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APPENDIX E Depreciation of Capital Expenses Considerations Regarding Depreciation Overview Depreciation and use allowances typically are the methods used to allocate the cost of fixed assets to activities conducted by the organization during its fiscal year. They usually are com- puted on the original acquisition cost of the asset and the period of useful service (useful life) established in each case for usable capital assets. Federal Transit Administration (FTA) and state Departments of Transportation typically specify the useful life for all capital assets used in tran- sit service. TCRP Report 144: Sharing the Costs of Human Services Transportation is designed to facilitate cost sharing agreements between public transit and human service agencies. In the majority of cases, transit agencies likely will receive capital assistance through one or more of the many programs administered by the FTA (i.e., Sections 5307, 5309, 5310, 5311, 5316, or 5317). Additionally, it is likely that when human service agencies purchase service from another organization, they may use, in part, revenues derived from federal grants that support client transportation. This scenario is common in coordinated transportation where cost sharing agreements are necessary. The Office of Management and Budget (OMB) is the agency of the federal government responsible for assisting the President in overseeing the preparation of the federal budget and supervising its administration in Executive Branch agencies. OMB promulgates rules on the allowability of expenditures under various federal grant awards. Both OMB Circulars A-87 and A-122 specifically exclude the cost of depreciation as an allowable expense under federal awards. Language in both circulars is identical, reading as follows: · The computation of depreciation or use allowances will exclude: The cost of land; Any portion of the cost of buildings and equipment borne by or donated by the federal gov- ernment irrespective of where the title was originally vested or where it presently resides; and Any portion of the cost of buildings and equipment contributed by or for the governmental unit, or a related donor organization, in satisfaction of a matching requirement. Implications for this Effort The Cost Sharing Model provides, at the user's discretion, the opportunity to include depreci- ation in the computation of fully allocated costs. In most cases, however, it is recommended that the user should not include depreciation in the model's computations for the reasons described in Chapter 11 of this report (see Volume 2, "Research Report"). In communities where the vast majority of the users of the Cost Sharing Model are using federal funds for capital purposes and 70
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Depreciation of Capital Expenses 71 everyone excludes capital costs, the Cost Sharing Model still will provide appropriate guidance for allocating costs among stakeholders. An Example of Depreciation A local senior center may require transportation of older adults to participate in the daily activities of the center. The center receives funding from the Area Agency on Aging (AAA) under the Older Americans Act (42 U.S.C. § 3030d [a] ). The center then seeks to enter into an agree- ment with the local community transportation agency to provide this service. The local trans- portation organization may have acquired its vehicles under one of the previously listed FTA grant programs; typically, the federal government will pay for 80 percent of the cost of the vehi- cle. In this example, it would not be permissible for the senior center to pay depreciation or use charges to the transportation agency for the part of the cost of equipment paid for by the federal government. This would be an unallowable expense. This commonly occurring situation is the typical arrangement in coordinated transportation agreements. In this situation, when an organization is attempting to develop a cost sharing agree- ment with another organization, depreciation should be excluded from the analysis so as to not violate OMB cost allowability standards. Alternative Considerations It is permissible for a transit organization to include that portion of an asset not paid for by the federal government in a use or depreciation charge. For example, the North Carolina Department of Transportation (NCDOT), in its cost sharing procedures, permits its grantees to include the non-federal share of capital equipment (as an option component) in cost sharing agreements with human service agencies. However, this introduces a fair amount of complexity into the Cost Sharing Model because each and every asset should be documented in terms of the original acquisition cost, useful life, and cost sharing arrangements at the time of purchase. This level of documentation can create additional accounting burdens for the organization. There are situations where inclusion of capital equipment is recommended in the Cost Sharing Model. These situations typically include scenarios where a transit agency enters into a service agreement with a private sector transportation provider (in which there would be no fed- eral participation in the provider's rolling stock and facilities) and depreciation would be rea- sonably a component of contract costs. In this circumstance, users of the Cost Sharing Model should include depreciation in the computations.