Allowable and Unallowable Costs 2 CFR Part 230 Appendix A – General Principles Appendix B – Selected Items of Cost Chief, Operational Oversight Division Joseph E. Baldwin (512) 460-5292 Project Review: February 2014

Topics “Super Circular” Information Introduction to OMB Circular A-122 (2 CFR 230) Categories of Allowable Costs Categories of Unallowable Costs OMB stands for Office of Management and Budget. This office publishes circulars. OMB Circular A-122 is the Cost Principles for Non-Profit Organizations. It was codified in the Code of Regulations (CFR) and is now called 2 CFR 230. The code specifically identifies categories of allowable and unallowable costs which we’ll see in subsequent slides. The

Super Circular 2 CFR Chapter I, and Chapter II, Parts 200,215,220, and 230 The Office and Management and Budget (OMB) has produced its long-awaited “super circular” and has published the final notice on December 26, 2013 in the Federal Register. http://www.gpo.gov/fdsys/pkg/FR-2013-12-26/pdf/2013-30465.pdf This final guidance supersedes and streamlines requirements from OMB Circulars A-21, A-87, A-110, and A-122 (which have been placed in OMB guidance's); Circulars A-89, A-102, and A-133; and the guidance in Circular A-50 on Single Audit Act follow-up. Federal agencies have one year to implement the policies and procedures applicable to Federal awards by promulgating a regulation by December 26, 2014." While the Super Circular took effect on December 26, 2013, Federal agencies have six months to submit draft implementing regulations to OMB, and non-Federal entities have until December 26, 2014, to comply and conform fully to the Super Circular. When does the uniform guidance become effective? • The effective date is covered in section 200.110, Effective/applicability date. • Federal agencies must implement the requirements to be effective by December 26, 2014. • Subpart F, Audit requirements, will apply to audits of non-Federal entity fiscal years beginning on or after December 26, 2014. The revised audit requirements are not applicable to fiscal years beginning prior to that date. • Administrative requirements and cost principles will apply to new awards and to additional funding (funding increments) to existing awards made after Dec 26, 2014. • Existing Federal awards will continue to be governed by the terms and conditions of the Federal award. Will this apply only to awards made after the effective date, or does it apply to awards made earlier? • Once the uniform guidance goes into effect for non-Federal entities, it will apply to awards or funding increments after that date. It will not retroactively change the terms and conditions for funds a non-Federal entity has already received. • We would anticipate that for many of the changes, non-Federal entities with both old and new awards may make changes to their entity-wide policies (for example to payroll or procurement systems). Practically speaking, these changes would impact their existing/older awards. Non-Federal entities wishing to implement entity-wide system changes to comply with the uniform guidance after the effective date of December 26, 2014 will not be penalized for doing so.

OMB Circular A-122 Why do you have to follow it Attachment A: General Principles Attachment B: Selected Items of Cost The VA requires that non-profit grantees follow Circular A-122 as part of the agreement to receive VA funds. Attachment A of the Circular contains the general principles. Attachment B of the Circular contains the selected items of cost which we are going to see in subsequent slides of this presentation.

Segregation of Costs Costs for each particular cost objective must be segregated A cost is allocable to a particular cost objective, such as a grant, contract, project, service, or other activity, in accordance with the relative benefits received. A cost is allocable to a Federal award if it is treated consistently with other costs incurred for the same purpose in like circumstances and if it: (1) Is incurred specifically for the award. (2) Benefits both the award and other work and can be distributed in reasonable proportion to the benefits received, or (3) Is necessary to the overall operation of the organization, although a direct relationship to any particular cost objective cannot be shown. Any cost allocable to a particular award or other cost objective under these principles may not be shifted to other Federal awards to overcome funding deficiencies, or to avoid restrictions imposed by law or by the terms of the award. The VA requires that non-profit grantees follow Circular A-122 as part of the agreement to receive VA funds. Attachment A of the Circular contains the general principles. Attachment B of the Circular contains the selected items of cost which we are going to see in subsequent slides of this presentation. § 200.302 Financial management (Super Circular) (b) The financial management system of each non-Federal entity must provide for the following Identification, in its accounts, of all Federal awards received and expended and the Federal programs under which they were received (3) Records that identify adequately the source and application of funds for federally-funded activities. These records must contain information pertaining to Federal awards, authorizations, obligations, unobligated balances, assets, expenditures, income and interest and be supported by source documentation.

Allowable Costs Be necessary and reasonable, and allocable, Conform to any limitations or exclusions set forth in the cost principles or the award, Be consistent with policies and procedures afforded all activities of the organization, Be accorded consistent treatment, Be determined in accordance with GAAP, Not be against the law, Not already be included in a cost sharing or matching requirement, Be net of applicable credits, Be adequately documented. Allowable cost must meet ALL of these criteria Super circular reference : § 200.403 Factors affecting allowability of costs.

Unallowable Costs Specifically identified in the grant/contract as being unallowable. Specifically identified in Circular A-122, as being unallowable. Does not meet the criteria listed in Circular A-122 to be allowable.

Sample Unallowable Costs Alcoholic Beverages, Bad Debts, Contingency Provisions, Contributions and Donations Entertainment, Fines and Penalties, Fund Raising Costs, Gift Cards, Interest on Borrowed Capital, Lobbying Costs, Social Memberships.

Advertising Allowable Recruitment of personnel required for performance of Federal award. Procurement of goods & services for the performance of the award. Disposal of scrap or surplus acquired in the performance of award.

Advertising Unallowable Costs of promotional items, memorabilia, gifts and souvenirs. Costs of advertising and public relations designed solely to promote the organization. SWAG – Stuff We All Get.

Unallowable regardless of circumstance. Alcoholic Beverages Unallowable regardless of circumstance.

Audit Costs Audits required by, and performed in accordance with, the Single Audit Act, as implemented Circular A-133 are allowable. Other audit costs are allowable if included in an indirect cost rate proposal, or if specifically approved by the awarding agency as a direct cost. The cost of agreed-upon procedures engagements to monitor sub-recipients who are exempted from A-133 are allowable. § 200.425 Audit services. However, the following audit costs are unallowable: Any costs when audits required by the Single Audit Act and Subpart F— Audit Requirements of this Part have not been conducted or have been conducted but not in accordance therewith; and (2) Any costs of auditing a non-Federal entity that is exempted from having an audit conducted under the Single Audit Act and Subpart F—Audit Requirements of this Part because its expenditures under Federal awards are less than $750,000 during the non- Federal entity’s fiscal year.

Bad Debts Bad debts, including losses (whether actual or estimated) arising from uncollectible accounts and other claims, related collection costs, and related legal costs, are unallowable. This includes NSF fees, late fees, returned check fees

Compensation for Personal Services Support of salaries and wages must include a Personnel Activity Reports (PARs or Time Distribution Reports) PARs must adhere to the following requirements: Must reflect after-the-fact determination of activity (not budget estimates). Must account for total activity for which employee is compensated. Must be signed by the employee or responsible supervisor. Must be prepared at least monthly and coincide with one or more pay periods. § 200.430 Compensation—personal services. Costs of compensation are allowable to the extent that they satisfy the specific requirements of this Part, and that the total compensation for individual employees: Is reasonable for the services rendered (2) Follows an appointment made in accordance with a non-Federal entity's laws and/or rules or written policies (3) Is determined and supported as provided in paragraph (i) of this section, Standards for Documentation of Personnel Expenses, when applicable. Standards for Documentation of Personnel Expenses Charges to Federal awards for salaries and wages must be based on records that accurately reflect the work performed. These records must: Be supported by a system of internal control which provides reasonable assurance that the charges are accurate, allowable, and properly allocated; (ii) Be incorporated into the official records of the non-Federal entity; (iii) Reasonably reflect the total activity for which the employee is compensated by the non-Federal entity, not exceeding 100% of compensated activities (iv) Encompass both federally assisted and all other activities compensated by the non-Federal entity on an integrated basis, but may include the use of subsidiary records as defined in the non-Federal entity's written policy; (v) Comply with the established accounting policies and practices of the non-Federal entity (vii) Support the distribution of the employee's salary or wages among specific activities or cost objectives if the employee works on more than one Federal award; a Federal award and non-Federal award; an indirect cost activity and a direct cost activity; two or more indirect activities which are allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity. viii) Budget estimates (i.e., estimates determined before the services are performed) alone do not qualify as support for charges to Federal awards (2) For records which meet the standards required in paragraph (i)(1) of this section, the non-Federal entity will not be required to provide additional support or documentation for the work performed, other than that referenced in paragraph (i)(3) of this section. (3) In accordance with Department of Labor regulations implementing the Fair Labor Standards Act (FLSA) (29 CFR Part 516), charges for the salaries and wages of nonexempt employees, in addition to the supporting documentation described in this section, must also be supported by records indicating the total number of hours worked each day.

Contributions and Donations Costs of contributions and donations, including cash, property, and services, from the non – Federal entity to other entities, are unallowable. The value of services and property donated to the non-Federal entity may not be charged to the Federal award either as a direct or indirect (F&A) cost. The value of donated services and property may be used to meet cost sharing or matching requirements (see § 200.306 Cost sharing or matching). Depreciation on donated assets is permitted in accordance with § 200.436 Depreciation, as long as the donated property is not counted towards cost sharing or matching requirements. § 200.434 Contributions and donations. Contributions or donations paid with grant funds or resources, including cash, property, and services, made by the organization, regardless of the recipient, are unallowable.

Depreciation Depreciation on buildings or equipment furnished by the federal government or purchased through federal grants are not an allowable expense. This pertains to capital items that are purchased with federal dollars. Compensation for the use of buildings, other capital improvements, and equipment on hand may be made through use allowance or depreciation. This pertains to capital items that were previously purchased with non federal funds. Depreciation is not allowable on cost sharing. (Assets purchased with Capital Grant 35% Matching Requirement) § 200.436 Depreciation. (c) Depreciation is computed applying the following rules. The computation of depreciation must be based on the acquisition cost of the assets involved. For an asset donated to the non-Federal entity by a third party, its fair market value at the time of the donation must be considered as the acquisition cost. Such assets may be depreciated or claimed as matching but not both. (e) Charges for depreciation must be supported by adequate property records, and physical inventories must be taken at least once every two years to ensure that the assets exist and are usable, used, and needed. Statistical sampling techniques may be used in taking these inventories. In addition, adequate depreciation records showing the amount of depreciation taken each period must also be maintained.

Entertainment Costs of entertainment, including amusement, diversion and social activities and costs relating to these activities such as tickets, meals, lodging, rentals, transportation and gratuities are unallowable, unless…..

Entertainment Those cost have a programmatic purpose and are authorized in the approved budget , or Those cost have prior written approval from the federal awarding agency. VA GPD will allow these cost when involving a Veteran population with a program specific purpose. Limits are set to no more than twice a year and no more than $20 per person. Expenses incurred for therapy and treatment must be detailed in the grant application, approved by the GPD Program Office, and documented as to cost and allocation to each veteran in the appropriate case file. The therapy and treatment must be documented in the Veteran’s case file as part of the treatment plan approved by the licensed clinician or licensed case worker. Additional requirements related to costs incurred for treatment and therapy will also adhere to these expenses.

Fines and Penalties Costs of failures to comply with Federal, state, or local laws are unallowable. Allowable if incurred as a result of compliance with specific provisions of an award or instructions in writing from the awarding agency.

Fund Raising Fund raising and similar expenses incurred solely to raise capital or obtain contributions are unallowable. Fund raising activities shall be allocated an appropriate share of indirect costs. § 200.442 Fund raising and investment management costs. Fund raising costs for the purposes of meeting the Federal program objectives are allowable with prior written approval from the Federal awarding agency. Proposal costs are covered in § 200.460 Proposal costs.

Unallowable regardless of the circumstance. Gift Cards Unallowable regardless of the circumstance. Gift cards and gift certificates are considered cash according to the IRS. These items are generally redeemable for general merchandise or have a cash equivalent value. Cash is a disallowed cost therefore Gift Cards are a disallowed cost.

Insurance Insurance required or approved pursuant to an award is allowable. Insurance carried by the organization in general conduct of business is allowable subject to the following limitations: Reasonable coverage, Cost of insurance on officers must represent additional compensation and the organization may not be identified as the beneficiary.

Lobbying Unallowable: Attempts to influence election outcomes, Contributing to political causes, Attempts to influence Federal or State legislation through virtually any communicative device, Legislative liaison activities when performed in support of unallowable lobbying.

Maintenance and Repairs Costs necessary to keep buildings and equipment in efficient operating condition are allowable. Costs which add to the permanent value or appreciably prolong the life of the asset shall be treated as capital expenditures.

Meetings and Conferences Costs of meetings and conferences, the primary purpose of which is the dissemination of technical information, are allowable. Costs include meals, transportation, rental of facilities, speakers’ fees, and other items incidental to the meeting or conference. These cost should be adequately documented.

Professional Service Costs Costs of professional and consultant services rendered by persons who are members of a particular profession or possess a special skill, and who are not officers or employees of the non-profit organization, are generally allowable if reasonable and not contingent on recovery of costs from the Federal government.

Recruiting Generally, advertising and associated costs incurred for recruitment of staff are allowable but They must meet the test of reasonableness and, They must conform with established practices of the organization.

Supplies to Support Veterans Costs incurred for materials and supplies necessary to carry out a Federal award and are tied to a Veteran’s service / treatment plan are allowable. Bus Tokens Work / school related materials These costs should be adequately documented and tracked. Bus tokens should be tracked by keeping a log of who receives them, date received and signature of person receiving them. Supplies tied to service / treatment plan should be documented in the case notes.

Training Costs Generally, training and education costs related to employee development, such as, workshops, textbooks, classes, etc. are allowable.

Transportation Allowable as direct if provided for in the award. Allowable as indirect for equitable distribution to all benefiting activities.

Travel Expenses for transportation, lodging, subsistence, and related items incurred by employees on official business are allowable. Costs may be charged on an actual basis, per diem or mileage basis or a combination, but must be consistent with those normally allowed by the organization. § 200.474 Travel costs. must be considered reasonable and otherwise allowable only to the extent such costs do not exceed charges normally allowed by the non-Federal entity in its regular operations as the result of the non-Federal entity's written travel policy. In addition, if these costs are charged directly to the Federal award documentation must justify that: (1) Participation of the individual is necessary to the Federal award; and (2) The costs are reasonable and consistent with non-Federal entity's established travel policy.

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