Cost Accounting Standards Disclosure Statement Download
Rachele Weishaar
Caution: This waiver authority is not available unless the cognizant Federal agency and the educational institution have established a disclosure statement due date pursuant to a written agreement executed prior to January 1, 1996, and award is made prior to the established disclosure statement due date.
AGENCY: Office of Management and Budget. ACTION: Final Revision and Recompilation of OMB Circular A-21. SUMMARY: The Office of Management and Budget (OMB) revises OMB Circular A-21, "Cost Principles for Educational Institutions," by incorporating four Cost Accounting Standards applicable to educational institutions, issued by the Cost Accounting Standards Board (CASB) on November 8, 1994 (59 FR 55746), and extending these standards to all sponsored agreements. The revision also: requires certain large institutions to disclose their cost accounting practices by the submission of a Disclosure Statement prescribed by the CASB; amends the definition of equipment; eliminates in 1998 the use of special cost studies to allocate utility, library and student services costs; and, requires the use of fixed facilities and administrative cost rates for the life of sponsored agreements. Further, the revision establishes cost negotiation cognizant agency responsibilities, replaces the term "indirect costs" with "facilities and administrative costs" (to describe more accurately the various cost components of sponsored agreements), clarifies the policy for a change from use allowance to depreciation, adds criteria to interest allowability, and disallows tuition benefits for employee family members. Finally, the revision rescinds OMB Circular A-88, "Indirect Cost Rates, Audits, and Audit Follow-up at Educational Institutions," in its entirety. The recompilation of Circular A-21 in its entirety appears after the revision. EFFECTIVE DATE: The effective date of this revision is the issuance date of this revision in the Federal Register, unless otherwise noted within this revision. FOR FURTHER INFORMATION: Educational institutions should contact the educational institution's cognizant Federal agency. Federal agencies should contact Gilbert Tran, Office of Financial Federal Financial Management, Office of Management and Budget, (202) 395-3993. SUPPLEMENTARY INFORMATION: A. Purpose of Circular A-21. Office of Management and Budget (OMB) Circular A-21, "Cost Principles for Educational Institutions," establishes principles for determining costs applicable to Federal grants, contracts, and other sponsored agreements with educational institutions. B. Recent Prior Revisions. Circular A-21 was last amended in 1991 and 1993 (56 FR 50224 of 10/1/91 and 58 FR 39996 of 7/15/93, respectively). The 1991 revisions made certain specified costs unallowable for Federal reimbursement and placed a limit on the amount of reimbursable administrative costs. That revision also required a certification to accompany each rate proposal. The 1991 revisions also added Exhibit A containing a list of colleges and universities subject to Section J.12.F, Depreciation and Use Allowance. The 1993 revisions further clarified and standardized the Circular's principles for determining allowable costs. C. Current Revisions. On February 6, 1995, OMB proposed revisions in 60 FR 7104 and 60 FR 7106. In 60 FR 7104, OMB proposed the extension of the four cost accounting standards (CAS) applicable to educational institutions to all sponsored agreements and an amendment to the definition of equipment. In 60 FR 7106, OMB proposed eight additional revisions, including the rescission of OMB Circular A-88, "Indirect Cost Rate, Audits, and Audit Follow-up at Educational Institutions," and mentioned six other revisions for future consideration. Circular A-21 is revised to: 1. Incorporate the four CAS (48 CFR 9905) and the Disclosure Statement (the Cost Accounting Standards Board's (CASB) form DS-2) and associated administrative requirements promulgated by the CASB for educational institutions. This action will extend the four CAS to all sponsored agreements (see Sections C.10, 11, 12 and 13 and Appendix A) and extend the applicability of the DS-2 (48 CFR 9903.202) to major educational institutions (see Sections C.14, K.2.b and Appendix B). Guidance for the implementation and administration of the CAS requirements and the submission of required DS-2s is also provided. 2. Replace the term "indirect" costs with "facilities and administrative" (F&A) costs. F&A costs are synonymous with "indirect" costs, as previously used in this Circular and as currently used in Appendices A and B. 3. Eliminate the use of special cost studies to allocate utility, library and student services costs effective July 1, 1998, at which time an alternative methodology making payments on utility costs will be in place (see Section E.2.d(5)). 4. Require Federal funding agencies to use F&A rates in effect at the time of an initial award throughout the life of the sponsored agreement (see Section G.7). 5. Rescind Circular A-88 and establish cost negotiation cognizance for educational institutions and cognizant agency responsibilities in Circular A-21 (see Section G.11). 6. Eliminate the allowability of dependent tuition benefits (see Section J.8.f(2)). 7. Clarify the policy governing the transition from use allowance to depreciation (see Section J.12.b.(3)). 8. Amend the definition of equipment by increasing the capitalization threshold to the lesser of the amount used for financial statement purposes or $5000 (see Section J.16). 9. Establish criteria for reimbursement of interest costs (see Section J.22.f). Circular A-21, as amended by this revision, consists of the Circular published at 44 FR 12368 (2/26/79), as amended by Transmittal Memoranda Numbers 1 through 5, at 47 FR 33658 (7/23/82), 51 FR 20908 (6/9/86), 51 FR 43487 (12/2/86), 56 FR 50224 (10/01/91), 58 FR 39996 (7/15/93), respectively, and the amendments herein. A recompilation of the entire Circular A-21 with all its amendments to date appears at the end of this notice and is available in electronic form on the OMB Home Page at /OMB, or in hard copy by calling OMB's Publication Office at (202) 395-7332. D. Paperwork Reduction Act This revision includes an information collection requirement for educational institutions receiving more than $25 million in federally-sponsored agreements to file the CASB's DS-2. This revision's information collection requirement covers more educational institutions than those subject to CASB's regulatory requirement for filing the DS-2, pursuant to Public Law 100-679, which was previously approved and assigned OMB control number 0348-0055 (which expires August 31, 1997). On February 6, 1995 (60 FR 7104), OMB requested comments on this proposed information collection requirement in accordance with the Paperwork Reduction Act (44 U.S.C. Chapter 35 et seq.). The proposed information requirement will not be effective until another notice is published in the Federal Register. The subsequent notice will provide the effective date and the OMB control number. E. Comments and Responses OMB received about 200 comments from colleges and universities, Federal agencies, professional organizations, and accounting firms. The comments and OMB's responses are included in this notice. Several of the comments resulted in modifications to OMB's original proposal. The comments received and OMB's responses are summarized below. Cost Accounting Standards (CAS) (Sections C.10-13 & Appendix A) Comment: Many commenters stated that OMB Circular A-21 currently provides adequate rules and guidelines regarding cost reimbursements for Federal grants and contracts. Therefore, they argued that the proposed incorporation of the CAS would duplicates Circular A-21's requirements. Response: OMB concurs that many of the requirements covered under the CAS currently exist in OMB Circular A-21. However, the four CAS are being incorporated since they provide more explicit provisions and guidance regarding the consistent application of cost accounting practices at educational institutions. To minimize potential conflict between OMB policies and the Cost Accounting Standards Board (CASB) regulations at 48 CFR 9903, the CASB has committed to perform an analysis to identify administrative requirements -- especially those relating to contract clauses, definitions of a cost accounting practice, and the cost impact process -- that may not be readily adaptable to colleges and universities. The CASB will separately evaluate the need to establish any unique or alternative provisions that should be applied to colleges and universities based on the changes in Circular A-21. Recognizing that the two sets of documents should be compatible, the CASB will, within the limitations imposed by the statutory requirements of the CASB's organic statute, examine the administrative requirements issue in order to determine what improvements can be made to the administrative requirements of the CASB's rules as they effect colleges, universities and Federal cognizant agencies. Comment: The CAS language refers to contracts. Language in the Circular needs to be amended to cover sponsored agreements. Response: The CAS language in Sections C.10, 11, 12 and 13 and Appendix A of the Circular has been changed to cover all forms of sponsored agreements. Comment: The proposal stated that the CAS provisions will not go into effect on January 9, 1995; however, no other effective date was provided. When will the CAS language become effective? Response: For CAS-covered contracts, the CASB's effective date for the application of CAS was January 9, 1995. For other sponsored agreements, the application of CAS is effective for the educational institution's fiscal year starting on or after the publication date of this revision. Comment: The CAS were intended for commercial enterprises and are not appropriate for colleges and universities. Also, commercial enterprises are not limited by a 26 percent administrative cap; therefore, they can recover additional administrative costs to comply with CAS. Response: Commercial contractors are subject to 19 CAS. Only four of those CAS are being applied to universities. The four CAS are for: (1) consistency in estimating, accumulating and reporting costs; (2) consistency in allocating costs incurred for the same purpose; (3) accounting for unallowable costs; and, (4) cost accounting period. Since these CAS merely strengthen the cost principles currently in Circular A-21, the implementation of CAS should not significantly increase burden or result in any additional costs to universities. Comment: The revision limits an educational institution's flexibility to take necessary or advantageous action in a changing environment. Response: The application of the four CAS should not limit an educational institution's flexibility in a changing business environment. The standards only require that costs be treated consistently and, if an educational institution makes an accounting change that materially impacts sponsored agreement reimbursement, then the change and its impact need to be reported. These requirements currently exist in Circular A-21. A change that converts a cost from direct to F&A (during a period where an educational institution has a predetermined F&A rate) normally is not considered a significant change, because it does not have a material impact on sponsored agreement reimbursement. Comment: Limit CAS coverage to sponsored agreements in excess of $500,000, which is consistent with CAS coverage of contracts. Some universities have several thousand agreements. Most of them are smaller than the $500,000 threshold. The smaller agreements should not be covered by these requirements. To cover smaller agreements would hold educational institutions to a higher standard than the industry's standard. At issue is whether or not a cost impact proposal or some other form of submission for an equitable adjustment should be made on all agreements. Response: The four CAS promote consistency in cost accounting practices used by an educational institution to estimate, accumulate and report costs charged against federally-sponsored agreements. These underlining principles currently exist in Circular A-21 which covers all sponsored agreements. The four CAS set forth more explicit fundamental requirements, techniques and illustrations on how to comply with these principles. Therefore, it is appropriate to extend these CAS to all sponsored agreements. Furthermore, a cost impact proposal is not required to be prepared for each agreement when an educational institution changes accounting practices. Instead, CAS regulations (48 CFR 9903.306 (e) and (f)) allow the use of "any other suitable technique" for cost impact adjustment. Thus, a cost impact adjustment could be done through the F&A cost negotiation process and rate agreement if deemed appropriate by the cognizant agency. Comment: Educational institutions do not have sufficient funds to build accounting systems effective enough to comply with CAS. Commenters suggested an increase of the administrative cap of 26 percent of modified total direct costs (MTDC) to cover the increased paperwork burden. Failing this, the commenters requested an increase of the alternative administrative threshold rate from 24 percent, as allowed in Section G.8, to 26 percent. Response: Compliance with CAS should not require educational institutions to acquire additional accounting systems. Since the CAS only clarify existing provisions for sponsored agreements, existing accounting systems that comply with ___.21, Standards for financial management systems, in OMB Circular A-110, "Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals and Non-Profit Organizations," should require no change. Comment: The Circular should stipulate that Federal agencies retain the latitude to permit certain administrative expenditures to be charged directly to a project when they believe that these costs are essential for the conduct of the project. Response: Section C.11 states that "all costs incurred for the same purpose, in like circumstances, are either direct costs only or F&A costs only with respect to final costs objectives." However, there are circumstances where it is appropriate to direct charge costs, such as administrative and clerical salaries, when these costs are normally charged indirectly. For example, direct charging of these costs may be appropriate where a major project or activity requires a significant level of administrative or clerical services and individuals involved can be specifically identified with the project or activity. In this example, the administrative or clerical service costs are not incurred for the same purpose and under like circumstances as are administrative and clerical service costs associated with general university functions, such accounting operations or general administrative activities, which do not result from specifically identifiable requirements. Comment: CAS definitions (for direct cost, "indirect" cost, consistency and accounting change) are more limiting than in Circular A-21. How will such inconsistencies between the two documents be handled? Response: Inconsistency in definitions and cost policy interpretations do not exist between the two documents. To further assure consistency between the two documents, all inquiries related to the CAS applicable to educational institutions will be addressed by OMB's Office of Federal Financial Management, in coordination with the CASB. Comment: The precision required by CAS would not be consistent with future proposed systems of benchmarking, thresholds, caps, and other limiting factors. OMB is sending out mixed messages. Response: The purposes of the four CAS and future proposed revisions to Circular A-21 are different. The four CAS incorporated in the Circular serve to promote consistent treatment of estimated costs proposed to the Federal Government and actual costs charged as reimbursable cost against federally- sponsored agreements. The purposes of the future proposed revisions are to assure the consistent treatment of costs proposed and charged to federally-sponsored agreements. Comment: Some small colleges have training grants with 8 percent overhead limits. Could CAS requirements and disclosures be waived for those educational institutions with low overhead rates (perhaps 10 percent)? Response: Small colleges with less than $25 million in Federal funding covered under this Circular will be subject to the CAS but are exempt from the Disclosure Statement filing requirements. Disclosure Statement (DS-2) (Section C.14 & Appendix B) Comment: Many commenters express concerns that the preparation of the Disclosure Statement (DS-2) can take as much as 2500 hours. A suggestion was made to require a submission only for the year when the educational institution is required to submit a F&A cost rate proposal. Response: OMB disagrees that the DS-2 can take as much as 2500 hours to complete unless a university does not currently have adequate written cost accounting policies. The DS-2 is a 20-page document that provides a summary of an educational institution's cost accounting system for Federal grants and contracts. The cost accounting practices used for Federal grants and contracts should already be properly documented as required by Subpart C, ___.21, Standards for financial management systems, in OMB Circular A-110. Therefore, the effort to summarize the existing practices in the DS-2 should not be overly burdensome to complete. In addition, educational institutions do not have to file the DS-2 on an annual basis. Educational institutions are only required to file an initial DS-2 in accordance with the time frame described in Section C.14 and thereafter, educational institutions only need to submit amendments of sections affected by changes in cost accounting practices deemed significant by the cognizant agency. Section C.14.d discourages the resubmission of a complete, updated DS-2 except for extensive changes. Furthermore, the DS-2 submission is required only for educational institutions receiving more than $25 million in federally-sponsored agreements during their most recently completed fiscal year. Comment: The paperwork burden imposed has not proven necessary and the costs of providing the information outweigh the benefits to be derived. Response: OMB believes that the DS-2 requires no more information than would normally be provided to the cognizant agency for review of an educational institution's F&A cost rate proposal and for negotiation of the associated rate agreement. OMB does not intend for the paperwork to be an arduous process, rather a reasonable representation of the accounting practices and policies that are used by the educational institution in recovering costs under Federal sponsored programs. Comment: The DS-2 will result in additional work and expense, but, because of the 26 percent cap, educational institutions will not be allowed to recover those amounts. Response: OMB believes that the information required by the DS-2 is of the type that historically should have been submitted during F&A cost rate negotiations and made available for audits of grants and contracts in accordance OMB Circular A-133, "Audits of Institutions of Higher Education and Other Non-Profit Institutions." Therefore, the only additional time requirements should be to put the same information in the format required by the DS-2 and to submit information on accounting changes, as needed. Subsequently, the information will not have to be resubmitted every time a rate proposal is submitted. Only changes in cost accounting practices need to be addressed as the changes are made. This should result in administrative cost savings in the long term. Comment: The revision should clarify what constitutes an accounting change, and provide a materiality threshold so that insignificant changes do not have to be reported. Response: OMB does not intend for educational institutions to report insignificant accounting changes. Sections C.14.d and g emphasize that a change is to be reported and approved by the cognizant agency only when "the change is expected to have a material impact on the educational institution's negotiated F&A rates ..." (emphasis added). The determination of whether an accounting change is significant and, therefore, requires an amendment to the DS-2 and possibly a cost impact proposal is to be made by the cognizant agency. However, educational institutions are prohibited under the allocability clauses of the Circular from double-counting any costs to the Federal Government which could result from a change in accounting. Comment: There were many comments about confusion over the submission dates for the initial DS-2 between the proposed dates stated in the proposed revision to Circular A-21 and the dates published by the CASB on November 8, 1994. Response: In order to clarify the submission dates for the initial DS-2, and to prevent confusion, the DS-2 submission dates in this Circular for CAS-covered educational institutions are the same as those published by the CASB on November 8, 1994. The DS-2 submission date for educational institution not covered by the CASB requirements is six months after the end of the fiscal year which starts after the publication date of this revision. In addition, the cognizant agency has the authority to provide a filing date extension on a case-by-case basis, unless the DS-2 submission date is defined by receipt of a CAS-covered contract by the educational institution. Comment: Small colleges and universities are disproportionately affected by the DS-2 submission requirements since a small university which received a CAS-covered contract and $25 million in sponsored awards could have the same submission due date as the top 20 universities which receive substantially more Federal awards (approximately $150 million or more). Response: To provide consistency and avoid confusion among all colleges and universities regarding the submission due dates for the DS-2, OMB has revised the due dates to correspond with the due dates published by the CASB. A cognizant agency has the authority to grant a filing date extension. Comment: A definition is needed for "a component unit" or the previously-defined terms "segment" and "a business unit" should be used. Response: "A component unit" in Section C.14 is replaced with "a business unit." A business unit at colleges and universities means any unit of an educational institution which is not divided into segments. Segment means one of two or more divisions, campus locations, or other subdivisions of an educational institution that operate as independent organizational entities under the auspices of the parent educational institution and report directly to an intermediary group office or the governing central system office of the parent educational institution. Comment: For those educational institutions that are required to file a DS-2, there should be a transition time period (e.g., within one year after submittal) in which the cognizant agency is required to identify any procedures or descriptions that it believes would lead to disallowance of costs in the future and the educational institution should be given an opportunity to correct these procedures or descriptions without a penalty. When the document is found acceptable to the cognizant agency, then it should receive a written acknowledgment that, in the agency's opinion, the document describes acceptable practices. An educational institution would then only be subject to disallowances if it is found to be violating its described practices in such a way that unallowable costs were being incurred. Response: OMB disagrees. The DS-2 should disclose the cost accounting practices used to estimate, accumulate and report the costs of sponsored agreements over the award periods of performance. If the cognizant agency identifies established or disclosed cost accounting practices that would lead to disallowance of costs, it would require the educational institution to correct the practice and may also compute a cost adjustment, if material, in accordance with Section C.14.e. Comment: Any subsequent cost adjustments for procedures that are inconsistent with those disclosed in the DS-2 and result in unallowable costs should be limited to the time period beginning after acceptance of the DS-2 by the cognizant agency. Response: While the purpose of the DS-2 is to disclose an educational institution's current cost accounting practices and is intended more for future purposes than for a review of past practices, it may be necessary to make adjustments for some unallowable costs that may have been reimbursed in the past. These adjustments will be made at the discretion of the cognizant agency. Adjustments for the effects of deviations from the practices disclosed in the DS-2 can occur only after the filing. However, the effect of deviations by an educational institution from established practices, whether or not a DS-2 submission is required, will continue to be subject to adjustments in accordance with Section C.8. Comment: In resolving questions about costs incurred, any claimed disallowances should be based on requirements of Circular A-21 with regards to allowability of costs and not some procedural issue related to following a procedure described in the DS-2. Response: OMB agrees that Circular A-21 should provide the basis of allowability of costs. However, in some instances, the DS-2 will help to clarify how such costs are allocated and may effect the reimbursement of costs claimed as allocable and, therefore, reimbursable costs. Comment: The DS-2 will be difficult to manage when the reporting entity manages grants from various locations. OMB should clarify disclosure requirements for multi-campus and multi-location educational institutions. Response: OMB expects that educational institutions' accounting policies would be the same, particularly if the locations are all covered by the same cost pools. If this is not the case, OMB believes that preparation of the DS-2 will help educational institutions to develop consistent accounting policies. However, if for some justified reasons various locations maintain different cost accounting practices, a separate DS-2 should be submitted for each business unit as stated in Section C.14.a. Terminology ("Indirect" costs) Comment: Most commenters agreed with the proposed change of terminology from "indirect" costs to "facilities and administrative" costs. However, some commenters noted that this change will create confusion and conflicts with other OMB cost principles circulars and OMB grants management circulars that still use the term "indirect" costs. Response: OMB agrees that inconsistent terminology may cause short term problems. However, this change is needed to more accurately describe the several cost pools for sponsored agreements at educational institutions. The replacement of the term "indirect" costs will be limited to Circular A-21 and not extended to other OMB grants management circulars because of the several cost pools that exist only in Circular A-21. The term "indirect" costs still appears in Appendix A - CASB's Cost Accounting Standards and Appendix B -Disclosure Statement (DS-2) since these appendices are directly from the CASB's regulations. Special cost studies (Section E.2.d.) Comment: The provision to limit special cost studies to allocate utility, library and student costs should be delayed until reasonable benchmarks can be established for the payment of these costs. Response: Benchmark studies to develop alternative payment methods for facility construction, utilities and library costs are currently underway. In the meantime, due to the ambiguous nature of special cost studies that were the source of disagreement between cognizant agencies and institutions, OMB plans to make utility, library and student services cost recoveries based on special cost studies unallowable costs. This restriction's effective date is delayed until July 1, 1998 at which time OMB will have in place an alternative method to pay utility costs. Utility, library and student services cost allocations based on special cost studies will be disallowed for administrative and facilities payment rates negotiated on or after July 1, 1998. The special cost studies cannot be used to establish rates beyond fiscal year ending in 1998, unless a rate agreement in effect at the time of this publication extends beyond 1998, in which case the use of special cost studies will terminate at the end of the rate agreement period. OMB is currently reviewing proposals for alternative methodologies for making payments on costs related to utilities. OMB will publish the proposals for public comments prior to July 1, 1997. Comment: Instead of eliminating the special cost studies, OMB should develop standards, methodology and criteria for conducting special cost studies that would be acceptable for the Federal Government. Response: Special cost studies were cited as an example of an area of potential abuse and source of disagreement and distrust between cognizant agencies and institutions. Rather than try to devise a set of complex parameters that would preclude any opportunity for abuse, OMB decided to disallow any cost allocations based upon those studies and, instead, to provide an altern