RECHARGE OPERATIONS AND SERVICE FACILITIES

Volume 3, Financial Management 
Chapter 10, Recharge Operations and Service Facilities
Responsible Executive: Vice President for Financial Affairs and University Controller
Responsible Office: General Accounting
Originally Issued: November 1996
Revised: June 2000
Errors or changes? Email us.

CONTENTS

REASON FOR POLICY

ENTITIES AFFECTED BY THIS POLICY

WHO SHOULD READ THIS POLICY

RELATED DOCUMENTS

CONTACTS

DEFINITIONS

OVERVIEW

Introduction

Classification
Exceptions

What May Be Included in a User Fee

What Must Not Be Included in a User Fee
Depreciation and Replacement Costs
Calculation of User Fees
One Approach to Developing User Fees
Examples of User Fee Calculation
External Users
Subsidies
Review and Approval of User Fees

Account Structures

Recording Revenues, Expenses, and Transfers
Accounting for Leases in a Service Facility
Tax
Inventories
Coding Physical Space
Record Retention

RESPONSIBILITIES

APPENDIX: Examples of Federal Allowable and Unallowable Costs

General Comments

POLICY STATEMENT

REASON FOR POLICY

ENTITIES AFFECTED BY THIS POLICY

• Endowed Ithaca and Contract Colleges of the University (excluding the Joan and Sanford I. Weill Medical College)

WHO SHOULD READ THIS POLICY

• College, Unit, and Department Administrators
• Managers of Recharge Operations and Service Facilities

RELATED DOCUMENTS

 CONTACTS

DEFINITIONS

OVERVIEW

Introduction

Recharge operations and service facilities are operating units that provide goods or services primarily to the academic community, for which they recover some or all of the costs of those goods or services from users.

 The following is a summary of the university's policy governing recharge operations and service facilities:

1. Approval from the cognizant dean, director, or department head must be obtained before establishing a recharge operation or service facility.

 2. All user fees are to be calculated in such a manner to recover no more than federal allowable cost of the goods or services being provided (see the "User Fees" Section of this document).

 3. User fees are to be calculated in such a manner to ensure that a proportionate share of federal allowable costs is allocated to all users. No cost may be shifted from one user to another (see the "User Fees" Section of this document).

 4. All user fees for service facilities must be approved annually by the Manager of Accounting for General Operations (see the "Review and Approval of User Fees" segment of this document).

 5. An operating surplus must be reflected in an adjustment to future user fees. Normally such an adjustment is made annually. Under no circumstances may you transfer an operating surplus out of the recharge operation or service facility account to subsidize other activities (see the "Recording Revenues, Expenses, and Transfers" segment of this document).

 6. An operating deficit may be reflected in an adjustment to future user fees.

Classification

Exceptions

USER FEES

What May Be Included in a User Fee

 Federal allowable operating costs include:

• salaries and wages, and applicable university benefit rates;
• supplies and materials;
• subcontracts and outside services;
• equipment lease or rental;
• external interest expense;
• facilities expense (utilities, maintenance, and custodial cost) paid by the recharge operation or service facility for the occupied space;
• prior-year operating deficit (increase to user fee);
• prior-year operating surplus (decrease to user fee);
• other directly-related expenses (e.g., travel, communications);
• depreciation related to capital assets not purchased with federal funds (see the "Depreciation and Replacement Costs" segment of this document).

What Must Not Be Included in a User Fee

• building depreciation;
• facilities expense (utilities, maintenance, and custodial cost) paid by the university and not recorded in the recharge operation or service facility account;
• university and departmental overhead costs that are not charged to the recharge operation or service facility account;
• purchase price or value of equipment (this should be depreciated).

Costs that must not be in user fees because they are federal unallowable and must not be recorded in recharge operation or service facility accounts include, but are not limited to: entertainment;

• bad debt;
• advertising;
• public relations;
• alcoholic beverages;
• contributions and donations.

Depreciation and Replacement Costs

 Caution: It is important that the federal government not be charged for a piece of equipment directly through a user fee and indirectly through the depreciation component of the indirect cost rate. To preclude the possibility of such double-recovery, the following actions are required:

- Each service facility manager must include, as part of the user fee submission, a capital equipment listing that contains equipment descriptions, asset item numbers, acquisition costs, acquisition dates, depreciable lives, and annual depreciation expenses for all items of equipment for which depreciation expense is being recovered through the service facility user fee.

- Each recharge operation manager must provide a capital equipment listing to the Capital Assets area in the Division of Financial Affairs. The listing must contain equipment descriptions, asset item numbers, acquisition costs, acquisition dates, depreciable lives, and annual depreciation expenses for all items of equipment for which depreciation expense is being recovered through the recharge operation user fee.

The recognition of depreciation expense for a particular asset commences in the year in which the asset is placed into service. Depreciation expense is calculated using the straight-line method. Under this method, depreciation expense is calculated by dividing the assets acquisition cost by its depreciable life. For example, the FY2000 depreciation for an asset with a 5-year depreciable life that is acquired for $4,000.00 and placed into service on February 1, 2000 would be $800.00. Note that a full year's depreciation is allocated to FY2000 even though the asset was not in service for all of FY2000. Depreciation of $800.00 would be recognized in each of the years FY2000 through FY2004, with no depreciation recognition after FY2004.  

Following is a list of depreciable lives approved by the federal government that should be used when calculating the annual recovery cost of moveable equipment:
 

TYPE OF EQUIPMENT	LIFE   (yrs.)
Computers	3
Vehicles	4
Audio Visual	5
Business Machines	5
Research Lab, hi-tech	5
Athletic Equipment	10
Clinical Lab	10
Musical Instruments	10
Office Furniture	10
Research Lab, Mechanical	10
Tools	10
Miscellaneous	10

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Caution: If depreciation included in a user fee is based on a different depreciable life than shown above, it must be justified, documented, and approved by the Manager of Accounting for General Operations.

 If the recharge operation or service facility receives a piece of donated equipment, the fair market value of that equipment is used to calculate the amount of depreciation recoverable through the user fee.

 Recharge operations and service facilities that wish to include equipment depreciation cost in their user fees must establish a Renewal and Replacement Plant Fund Account (fund group 332, function 182). Contact the Supervisor of Plant Accounting in the Division of Financial Affairs for assistance with establishing a Renewal and Replacement Plant Fund Account.

 Apart from funding received from sources external to recharge operations and service facilities, the only means of generating funds from which to acquire capital assets is from the depreciation of existing assets. Before year-end, recharge operation and service facility managers are to transfer the portion of the user fee revenue that relates to equipment depreciation from the designated operating account to the Renewal and Replacement Plant Fund Account (fund group 332; function 182). A department may choose to transfer this revenue on a more regular basis. Always use appropriate transfer object codes (i.e., 7420 -- Transfer to Plant and 2360 -- Transfer From Current Funds Designated).

 Caution: The cumulative amount of transfers to the Renewal and Replacement Plant Fund Account in any fiscal year must not exceed the amount of depreciation expense that was included in the user fee calculation.

Capital asset purchases are not to be charged to recharge operation or service facility accounts. Capital asset purchases should be charged to the Renewal and Replacement Plant Fund Account to the extent that funds are available. If the balance in the Renewal and Replacement Plant Fund Account is insufficient to cover the acquisition cost of an asset, the department must secure additional funding from a source external to the recharge operation or service facility. Renewal and Replacement Plant Fund Accounts must not be in overdraft (deficit).

Caution: The depreciation amount used in the user fee calculation will need to be adjusted if the federal government has provided full or partial funding towards the purchase of a particular piece of equipment in a recharge operation or service facility. Depreciation must not be charged for the portion of equipment purchased with federal funds.

Calculation of User Fees

  User fees are developed in order to recover some or all of the costs associated with providing a particular good or service. Only federal allowable costs may be recovered in user fees. In the absence of subsidies, recharge operations and service facilities are operated as break-even entities. User fees must be cost-based, and therefore can not attempt to recover more than estimated federal allowable costs over the break-even period. The requirement to match revenues and expenses over a break-even period provides a degree of flexibility with regard to the setting of user fees. While the goal should be to set user fees at a level sufficient to cover non-subsidized costs on a fiscal-year basis, it is recognized that this may not always be possible. Usage of the break-even period permits the development of more stable user fees, and avoids significant user fee increases and decreases.

Because user fees are developed using estimated revenues and expenses, there may be some variance between estimated and actual revenues and expenses. This variance is referred to as a "carry-forward." Carry-forwards can be either positive or negative indicating either an operating surplus or an operating deficit. If actual operating revenues exceed actual operating expenses, then a surplus results, which must be factored into the development of subsequent user fee calculations. Likewise, if actual operating expenses exceed actual operating revenues, then a deficit results, which can also be factored into the development of subsequent user fee calculations. Under no circumstances may an operating surplus be transferred out of the recharge operation or service facility account to subsidize other activities.

One Approach to Developing User Fees

1. Determine the appropriate unit of output for each user fee to be developed. User fees are calculated in terms of units of output (see the "Definitions" Section of this document). The selection of an appropriate unit of output and the method of calculating user fees will vary depending on the nature of the operation or facility.

2. Develop an estimate of the demand for each product or service in terms of units of output. This can be derived from past results and/or using information from likely users.

Caution: When hours is the chosen unit of output, it is important to ensure that the total hours used to calculate the user fee reflects estimated billable hours (hours demanded) and not available hours (readiness to serve). Available hours do not directly relate to the number of hours that will be demanded by and billed to your customers. Usage of available hours may result in a lower user fee and an under-recovery of costs (operating deficit). However, usage of billable hours will yield a user fee that reflects the actual costs of providing the product/service.

3. Develop an expense estimate for each product or service provided based on the demand estimate from step two above. Typical expenses include salaries & wages, employee benefits, supplies, depreciation, communications charges, equipment repair and maintenance, etc.

Caution: Federal unallowable expenses must not be included in the expense estimate (see the "What Must Not be Included in a User Fee" segment of this document).

4. Determine the amount of any applicable user fee subsidy.

5. Subtract the amount of any user fee subsidy from total estimated expenses to determine net expenses.

6. Divide net expenses by the demand estimate from step 2 above to determine the user fee for a particular product or service.

7. Multiply the demand estimate developed in step two above by the user fee calculated in step 6 above to determine estimated revenue. The resulting revenue figure should equal estimated expenses.

Examples of User Fee Calculation

Example A: User Fee Calculation for a recharge operation or a service facility that provides photocopying services.

1. The unit of output for this service facility is the number of pages copied.

2. The estimated demand is 2 million copies for the upcoming fiscal year. This was determined from a review of prior years' data and a survey of past and present users.

3. The user fee subsidy, as determined by the department head, is $15,000.

4. Expenses:

(a) Salary and Wages, and Employee Benefits:

(b) Supplies:

Item	Unit of Measure	Quantity	Cost Per Unit	Ext. Cost
Paper	Ream	4,000	2.50	10,000
Ink	Gallon	100	15.00	1,500
Toner	Quart	50	11.50	575
Miscellaneous				200
Total					12,275

(c) Equipment Repair and Maintenance:

Item	Estimated No. of Repairs	Cost Per Repair	Estimated Repair Cost
Maintenance Contract			8,000
Estimated Repairs	4	500	2,000
Total				10,000

(d) Depreciation:

Equipment	Tag No.	Acquisition Cost	Depreciable Life	Annual Depreciation
Copier #1	E123456	40,000	5	8,000
Copier #2	E123457	35,000	5	7,000
Total					15,000

In this example, $15,000 would be transferred to the Renewal and Replacement Plant Fund Account before fiscal year-end, as it would each year over the 5-year depreciable lives of the assets.

(e) Other Directly Related Expenses:

(f) Carry-forward from Prior Fiscal Year:

Subsidies

1. doing so furthers the accomplishment of a primary mission area (i.e., instruction, research or public service); and

2. the goods or services provided either are not available from sources external to Cornell, or can not be provided from external sources in a more cost effective or efficient manner.

The continual subsidization of inefficient or non-competitive recharge operations and service facilities redirects vital university resources from activities that could further the accomplishment of the university's primary missions.

• Option A

User Fee Subsidy: When all users are charged less than the total cost of the goods or services provided.

 Example: a service facility receives an appropriation from the college to defray costs not included in the user fee. If there is no user fee subsidy to your service facility, record expenses and revenues in one operating account. If, however, there is a user fee subsidy, record the dollar amount of the subsidy in a separate service facility account with the same function code (function 442 or 452).

• Option B

User Subsidy: when certain users are not charged for the cost of the goods or services provided.

 Example: a department does not bill students for the use of a service facility. The department must transfer funds to the service facility account to cover the cost of providing the service to students.

 For information on recording a subsidy, see the "Recording Revenues, Expenses, and Transfers" segment of this document.

Review and Approval of User Fees

Established user fees for service facilities must be reviewed annually, revised where necessary, and submitted to the Manager of Accounting for General Operations on or before May 1 of each year for approval.

Note: Reviews of recharge operations are done at the department level.

1. Submit user fee calculations at any time during the first year of operation. Then submit annually on or before May 1.

 2. Submit a proposed line-item budget as part of the fee approval process. Budgeted expenses should be listed by object code group (e.g., Salaries and Wages, Benefits, Supplies) for ease of review. Estimated revenues must be documented as proposed user fee(s) multiplied by the estimated units of output. Estimated revenues should equal budgeted expense plus or minus prior-year operating surplus or deficit.

 3. If depreciation is included in a user fee, you must also submit the following:

• equipment description;
• asset item numbers;
• acquisition cost;
• acquisition date;
• depreciable life;
• annual depreciation expense.
4. If the facility occupies a room or rooms dedicated to its activity, the building and room numbers must be provided with the user fee.

ACCOUNTING PROCEDURES

Account Structures

To set accurate user fees, you must be able to identify the revenue and expense related to each recharge operation. You are not, however, required to have a separate account for each recharge operation.

You are required to have a separate account(s), coded to either function 442 or 452.

Recording Revenues, Expenses, and Transfers

 Revenues: Record recharge operation and service facility revenue from other university accounts using the Earnings -- Interdepartmental object code series (113X, 129X). Record revenue generated from cash sales using the Miscellaneous Income object code series (120X-128X).

Caution: Do not use a reverse expense object code to record revenues in a recharge operation or service facility account.

Note: If your department chooses not to charge certain users of a service facility (i.e., provide a user subsidy), process journals to record the subsidized fees as an expense in your department's account and as a revenue in the service facility's account (for more information see the "Subsidies" segment of this document).

Transfers: Normally, the only allowable transfers into a recharge operation or service facility accounts are to fund user fee subsidies. Normally, the only allowable transfers out of recharge operation or service facility accounts are those to Renewal and Replacement Plant Fund Accounts for equipment replacement or renewal, as outlined in this policy.

Year-end Closing Process: Recharge operation and service facility accounts must not close to other accounts as part of the year-end closing process. Account balances must be rolled forward to the next accounting period to ensure that surpluses and deficits are properly reflected in the calculation of user fees.

Accounting for Leases in a Service Facility

Capital Leases: A lease that transfers a substantial portion of the benefits and risks inherent in the ownership of property is called a capital lease. In order for a lease to be classified as a capital lease, one or more of the following four criteria must be met:

1. Ownership of the property is transferred to the lessee by the end of the lease term;

2. The lease contains a bargain purchase option;

3. The lease term, at inception, is substantially (75% or more) equal to the estimated economic life of the leased property, including earlier years of use (exception: this criterion can not be used for a lease that begins within the last 25% of the original estimated economic life of the leased property); and

4. The present value of the minimum lease payments at the beginning of the lease term, excluding insurance, maintenance, taxes, and profits paid to the lessor, is 90% or more of the fair value of the property at the inception of the lease.

A capital lease is accounted for by the lessee as the acquisition of an asset, and the incurrence of a liability. The initial recording value of the leased asset is the lesser of the fair value of the leased asset or the present value of the minimum lease payments, excluding insurance, maintenance, taxes, and profits paid to the lessor. The asset is depreciated in the same manner as other Cornell assets. The useful life of the asset is either (a) the estimated economic life, or (b) the lease term, depending on which of the above four criteria was used to classify the lease. If either of the first two criteria was used in classifying the lease, the asset is depreciated over the economic life of the asset. In all other cases, the asset is depreciated over the lease term .

Operating Leases: All leases not qualifying as a capital lease are classified as operating leases. Rental expense relating to an operating lease is amortized, on a straight-line basis, over the periods in which the lessee derives benefit from the asset.

Tax

 Unrelated Business Income Tax (UBIT): Income from users who are not Cornell departments, employees, students, faculty, or staff may be subject to income tax. The recharge operation or service facility must separately identify such income. An informal method, such as a periodic survey of users, is sufficient for this purpose. The survey should be taken by the operation or facility manager at intervals during the year (such as one day a month) and should include type of customer and amount of sale. For purposes of the annual UBIT analysis, the manager can calculate the percentage of sales by type of customer and apply these percentages to total annual sales.

Note: Recharge operations need not track the information at this time. The Tax Compliance Office will determine, based upon its annual review of gross revenues, which recharge operations will be asked to do so.

 Sales Tax: Units of the university are required to collect sales tax on the sale of goods from a "store" (a place or establishment where goods are sold from display with a degree of regularity, frequency, and continuity). This requirement does not apply if the sale is to another Cornell department; if the goods are delivered out-of-state; or if the customer provides a properly completed New York State exemption certificate. For more information, contact uco-tax@cornell.edu, or the Assistant Controller for Disbursements and Tax.

Inventories

If your recharge operation or service facility has established an inventory asset account, you must perform a physical inventory at least annually and reconcile the inventory to the accounting records. If your recharge operation or service facility is not required to have an inventory asset account, you may still choose to maintain internal inventory records. Inventory losses (i.e., shrinkage) or gains should be considered positive or negative operating expense of the recharge operation or service facility.

Coding Physical Space

A recharge operation typically occupies rooms not dedicated to its specific function, but used for other purposes, such as a fax machine located in an administrative office. It is not necessary to differentiate the functional classification of the space occupied by the recharge operation from the remaining area in the room.

A service facility typically occupies rooms dedicated solely to its specific function. Since the facilities expenses (i.e., utilities, custodial, and maintenance costs) of the service facility are normally paid by the university and not recovered through the service facility user fees, they are included in the university's indirect cost rate. To accurately assign these costs, the space associated with the service facility must be functionally coded to the activities supported by the service facility as either Instruction, Research, Public Service, or Ancillary Support (an activity that is none of the others). Identify the rooms occupied by the service facility among these four space functions based on percentage of use. You may use an analysis of the accounts charged by the service facility or the customers served to estimate the functional usage of the rooms. This methodology must be adequately documented.

Note: A complete discussion of the coding of space is available in University Policy 2.7, Reporting the Use of Facilities. Contact the Manager of Cost Analysis for assistance with issues on the functional coding of space.

Record Retention

RESPONSIBILITIES

APPENDIX: EXAMPLES OF FEDERAL UNALLOWABLE AND ALLOWABLE COSTS

General Comments

Below is a listing of some common federal unallowable costs taken from OMB Circular A-21. For more information, contact the Indirect Cost area of the Division of Financial Affairs.

Caution: This list is not exhaustive. It is placed here for your reference only. For more detailed information, see OMB Circular A-21, at [http://www.whitehouse.gov/omb/circulars/a021/a021.html].