Leading / Thinking / Performing Presented by: Kevin J. McHugh, Senior Vice President and National Managing Director – Higher Education Services American Appraisal Associates October 3, 2007 The Benefits of Building Componentization and Fixed Equipment Inventories 2007 Conference on College Cost Accounting MECA / SECA / WECA Atlanta, Georgia October 3 – 5, 2007 Tips of the Trade: Improving Your F&A Rate and Submitting a Sound Proposal

The Benefits of Building Componentization and Fixed Equipment Inventories 2  First of All - What is a Building Componentization Study? And Why is it so important to your Institution? TOPICS

The Benefits of Building Componentization and Fixed Equipment Inventories 3 Overview Building Componentization Study

The Benefits of Building Componentization and Fixed Equipment Inventories 4 How Would Such a Study Help My Institution?  Basis for reimbursement of depreciation on construction and renovations/improvements  Monitor facility’s condition  Project capital improvement needs  Increase depreciation percentages, sometimes significantly, depending upon current capitalization lifing policies and procedures

The Benefits of Building Componentization and Fixed Equipment Inventories 5 Sample Building on a Use Allowance Basis

The Benefits of Building Componentization and Fixed Equipment Inventories 6 MECA / SECA / WECA Atlanta, Georgia Life = 50 Years

The Benefits of Building Componentization and Fixed Equipment Inventories 7 Sample Building via a Componentization Basis

The Benefits of Building Componentization and Fixed Equipment Inventories 8 Building Shell Life = 50 Years

The Benefits of Building Componentization and Fixed Equipment Inventories 9 Roof Covering Life = 20 Years

The Benefits of Building Componentization and Fixed Equipment Inventories 10 Interior Finishes Life = 20 Years

The Benefits of Building Componentization and Fixed Equipment Inventories 11 Plumbing Systems Life = 25 Years

The Benefits of Building Componentization and Fixed Equipment Inventories 12 Electrical Systems Life = 25 Years Lighting Systems

The Benefits of Building Componentization and Fixed Equipment Inventories 13 HVAC System Life = 20 Years

The Benefits of Building Componentization and Fixed Equipment Inventories 14 Fire Protection System Life = 25 Years

The Benefits of Building Componentization and Fixed Equipment Inventories 15 Elevator System Life = 25 Years

The Benefits of Building Componentization and Fixed Equipment Inventories 16 Fixed Equipment Asset Classification Life = 15 Years

The Benefits of Building Componentization and Fixed Equipment Inventories 17 Financial Analysis Use Allowance vs. Componentized Depreciation

The Benefits of Building Componentization and Fixed Equipment Inventories 18 Example Building Cost = $20,000,000

The Benefits of Building Componentization and Fixed Equipment Inventories Year Assigned Life 2% Use Allowance Recovery = $400,000

The Benefits of Building Componentization and Fixed Equipment Inventories 20 Building Componentization Depreciation Depreciation DescriptionLife Cost Expense Building Shell40$ 9,600,000$240,000 Building Services25 8,600, ,000 Fixed Equipment15 1,800, ,000 Total$20,000,000$704,000

The Benefits of Building Componentization and Fixed Equipment Inventories 21 Recovery 2 % Use Allocation Calculation$400,000 Componentized Depreciation Calculation$704,000 Accelerated Recovery$304,000

The Benefits of Building Componentization and Fixed Equipment Inventories 22 What are the Next Steps? Determine the Buildings to be Included Identify the Building Components - Perform a Lifing Analysis Determine Historical or Estimated Original Cost Information Deduct Federal Contribution

The Benefits of Building Componentization and Fixed Equipment Inventories 23 What are the Next Steps? Review Use Allowance Depreciation Already Taken Implement Perpetuation Policies/Procedures Calculate Depreciation for Each Component Implement Perpetuation Policies/Procedures Segregate The Fixed Equipment Costs

The Benefits of Building Componentization and Fixed Equipment Inventories 24 How Do I Know If This is Best for My Institution? Consider a Diagnostic Review Study:  Select three (3) buildings used in Organized Research  Determine Federal Contribution  The three buildings should be of different vintages: Old Middle Aged New  Perform a comparison analysis of the results of the three buildings (use allowance to depreciation)

The Benefits of Building Componentization and Fixed Equipment Inventories 25  If the analysis is towards implementation of componentized depreciation, then move forward with those remaining buildings used in Organized Research  Be consistent in your selection of buildings to be componentized  Do not cherry pick! How Do I Know If This is Best for My Institution?

The Benefits of Building Componentization and Fixed Equipment Inventories 26 Caution!  Please refer to the U.S. Department of Health and Human Services Program Support Centers – Division of Cost Allocation “DCA Best Practice Manual” for proper methodology (Item 16, Page 35 and 36).

The Benefits of Building Componentization and Fixed Equipment Inventories 27 Building Componentization  Why is it Important to have an accurate Building Componentization Study?

The Benefits of Building Componentization and Fixed Equipment Inventories 28 Why Maintain and Accurate Building Componentization Study?  Federal & State Financial Reporting Requirements  Possible Misleading Financial Statements  Qualified Auditor’s Report (A-133)  Stewardship of your Current Assets  Inadequate Maintenance Management  Risk Management – Property Insurance  Basis for Capital Budgeting

The Benefits of Building Componentization and Fixed Equipment Inventories 29 Possible Limitations of Current Records  Inconsistency in following the Institution’s Capitalization Policy  Improper Classification of Assets (Buildings vs. Equipment)  Unrecorded Retirements, Additions & Improvements  Unit / Group Projects for Multiple Buildings  Incorrect Descriptions  Age of the Current Data  Current Identification of CIP

The Benefits of Building Componentization and Fixed Equipment Inventories 30 Perpetuation Options “Life After Componentization”

The Benefits of Building Componentization and Fixed Equipment Inventories 31 Building Componentization Can We Do this Ourselves?  Sure!  You Need the Following: Valuation Guidelines Staff to Inventory Fixed Equipment Reconciliation Expertise Perpetuation Procedures In-Place

The Benefits of Building Componentization and Fixed Equipment Inventories 32 Other Important Considerations  Asset Lifing – Needs to be based upon “Institutional” experience, not “Industry Standards,” or “Publications.”  Our experience indicates the need for significant collaboration between the A-133 auditors and your F&A Consulting Team.  OMB Circular A-123 will eventually find it’s way to Institutions of Higher Education.  Reminder! Refer to the DCA Best Practice manual for acceptable vs. non-acceptable methodology.

The Benefits of Building Componentization and Fixed Equipment Inventories 33 Other Important Considerations  Stem Cell research activities will have restrictions pertaining to buildings and equipment utilized in this type of research.  Is your consultant’s methodology acceptable to DHHS or ONR?  Does your valuation consultant follow the Uniform Standards of Professional Appraisal Practice (USPAP)?  Is your consultant systems SAS 70 compliant?

The Benefits of Building Componentization and Fixed Equipment Inventories 34 Contact Information Kevin J. McHugh Senior Vice President and National Managing Director – Higher Education Services American Appraisal Associates, Inc K Street NW, Suite 420 Washington, DC (202) phone (202) fax