[Federal Register Volume 60, Number 194 (Friday, October 6, 1995)]
[Notices]
[Pages 52516-52522]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-24899]
[[Page 52515]]
_______________________________________________________________________
Part IV
Office of Management and Budget
_______________________________________________________________________
Cost Principles for Non-Profit Organizations; Notices
Federal Register / Vol. 60, No. 194 / Friday, October 6, 1995 /
Notices
[[Page 52516]]
OFFICE OF MANAGEMENT AND BUDGET
Cost Principles for Non-Profit Organizations; Final Revision to
Provision on Interest Allowability
AGENCY: Office of Management and Budget.
ACTION: Final revision to the interest provision in OMB Circular A-122,
``Cost Principles for Non-Profit Organizations''.
-----------------------------------------------------------------------
SUMMARY: This notice finalizes a revision to the provision on interest
allowability for non-profit organizations.
EFFECTIVE DATE: The revision is effective on September 29, 1995.
FOR FURTHER INFORMATION CONTACT: Federal agencies should contact the
Office of Federal Financial Management, Office of Management and
Budget, (202) 395-3993. Non-Federal organizations should contact the
organization's cognizant Federal funding agency. For a copy of the
Circular, contact Office of Administration, Publications Office, Room
2200, New Executive Office Building, Washington, DC 20503, or telephone
(202) 395-7332.
SUPPLEMENTARY INFORMATION:
A. Background
On September 26, 1994, the Office of Management and Budget (OMB)
published a proposed revision to OMB Circular A-122, ``Cost Principles
for Non-Profit Organizations,'' in the Federal Register (59 FR 49090).
The proposed revision was intended to encourage non-profit
organizations to acquire, whether by lease or purchase, assets in the
manner that would be least expensive. It provided that interest on
buildings and equipment would be allowable under certain circumstances
which included a favorable lease/purchase analysis, a limit on the
interest rate, an offsetting of certain investment earnings against
interest costs, and a needs assessment which might require pre-
approval. By allowing for reimbursement of interest, OMB anticipated
that many non-profit organizations would be able to enter into purchase
financing arrangements which could result in long- and/or short-term
savings when compared to leasing alternatives.
OMB received approximately 150 letters during the 60-day comment
period from non-profit organizations, auditing firms, and government
agencies. The comments were all supportive of the revision to allow
interest, although some requested modifications to the criteria or
clarifications regarding various aspects of the revision. As a result,
as explained below, OMB has adopted the proposal with modifications.
The revision will serve to provide consistency on interest
allowability across OMB's three cost principles circulars (Circular A-
122; Circular A-21, ``Cost Principles for Educational Institutions;''
and Circular A-87, ``Cost Principles for State, Local and Indian Tribal
Governments'') and to reduce the cost to the Federal Government of non-
profit organizations' facilities.
OMB is committed to providing consistency across the three cost
principles circulars with regard to cost allowability, and also to
ensure that facilities cost reimbursements are reasonable and
economical. Accordingly, we are hereby providing notice that efforts to
establish benchmark payment rates for space used to support federally-
sponsored research agreements will include both the non-profit
community as well as the university community (as announced in the
Federal Register (60 FR 7105) on February 6, 1995, in a proposed
revision to Circular A-21). This benchmarking effort has been
identified as a possible superior, long-range alternative to the needs
justification being imposed by this revision to Circular A-122. If
adopted, the benchmarks would eventually replace the needs
justification and would form the basis for reimbursement for research
space used in the conduct of federally-sponsored research.
With this final revision, Circular A-122 consists of the Circular
as issued in 1980 (45 FR 46022; July 8, 1980), as amended in 1984 (49
FR 18260; April 27, 1984), in 1987 (52 FR 19788; May 27, 1987), and in
this notice.
B. Comments and Responses
The comments received and OMB responses are summarized below.
Needs Assessment
Comment: The proposal would place restrictions and requirements on
non-profit organizations under sponsored agreements that are not placed
on commercial organizations under contracts with the Federal
Government.
Response: It is true that commercial organizations with Federal
contracts do not have some of the requirements, such as justifying the
need for an asset, that are being applied to non-profit organizations
under this revision to Circular A-122. As OMB explained in the
September 1994 proposal (59 FR 49090), the Federal Government often
contributes a substantial share of a non-profit organization's
revenues, and this greater Federal share could decrease the incentives
for non-profit organizations to make the most economical lease/purchase
decisions. The requirements in the proposal were deemed to be
reasonable methods of ensuring that reimbursements to non-profit
organizations will be at appropriate levels. Threshold levels for these
requirements were established in the final revision to reduce the
paperwork burden on smaller asset purchases. Finally, it is more
appropriate to compare the restrictions on non-profit organizations to
those being proposed for universities under Circular A-21 (60 FR 7105),
which are similar to those being instituted by this revision to
Circular A-122.
Comment: Needs assessment criteria are not needed because non-
profit organizations already have incentives to operate in a cost-
efficient manner. To imply otherwise, mischaracterizes the funding
situations faced by non-profit organizations and is factually
incorrect. Also, no criteria were listed for a needs assessment.
Further, the pre-approval provision will cause delays and be a resource
drain on Federal agencies, short on manpower and expertise to evaluate
the needs analyses, and would create confusion with the ``after-the-
fact'' reviews that could result in disapproval.
Response: The ``needs assessment'' was re-termed ``needs
justification,'' and is required to be prepared only for the
acquisition of facilities costing over $10 million and for which the
Federal Government's reimbursement is expected to equal or exceed 40
percent of the facility's cost. (The 51 percent proposed was reduced to
40 percent because of the significance of the Federal Government's
investment in facilities.) The needs justification will simply provide
a formal mechanism for organizations to justify their need for the
facility, a significant percentage of which is being financed with
Federal dollars. This justification is implicit under other provisions
of Circular A-122 on excess capacity, allocability, etc. (Attachment A,
A.2 and A.3; Attachment B.16). Criteria for the needs justification are
specified in the revision, and OMB believes the criteria will parallel
any such justification that a non-profit organization's management and
board of directors would be expected to use in determining the need for
additional facilities. Therefore, the needs justification would not
create an administrative burden for the organization. The pre-approval
aspect of the needs justification has been eliminated for many of the
reasons cited
[[Page 52517]]
by the commentor. The requirement now calls for the preparation, rather
than the submission, of the needs justification.
OMB is concerned about ensuring that costs reimbursed by the
Federal Government are not excessive, as might be the case if an
organization built a more expensive class A building when a less
expensive class B building would suffice. Therefore, the concept of
benchmark payment rates for space costs under Circulars A-122 and A-21
is being addressed by an interagency task force. Benchmarking
recommendations and proposals made by this task force will be addressed
in a future OMB notice to be proposed in the Federal Register. If and
when the benchmark payment rates for space costs are established, OMB
anticipates that the requirement for a needs justification would be
eliminated.
Lease/Purchase Analysis
Comment: A lease/purchase analysis is unnecessary and potentially
expensive to a non-profit organization. Lease/purchase analyses should
be required only for assets costing in excess of $1 million.
Response: Lease/purchase analyses generally are performed by an
organization's management as a common business practice in order to
determine the costs of acquisition of expensive assets under various
scenarios. Such analyses normally would be performed whether or not
Federal funds are at issue, and are not expensive analysis to perform,
certainly when one considers the amounts that are at stake in a real
estate lease or purchase. Also, by identifying less expensive
acquisition alternatives, such analyses generally pay for themselves.
Circular A-122 requires that to be allowable, costs must be reasonable
(Attachment A, A.3), and a lease/purchase analysis will provide such
supporting documentation. However, OMB recognizes that a lease/purchase
analysis may not be cost-effective for smaller facilities acquisitions.
Therefore a threshold of $500,000 was established in the final revision
for the lease/purchase analysis requirement for facilities. There will
be no requirement for a lease/purchase analysis for equipment.
Comment: Lease/purchase analysis is arbitrary because 30-40 year
leases do not generally exist for comparison to purchases.
Response: It is true that 30-40 year leases do not generally exist
for comparison purposes. However, potential long term lease costs can
be estimated for purposes of comparison with purchasing as an
acquisition alternative. This is a common business practice for private
sector companies, which must decide whether to purchase or lease the
office, warehouse, or factory space they need. These estimates must be
made in order to provide a comparison from which to determine the least
costly alternative.
Comment: A non-profit organization should be allowed to recover
interest in those circumstances when purchasing is clearly justified
for management or programmatic reasons (such as when the grantee wishes
to expand an existing, owned facility) or when leasing on site is not
practical or is not legally permissible.
Response: OMB understands that there may be circumstances which
would cause a non-profit organization to purchase an asset using debt
financing even though it may be more expensive than leasing, regardless
of the criteria established in this Circular. In that event, the
provision at paragraph 19.a.(1)(e) does not prohibit an asset purchase,
but it does limit reimbursement to the amount under the least expensive
alternative, even if the organization pursues a more expensive
alternative. A lease/purchase analysis is not required for renovations
or alteration under Paragraph 19.a.(1)(b).
Comment: The Circular should clarify whether or not interest on
land is allowable, and whether or not currently-owned land can be
considered an equity contribution in a building project.
Response: It is OMB's intent that interest on land would be
allowable (See Attachment B, Section 19.a.(1)). (The cost of land
continues to be unallowable under Attachment B.9.c(1).) To treat
interest on financing for land as an unallowable cost could otherwise
skew the result of a lease/purchase analysis. Equity in currently-owned
land may be considered an equity contribution to a project. Valuation
of the land for purposes of determining the amount of equity shall be
in accordance with OMB Circular A- 110, ``Uniform Administrative
Requirements for Grants and Agreements with Institutions of Higher
Education, Hospitals, and Other Non-Profit Organizations,'' Subpart C,
paragraph ______.23(c). For the purposes of the interest provision of
Circular A-122, equity contributions may be any non-Federal
contribution.
Comment: The proposal references OMB Circular A-94, ``Guidelines
and Discount Rates for Benefit-Cost Analysis of Federal Programs,''
which does not apply to many non-profit organizations, and could
increase costs. Also, the application of the discount rate and the
present value of money calculation in the lease/purchase analysis are
unnecessary and serve merely to complicate the assessment.
Response: Discount rates are commonly used in private sector lease/
purchase analysis calculations of cash flows discounted for the time
value of money. The provisions of Section 19.a.(1)(b) of this revision
will assist in providing consistency in the calculation methodologies
and discount rates used by non-profit organizations performing lease/
purchase analyses. The reference to Circular A-94 has been omitted in
the final revision, although the concepts of net present value found in
Circular A-94 were incorporated into the final revision. Present value
concepts are necessary for appropriate analysis in order to evaluate
the effects of the time value of money.
Comment: The Circular should provide policy guidance to assure
comparability of assumptions used in the preparation of the lease/
purchase analysis.
Response: The proposal was modified to provide clarification and
consistency in the preparation of the lease/purchase analysis at
Paragraph 19.a.(1)(b).
Cash Flow Analysis
Comment: The ``excess cash flow'' requirements are unfair to non-
profit organizations which carry all of the risk associated with
purchasing a facility, while the Federal Government is at no risk. Over
time, depreciation and principal payments will be equal, but a penalty
on ``excess cash flow'' would result in the Federal Government's paying
for less than the full cost of the use of a facility. This treatment
provides incentives to lease rather than to own.
Response: The excess cash flow provisions are not related to risk
of ownership, but to excessive earnings on the cash flow from allowable
costs. This provision does not result in the Federal Government's
paying for less than its allocable share of the allowable cost of a
facility. The Federal Government will pay its allocable share of
applicable interest depending upon the use of the capital asset to
support Federal projects. The interest on excess cash flows simply
minimizes the interest cost to the Federal Government in instances
where cash flow from depreciation reimbursement exceeds debt principal
payments. In order to reduce the administrative and paperwork burden on
smaller acquisitions, this revision only requires interest to be
calculated on excess cash flows related to debt instruments of $1
million or more, when the initial equity contribution is less than 25
percent.
[[Page 52518]]
Comment: The provision requires that earnings on positive cash
flows be offset against interest expense. If principal payments include
the cost of land, the positive cash flow and imputed earnings will be
understated.
Response: The commentor is correct. Because the cost of land is
unallowable (as opposed to the allowable cost of interest on land, as
explained above) under Attachment B Section 9.c(1), when computing cash
flows, each debt principal payment must be reduced by an amount equal
to the portion of the principal payment attributable to land. The
wording of the provision has been revised (Attachment B, Section
19.a.(1)(f)(ii)) to clarify how cash flow analyses are to be prepared.
Comment: The provision does not recognize the cost of the non-
profit organization's capital, or equity, that is contributed to the
asset acquisition, thus reducing the financing needs.
Response: In computing cash flow under Attachment B, Paragraph
19.a.(1)(f)(ii), the non-profit organization's equity contribution,
regardless of the amount, is recognized and treated as an outflow along
with principal and interest payments. This treatment has the effect of
allowing the grantee to retain earnings on positive cash flows
attributable to its equity capital. If the organization's equity
contribution exceeds 25 percent, a cash flow analysis is not required
and interest earnings on positive cash flow are not required to be
offset against interest expense charged to Federal programs. OMB
intends to study allowing the cost of an organization's own capital for
consideration in future revisions to Circular A-122. OMB may also
consider other alternatives to reimburse facilities costs. If and when
alternative facilities reimbursement methods are developed and
considered to be potentially superior to the present method, they will
be published for comment in the Federal Register.
Comment: The provision will require Federal agencies to compute
earnings on positive cash flows. How and at what rate is this to be
performed?
Response: The provision was modified at Paragraph 19.a.(1)(f)(ii)
to clarify when and how earnings are to be computed. (The three month
Treasury Bill rate to be used in the calculations can be found in such
publications as the Wall Street Journal.) OMB has developed a sample
format for reporting excess cash flows, which is displayed as follows:
BILLING CODE 3110-01-P
[[Page 52519]]
[GRAPHIC][TIFF OMITTED]TN06OC95.000
BILLING CODE 3110-01-C
[[Page 52520]]
Other
Comment: Definitions for a number of terms should be included,
e.g., equity contribution, re-acquired assets, and asset cost.
Response: Definitions of terms have been added to the final
revision in Attachment B, Paragraph 19.a.(3).
Comment: The provision should provide a disclaimer of the Federal
Government's liability regarding the debt incurred by a non-profit
organization when financing assets to be used in the fulfillment of
sponsored agreements.
Response: OMB does not express or imply any long-term obligation on
the part of the Federal Government to continue or increase funding for
sponsored agreements covered by this Circular. Nor does it express or
imply any obligation or liability to a non- profit organization or any
third party with respect to any financial borrowing or other financing
arrangement entered into by a non-profit organization to purchase an
asset.
Comment: Excess capacity costs should be unallowable, with a one
year grace period.
Response: The costs of initial excess capacity are unallowable
under the allocability and allowability provisions of this Circular
found at Attachment A, Paragraph 2.a and Attachment B, Paragraph 16
which do not allow exceptions for excess capacity in newly-acquired
space.
Comment: Interest costs of fully depreciated assets should also be
unallowable.
Response: Under the allocability provision found at Attachment A,
Paragraph 2.a, the interest costs on fully-depreciated, retired,
scrapped, or non-existent assets are unallowable.
Comment: In the best interests of the Federal Government, the
provision should allow for the prior existence of special agreements
which already allowed interest.
Response: OMB does not intend for the revision to replace any
written agreements between non-profit organizations and the Federal
Government that were made prior to the effective date of this revision.
Comment: Professional fees associated with the purchase of real
property should be allowable.
Response: Usual and customary professional fees and related costs
and fees associated with, and necessary to, the acquisition of real
property are allowable under Attachment B, Paragraph 9 whether expensed
or capitalized, in accordance with Generally Accepted Accounting
Principles (GAAP).
Comment: Many non-profit organizations are being forced to decide
on debt-financed property purchases before the change to Circular A-122
is adopted. The rule should have a retroactive date and/or allow
interest incurred after the effective date, regardless of the asset
acquisition date if the criteria set forth are met.
Response: If interest were to be allowed on assets purchased before
the effective date of this revision, the Federal Government would incur
the substantial cost on debt arrangements entered into by non-profit
organizations with full knowledge that interest was an unallowable
cost. In addition, these prior purchases were obviously not made in
accordance with the requirements that are being announced here. Also,
changes to interest allowability under Circulars A-21 and A-87 have,
similarly, not been applied retroactively.
Comment: The substantial relocation provision raises more issues
than it solves and is inconsistent with Executive Order 12866 calling
for streamlined regulations. Also, it suggests that the Federal
Government is in a better position than the non-profit organization to
make relocation decisions. If retained, the substantial relocation
provision should be limited to 20 years.
Response: The substantial relocation provision at Attachment B,
Paragraph 19.a.(1)(f)(iii) exists to ensure that the location of
Federal program operations is not shifted unnecessarily, or
``churned,'' to other debt-financed facilities after a debt instrument
is substantially retired. By churning Federal programs into debt-
financed buildings, the Federal Government carries the burden of costs
of facilities expansion that should reasonably be shared with non-
Federal entities. If such a relocation is needed, the cognizant Federal
agency must be notified and an adjustment of the indirect cost rate may
be necessary. The relocation does not require approval of the Federal
cognizant agency, as was originally proposed. (However, if interest
will be claimed on the new location, then the provisions of Paragraph
19.a. apply.) A time limit of 20 years was added to this provision.
Comment: The provision should cover financing of alterations and
renovations.
Response: The provision was modified at Attachment B, Paragraph
19.a.(1) to clarify the allowability of interest on financing of
alterations and renovations. Alterations and renovations will not
require a needs justification.
Comment: The provision should clarify whether ``re-acquired
assets'' include replacement assets.
Response: The provision was modified at Paragraph 19.a.(1) to
clarify the allowability of interest on replacement assets. However,
interest will not be allowable for re-acquired assets (Paragraph
19.a.(1)(f)(i)).
Comment: ``Fair market interest rate'' should be qualified to
similarly-situated organizations borrowing from a third party.
Response: The provision was modified at Paragraph 19.a.(1)(b) to
limit reimbursement to the fair market borrowing rates available to the
organization from an unrelated (``arm's length'') third party. This
provision is intended to prevent the Federal Government from
reimbursing organizations for interest at higher rates than necessary.
Comment: The provision should address situations of leasing and
buying to/from related parties.
Response: The revision eliminates the profit in related party
transactions by limiting interest expense reimbursement to a rate no
higher than available from an unrelated third party (Attachment B,
Paragraph 19.a.(1)(c)) and by limiting allowable costs related to the
purchase price of assets to the fair market value available from an
unrelated third party (Attachment B, Paragraph 19.a.(1)(f)(iv)). Also,
Attachment B, Paragraph 42.c. of the Circular provides that ``Rental
cost under less-than-arms-length leases are allowable only up to the
amount that would be allowed had title to the property vested in the
organization.''
Comment: The provision should state that interest on capital leases
is allowable.
Response: The provision was modified at Attachment B, Paragraph
19.a.(1) to clarify the allowability of interest under capital leases,
but a revised Attachment B, Paragraph 42.d. limits reimbursement to the
allowable costs of ownership, such as depreciation, maintenance, taxes,
and insurance. Unallowable costs include amounts paid for profit,
management fees, and taxes that would not have been incurred had the
organization purchased the facility. To satisfy the lease/purchase
analysis requirement, an analysis could be prepared to compare either
the costs of an operating lease versus a capital lease, or a capital
lease versus a purchase.
Comment: The provision should clarify that adjustable rate
financing methods are acceptable.
Response: OMB does not prescribe the form that borrowing
arrangements must take in order to be allowable. Therefore,
[[Page 52521]]
the provision allows interest regardless of whether interest rates are
fixed or variable, but assumes that the rates are market rates.
Comment: The proposed wording results in an unintended effective
restriction upon debt structures with variable or deferred repayment
terms, such as balloon loans.
Response: The provision is not intended to restrict the structuring
of debt repayment arrangements. However, it is designed to minimize
cost to the Federal Government where principal payments are delayed,
thus increasing interest costs. Under a balloon payment arrangement,
interest is charged on the full amount of the principal for the full
term of the loan. In order to reduce the interest costs that the
Federal grants will be charged, the revision has the effect of
encouraging debt structures where the principal is paid down on a
regular basis.
Comment: The Circular does not specify whether predetermined
multiple-year indirect cost rates can be established for non-profit
organizations that incur interest costs for capital assets since the
Federal participation of space in the new facility may vary from year
to year.
Response: Predetermined multiple-year indirect cost rates can be
established for non-profit organizations if the Federal cost
negotiators can determine the reasonableness and acceptability of space
projections provided by the non-profit organizations, regardless of
whether interest costs are incurred in financing the asset.
Alice M. Rivlin,
Director.
Revisions to Attachment B of Circular A-122
The following paragraphs replace paragraph 19.a of Attachment B to
Circular A-122:
19. Interest, fundraising, and investment management costs.
a. Interest.
(1) Costs incurred for interest on borrowed capital or temporary
use of endowment funds, however represented, are unallowable. However,
interest on debt incurred after the effective date of this revision to
acquire or replace capital assets (including renovations, alterations,
equipment, land, and capital assets acquired through capital leases),
acquired after the effective date of this revision and used in support
of sponsored agreements is allowable provided that:
(a) For facilities acquisitions (excluding renovations and
alterations) costing over $10 million where the Federal Government's
reimbursement is expected to equal or exceed 40 percent of an asset's
cost, the non-profit organization prepares, prior to the acquisition or
replacement of the capital asset(s), a justification that demonstrates
the need for the facility in the conduct of federally-sponsored
activities. Upon request, the needs justification must be provided to
the Federal agency with cost cognizance authority as a prerequisite to
the continued allowability of interest on debt and depreciation related
to the facility.
The needs justification for the acquisition of a facility should
include, at a minimum, the following:
A statement of purpose and justification for facility
acquisition or replacement
A statement as to why current facilities are not adequate
A statement of planned future use of the facility
A description of the financing agreement to be arranged
for the facility
A summary of the building contract with estimated cost
information and statement of source and use of funds
A schedule of planned occupancy dates
(b) For facilities costing over $500,000, the non-profit
organization prepares, prior to the acquisition or replacement of the
facility, a lease/purchase analysis in accordance with the provisions
of OMB Circular A-110, ``Uniform Administrative Requirements for Grants
and Agreements with Institutions of Higher Education, Hospitals and
Other Non-Profit Organizations,'' sections ______.31 through ______.37,
which shows that a financed purchase or capital lease is less costly to
the organization than other leasing alternatives, on a net present
value basis. Discount rates used should be equal to the non-profit
organization's anticipated interest rates and should be no higher than
the fair market rate available to the non-profit organization from an
unrelated (``arm's length'') third-party. The lease/purchase analysis
shall include a comparison of the net present value of the projected
total cost comparisons of both alternatives over the period the asset
is expected to be used by the non-profit organization. The cost
comparisons associated with purchasing the facility shall include the
estimated purchase price, anticipated operating and maintenance costs
(including property taxes, if applicable) not included in the debt
financing, less any estimated asset salvage value at the end of the
period defined above. The cost comparison for a capital lease shall
include the estimated total lease payments, any estimated bargain
purchase option, operating and maintenance costs, and taxes not
included in the capital leasing arrangement, less any estimated credits
due under the lease at the end of the period defined above. Projected
operating lease costs shall be based on the anticipated cost of leasing
comparable facilities at fair market rates under rental agreements that
would be renewed or reestablished over the period defined above, and
any expected maintenance costs and allowable property taxes to be borne
by the non-profit organization directly or as part of the lease
arrangement.
(c) The actual interest cost claimed is predicated upon interest
rates that are no higher than the fair market rate available to the
non-profit organization from an unrelated (``arm's length'') third
party.
(d) Investment earnings, including interest income, on bond or loan
principal, pending payment of the construction or acquisition costs,
are used to offset allowable interest cost. Arbitrage earnings
reportable to the Internal Revenue Service are not required to be
offset against allowable interest costs.
(e) Reimbursements are limited to the least costly alternative
based on the total cost analysis required under (b). For example, if an
operating lease is determined to be less costly than purchasing through
debt financing, then reimbursement is limited to the amount determined
if leasing had been used. In all cases where a lease/purchase analysis
is performed, Federal reimbursement shall be based upon the least
expensive alternative.
(f) Non-profit organizations are also subject to the following
conditions:
(i) Interest on debt incurred to finance or refinance assets
acquired before or reacquired after the effective date of this Circular
is not allowable.
(ii) For debt arrangements over $1 million, unless the non-profit
organization makes an initial equity contribution to the asset purchase
of 25 percent or more, non-profit organizations shall reduce claims for
interest expense by an amount equal to imputed interest earnings on
excess cash flow, which is to be calculated as follows. Annually, non-
profit organizations shall prepare a cumulative (from the inception of
the project) report of monthly cash flows that includes inflows and
outflows, regardless of the funding source. Inflows consist of
depreciation expense, amortization of capitalized construction
interest, and annual interest expense. For cash flow calculations, the
annual inflow figures shall be divided by the number of
[[Page 52522]]
months in the year (usually 12) that the building is in service for
monthly amounts. Outflows consist of initial equity contributions, debt
principal payments (less the pro rata share attributable to the
unallowable costs of land) and interest payments. Where cumulative
inflows exceed cumulative outflows, interest shall be calculated on the
excess inflows for that period and be treated as a reduction to
allowable interest expense. The rate of interest to be used to compute
earnings on excess cash flows shall be the three month Treasury Bill
closing rate as of the last business day of that month.
(iii) Substantial relocation of federally-sponsored activities from
a facility financed by indebtedness, the cost of which was funded in
whole or part through Federal reimbursements, to another facility prior
to the expiration of a period of 20 years requires notice to the
Federal cognizant agency. The extent of the relocation, the amount of
the Federal participation in the financing, and the depreciation and
interest charged to date may require negotiation and/or downward
adjustments of replacement space charged to Federal programs in the
future.
(iv) The allowable costs to acquire facilities and equipment are
limited to a fair market value available to the non-profit organization
from an unrelated (``arm's length'') third party.
(2) For non-profit organizations subject to ``full coverage'' under
the Cost Accounting Standards (CAS) as defined at 48 CFR 9903.201, the
interest allowability provisions of paragraph 19.a. do not apply.
Instead, these organizations' sponsored agreements are subject to CAS
414 (48 CFR 9903.414), cost of money as an element of the cost of
facilities capital, and CAS 417 (48 CFR 9903.417), cost of money as an
element of the cost of capital assets under construction.
(3) The following definitions are to be used for purposes of
paragraph 19:
(a) ``Re-acquired assets'' means assets held by the non-profit
organization prior to the effective date of this revision that have
again come to be held by the organization, whether through repurchase
or refinancing. It does not include assets acquired to replace older
assets.
(b) ``Initial equity contribution'' means the amount or value of
contributions made by non-Federal entities for the acquisition of the
asset or prior to occupancy of facilities.
(c) ``Asset costs'' means the capitalizable costs of an asset,
including construction costs, acquisition costs, and other such costs
capitalized in accordance with General Accepted Accounting Principles
(GAAP).
The following paragraph replaces paragraph 42.d. of Attachment B to
Circular A-122):
42. Rental Costs.
d. Rental costs under leases which are required to be treated as
capital leases under Generally Accepted Accounting Principles (GAAP),
are allowable only up to the amount that would be allowed had the
organization purchased the property on the date the lease agreement was
executed, i.e., to the amount that minimally would pay for depreciation
or use allowances, maintenance, taxes, and insurance. Interest costs
related to capitalized leases are allowable to the extent they meet
criteria in Attachment B, paragraph 19.a. Unallowable costs include
amounts paid for profit, management fees, and taxes that would not have
been incurred had the organization purchased the facility.
[FR Doc. 95-24899 Filed 10-5-95; 8:45 am]
BILLING CODE 3110-01-P
