exceptions

• Leases of• Intangible assets• Biological assets• Inventory• Assets financed with conduit debt*

• Service concession arrangements

• Supply contracts

3 *Unless lessor reports asset & conduit debt

Implementation Guide 2019-3,Leases

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4.1. Q—A government obtains the right to use land, which has a market rent of $100,000 per year, for $1 per year. Should the government apply the requirements in Statement 87 to that transaction?

A—No. The definition of a lease in paragraph 4 of Statement 87 specifies that the Statement should be applied only to exchange or exchange-like transactions. Paragraph 1 of Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, classifies all transactions of state and local governments into two categories: (a) exchange and exchange-like and (b) nonexchange. The government’s right to use land for $1 does not meet the description of an exchange or exchange-like transaction because each party does not receive or give up essentially equal value or not quite equal value.


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4.5. Q—Do easements meet the definition of a lease?

A—An easement provides the right to use a tangible asset, for example, land. Some easements meet the definition of a lease, while other easements do not. Paragraph 4 of Statement 87 states that, among other things, a lease is “for a period of time in an exchange or exchange-like transaction” (footnote reference omitted). Permanent easements, which last indefinitely without cancellation options, do not meet the period-of-time criterion. In addition, easements obtained for an amount that does not meet the description of exchange or exchange-like transactions in Statement 33, as amended, do not meet the exchange or exchange-like criterion.


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4.8. Q—Are cell phone tower or antenna placement agreements leases?

A—If the agreements meet the definition of a lease in paragraph 4 of Statement 87, including the control criterion, then such agreements are leases. The control criterion generally is met if a cell phone tower or antenna placement agreement conveys control of the right to use the land on which the tower is placed or the connection point to which the antenna is affixed.


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4.9. Q—A contract allows the vendor to replace the underlying asset with an essentially identical asset. Does that substantive right of substitution affect the evaluation of whether the contract conveys control of the right to use the asset?

A—No. A lease conveys control of the right to use another entity’s asset. That right is distinct from the underlying asset. That is, the right-to-use asset relates to the service capacity associated with an underlying asset, rather than the underlying asset itself. Substitution with an essentially identical asset allows the lessee to maintain control of the right to use the service capacity of another entity’s underlying asset and is consistent with the definition of a lease in paragraph 4 of Statement 87.


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4.18. Q—A government enters into a lease with a 6-month noncancellable period and an option to extend for another 12 months after the noncancellable period. The government is not reasonably certain that it will exercise the option to extend and, therefore, assesses the lease term as six months. Is this agreement a short-term lease under Statement 87?

A—No. Paragraph 16 of Statement 87 states that a short-term lease “has a maximum possible term under the lease contract of 12 months (or less), including any options to extend, regardless of their probability of being exercised.” Therefore, the lessee should report a lease liability and a lease asset; however, the lease term would be only six months.


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4.23. Q—A government adopts a capitalization threshold and expenses acquisitions, including lease assets, that fall below that threshold. Can the government apply a similar threshold to lease liabilities?

A—Lease liabilities that are significant, either individually or in the aggregate, should be recognized. Authoritative pronouncements do not provide specific guidance related to a determination of capitalization threshold amounts. However, governments often establish capitalization thresholds. (See Question 7.9.8 of Implementation Guide No. 2015-1.) When applying a capitalization threshold to leases, lessees should consider the quantitative and qualitative significance of the lease liability, in addition to the significance of the lease asset in accordance with the guidance provided in Question 7.4.1 of Implementation Guide 2015-1, as amended.


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4.60. Q—A government leases two floors of an eight-floor building. A part of the lease payments covers the government’s share of utilities and janitorial costs for maintaining a lobby that all tenants share. Should the utilities and janitorial costs for the lobby be included in the government’s lease liability?

A—Based on paragraph 64 of Statement 87, if it is practicable for the government to separate and estimate the costs for those services, the costs should not be included in the government’s lease liability. For example, if the lease contract itself does not specify the amount (in dollars or percentage), the government could request that information from the landlord. Additionally, local real estate professionals may have statistics such as average charges per square footage. However, if it is not practicable for the government to separate the costs and estimate them, based on the provisions in paragraph 67 of Statement 87, the janitorial services and utility costs for the lobby should be included in the government’s lease liability.


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4.76. Q—For leases that were reported as operating leases prior to the implementation of Statement 87, should a government determine what the lease asset would have been on the date of implementation if it initially had been recognized and amortized in prior periods as a lease under the provisions of Statement 87?

A—No. Paragraph 94 of Statement 87 states that leases should be measured using the facts and circumstances that existed at the beginning of the period of implementation. The government is not required to estimate what the lease asset would have been if it initially had been recognized and amortized in prior periods as a lease under the provisions of Statement 87. The lease liability should be measured using the remaining lease term and discount rate as of the beginning of the earliest period restated. The right-to-use asset should be measured based on the lease liability at that date and no restatement of beginning net position would be required because the lease asset and the lease liability would be the same.

Effective Date and Transition

• Periods beginning after December 15, 2019

• Retroactive• Restate prior periods presented• Cumulative effect to beginning net position/fund balance

• Facts & circumstances existing at implementation

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Implementation

• GASB 87 will likely be very burdensome to implement• Focus on BOTH lessee & lessor contracts• A number of public sector entities, such as airports, have hundreds of

leases to analyze

• Implementation will require significant time investment • Significant number of leases• Complexity of agreements to be analyzed

• Entities are faced with implementation of several other standards in addition to GASB 87

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BKD LeaseVision

A one-stop lease standard implementation solution,which includes

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Implementation road map

Artificial intelligence technology

Excel tools

Implementation Road Map• Education• Project governance• Determining scope• System requirements• Finding leases• Categorizing & analyzing in-

scope leases• Policies & internal controls

• Sample journal entries• Finalize disclosures• Draft financial statement

presentation• Communication to external

parties• Post-implementation review

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Implementation Road Map

• Detachable checklists to guide process & assist with documentation

• Specifically written for GASB guidance, by professionals with a deep understanding of the guidance & standard-setting process

• Easy to read & can be shared with other departments

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AI Technology to Excerpt Lease Terms

• AI technology trained to identify & excerpt key lease terms• Public sector entity agreements used to “train” the software • Output provided in both Word & Excel formats

• Word provides easy-to-read summary• Tables & schedules extracted from agreements presented in Excel

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LeaseVision Excel Tool

• GASB• Lessee version• Lessor version

• Includes technical guidance & tips throughout• Built-in, how-to instructions• Customizable journal entry sections• Maintain amortization schedules & accumulate disclosure

information

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BKD Thoughtware®

• Webinars, seminars & articles

• Many are CPE-eligible

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Amy Shreck, CPA | [email protected]

Documents

Benefits of a Cost Allocation Plan