Introduction to OMB Circular A-122, “Cost Principles for Non-Profit Organizations”. How to ensure internal controls are established for the organizations to comply with Federal grant regulations such as A-122, A-110 and federal grant requirements.

1. OMB Circular A-122
Julie L. Jones
Managed Accounting Services Partner
April 11, 2013
Thrive. Grow. Achieve.
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2. AGENDA
• Non-Profit Circular Overview
– What are OMB Circulars?
– Why are they important?
– Which Circulars apply to non-profit organizations?
• OMB Circular A-122
– Key Definitions
– Selected Items of Costs
• Questions
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3. WHAT ARE OMB CIRCULARS?
• Administrative policy documents issued by
the Office of Management and Budget (OMB)
to Federal agencies as instructions or
information regarding a variety of topics
including grant administration.
• OMB has worked cooperatively with the
grantor agencies and the grantee community
to develop government-wide policy to assure
that grants are managed properly and that
federal dollars are spent in accordance with
applicable laws and regulations.
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4. WHY ARE THEY IMPORTANT?
• Entities receiving funds directly from the
federal government are required to follow the
rules and regulations outlined in the OMB
Circulars.
• Entities that receive “pass-through” funds
from Foundations and other state agencies
are also required to follow OMB Circulars.
• Auditors test compliance with these circulars
and report findings to the agencies.
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5. WHICH CIRCULARS APPLY TO
NONPROFIT ORGANIZATIONS?
• Key Circulars for all Non-Profit Organizations:
• OMB A-110 – Uniform Administrative Requirements
for Grants and Other Agreements with Institutions of
Higher Education, Hospitals or Other Non-Profit
Organizations
• OMB A-122 – Cost Principles for Non-Profit
Organizations
• OMB –A-133 – Audits of States, Local Governments
and Non-Profit Organizations
• Circulars can be found at:
http://www.whitehouse.gov/omb/circulars
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6. OMB CIRCULAR A-122 KEY DEFINITIONS
• Allowable
• Reasonable
• Allocable
• Cost Types
• Unallowable
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7. DEFINITION: ALLOWABLE
Source: Attachment A, Section A
To be allowable, costs must be:
• Reasonable and allocable
• Conform to any limitations or exclusions set forth in
the cost principles or the award
• Be consistent with policies and procedures afforded
all activities of the organization
• Be accorded consistent treatment
• Be determined in accordance with GAAP
• Not already be included in a cost sharing or
matching requirement
• Be adequately documented
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8. “ADEQUATELY DOCUMENTED”
Key essentials of “adequate documentation”:
• Contemporaneous– Done at or close to the time of the
event
• Sufficient –Does not require additional explanation or
support
• Documents Exceptions or Changes – Describes
changes to original information, as necessary
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9. DEFINITION: REASONABLE
• A cost is reasonable if, in its nature or amount:
− It does not exceed that which would be incurred by
a prudent person under the circumstances
prevailing at the time the decision was made to
incur the costs
− The question of the reasonableness of specific
costs must be scrutinized with particular care in
connection with organizations or separate divisions
thereof which receive the preponderance of their
support from awards made by Federal agencies.
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10. DEFINITION: ALLOCABLE
• A cost is allocable to a particular cost objective, such as
a grant, contract, project, service, or other activity, in
accordance with the relative benefits received. A cost is
allocable to a Federal award if it is treated consistently
with other costs incurred for the same purpose in like
circumstances and if it:
– (1)Is incurred specifically for the award.
– (2)Benefits both the award and other work and can be
distributed in reasonable proportion to the benefits
received, or
– (3)Is necessary to the overall operation of the organization,
although a direct relationship to any particular cost
objective cannot be shown.
• Any cost allocable to a particular award or other cost
objective under these principles may not be shifted to
other Federal awards to overcome funding deficiencies,
or to avoid restrictions imposed by law or by the terms
of the award 9

11. COST TYPES
• Direct costs, where the final cost objective is
known or a single cost objective or program
benefits.
• Indirect costs, incurred for common or joint
purposes benefiting more than one cost objective,
but which are not readily identified or assigned to
the benefiting cost objective (and usually
recovered through an indirect cost rate).
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12. DEFINITION: UNALLOWABLE
• Those specifically identified in the grant or
contract as being unallowable.
• Specifically identified in A-122 as being
unallowable.
• Does not meet the criteria listed in A-122 to be
allowable.
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13. SELECTED ITEMS OF COST
• These principles apply whether a cost is
treated as direct or indirect.
• Contains 52 Selected Items, which do not
represent all allowable or unallowable costs.
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14. ADVERTISING & PUBLIC RELATIONS COSTS
• Allowable Advertising
− Recruitment of Personnel
− Procurement of Goods & Services
− Disposal of Scrap or Surplus
• Allowable Public Relations
− Costs are specifically required by award
− Cost of keeping the public informed on matters of
public concern . . . such as notices of
contract/grant awards . . . etc.
• Specifically UNALLOWABLE:
– Costs of promotional items, memorabilia, gifts and
souvenirs
– Costs of advertising and public relations designed
solely to promote the organization
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15. ALCOHOLIC BEVERAGES
• Costs of alcoholic beverages
are UNALLOWABLE!
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16. COMMUNICATION COSTS
• Communication costs are
allowable
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17. COMPENSATION FOR PERSONAL SERVICES
• Includes all compensation paid currently or
accrued by the organization during the period
of the award.
• Compensation costs are allowable when:
– Reasonable
– Consistent/Allocable
– Adequately documented
• Fringe benefits
– Generally allowable
– Authorized absences are allowable if costs are
equitably distributed
– Employer contributions are allowable when paid in
accord with established written policies
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18. COMPENSATION FOR PERSONAL
SERVICES (CONTINUED)
• Support of salaries and wages requires–
Personnel Activity Reports(or Time Distribution
Reports (i.e. timesheets) to those who in whole or
part are assigned directly to the awards.
• The timesheets must reflect an after-the-fact
determination of activity
• Must account for total activity for which employee is
compensated
• Must be signed by the employee or responsible
supervisor
• Must be prepared monthly and coincide with one or
more pay periods
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19. CONTINGENCY PROVISIONS
• Contributions to a contingency reserve or any
similar provision made for events the occurrence
of which cannot be foretold with certainty as to
time, intensity, or with an assurance of their
happening are UNALLOWABLE.
• Exceptions might be self-insurance, pension
funds and reserves for normal severance pay.
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20. CONTRIBUTIONS
Contributions and donations by the
organization to others are UNALLOWABLE.
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21. DEPRECIATION AND USE
ALLOWANCES
• Costs are allowable
• Computation of use allowance or
depreciation shall be based on
acquisition cost.
• Acquisition cost of a donated asset
shall be the fair market value at the
time of donation.
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22. DEPRECIATION AND USE
ALLOWANCES (CONTINUED)
• Computation of use allowance or depreciation
will exclude:
− Cost of land
− Any portion donated by Federal Government
− Any matching portion
• Adequate property records must be
maintained
• Physical inventories must be taken at least
once every two years
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23. DONATIONS
• The value of donated services, goods
or space is not reimbursable either as
a direct or indirect cost.
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24. ENTERTAINMENT COSTS
Costs of amusement, diversion, social
activities, ceremonials and costs relating
to these activities such as meals,
lodging, rentals, transportation and
gratuities are UNALLOWABLE.
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25. EQUIPMENT & OTHER CAPITAL
EXPENDITURES
• Equipment -an article of non expendable,
tangible personal property having a useful life
of more than one year and an acquisition cost
equal to or greater than the lesser of:
– The organization’s financial statement capitalization
level or
– $5,000
• UNALLOWABLE as indirect costs
• Prior approval from the awarding agency must
be obtained to direct charge
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26. FINES AND PENALTIES
• Costs of failures to comply with Federal, state,
or local laws are UNALLOWABLE
• Allowable if incurred as a result of compliance
with specific provisions of an award or
instructions in writing from the awarding
agency.
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27. GOODS OR SERVICES
FOR PERSONAL USE
• UNALLOWABLE regardless of whether the
cost is reported as taxable income
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28. HOUSING AND PERSONAL
LIVING EXPENSES
• UNALLOWABLE as an indirect cost or fringe
benefit regardless of whether it is reported by
the employee as taxable income
• Allowable as direct if necessary and approved
by the awarding agency
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29. INSURANCE AND
INDEMNIFICATION
• Insurance required or approved pursuant to an
award is allowable
• Insurance carried by the organization in
general conduct of business is allowable
subject to the following limitations
– Reasonable coverage
– Cost of insurance on officers must represent
additional compensation and the organization
may not be identified as the beneficiary
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30. INTEREST, FUNDRAISING AND INVESTMENT
MANAGEMENT COSTS
• Interest is generally UNALLOWABLE
• Fundraising and similar expenses
incurred solely to raise capital or
obtain contributions are
UNALLOWABLE
• Costs of investment counsel & staff
and similar expenses are
UNALLOWABLE
• Fundraising and investment activities
shall be allocated an appropriate share
of indirect costs
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31. LABOR RELATIONS COSTS
• Costs of maintaining satisfactory relations
with employees, including labor management
committees, employee publications and other
related activities are allowable
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32. LOBBYING
• UNALLOWABLE if:
− Attempts to influence election outcomes
− Contributing to political causes
− Attempts to influence Federal or State
legislation through virtually any
communicative device
− Legislative liaison activities when performed in
support of unallowable lobbying
• Allowable
− Providing a technical presentation on a topic
directly related to the performance of an award
− Any activity specifically authorized by statute
to be accomplished with funds under the
award
 Must keep records to show funds were paid from
non-federal source or they are related to allowable
lobbying activities
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33. LOSSES ON OTHER AWARDS
Any excess of costs over income on any
award is UNALLOWABLE as a cost of any
other award
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34. MAINTENANCE AND REPAIRS
• Costs necessary to keep buildings and
equipment in efficient operating
condition are allowable
• Costs which add to the permanent
value or appreciably prolong the life of
the asset shall be treated as capital
expenditures
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35. MATERIALS AND SUPPLIES
• Costs necessary to carry out a Federal
awards are allowable
• Must be charged at actual prices, net
of applicable credits.
• Only those actually used for the
performance of Federal award may be
charged as direct costs.
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36. MEETINGS AND CONFERENCES
• Costs of meetings and conferences,
including travel costs, etc., when the
primary purpose is the dissemination
of technical information are allowable
− Costs of renting facilities, meals, speakers
fees, etc., are allowable
− Should be charged directly whenever possible
− Costs for meetings held for general
administration of the organization are allowable
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37. MEMBERSHIPS, SUBSCRIPTIONS AND
PROFESSIONAL ACTIVITY COSTS
• Membership in business, technical and
professional organizations are allowable
• Subscriptions to business, technical and
professional periodicals are allowable
• Costs of memberships in civic or community
organizations are allowable with prior approval
by the cognizant Federal agency
• Memberships in country, social, or dining
clubs are UNALLOWABLE.
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38. ORGANIZATION COSTS
• All costs of organization or
reorganization are UNALLOWABLE
except with prior approval of the
awarding agency
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39. PARTICIPANT SUPPORT COSTS
• These costs include stipends or
subsistence allowances, travel
allowances, and registration fees paid
to or on behalf of participants or
trainees (but not employees) in
connection with meetings,
conferences, symposia, or training
projects and are allowable direct costs
with prior approval of the awarding
agency.
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40. PRE-AWARD COSTS
• Pre-award costs are costs incurred
prior to the effective date of the award
directly pursuant to the negotiation of
the award
• Pre-award costs are allowable only to
the extent that they would have been
allowable if incurred after the effective
date of the award and only with the
written approval of the awarding
agency
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41. PROFESSIONAL SERVICE COSTS
• Costs of professional and consultant services
rendered by persons who are members of a
particular profession or possess a special skill, and
who are not officers or employees of the
organization are allowable after considering the
following factors among others:
– Nature and scope of services rendered
– Necessity for contracting for the service
– Whether the work can be done more economically
by direct employment
– Qualifications of the individual or concern rendering
the service
– Adequacy of the contractual agreement for the
service
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42. PUBLICATION AND PRINTING COSTS
• Generally allowable
• Direct charges need prior approval of
the awarding agency
• Allocate as indirect if not identifiable
with a particular cost objective
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43. RECRUITING COSTS
• Generally, advertising and associated
costs incurred for recruitment of staff
are allowable but:
− They must meet the test of reasonableness
and
− They must conform with established
practices of the organization
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44. RELOCATION COSTS
• Relocation costs for a permanent change of
duty assignment are generally allowable if:
−The move is for the benefit of the employer
−Reimbursement to the employee is in accord with
established written policy
−Reimbursement does not exceed actual expenses
• Unallowable costs include:
−Fees associated with acquiring a new home
−Loss on sale of former home
−Continuing mortgage or loan payments on existing
home
−Income taxes paid by employee on relocation costs
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45. SELLING AND MARKETING
• Costs of selling and marketing
products or services of the
organization are unallowable
• They are allowable as direct cost if
prior approval is obtained and they are
necessary for performance of the
award
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46. SEVERANCE PAY
• Severance pay is allowable only to the
extent that it is required by:
−Law
−Employer-employee agreement
−Established policy that effectuates an
implied agreement on the organization’s
part
−Circumstances of the employment
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47. TAXES
• Taxes are generally allowable except
for:
− Taxes from which exemptions are available
− Special assessments on land which represent
capital improvements and
− Federal income taxes
• Applicable credits(offsets to taxes)
must be taken where appropriate
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48. TRAINING AND EDUCATION COSTS
• Generally, training and education costs
related to employee development,
such as, workshops, textbooks,
classes, etc. are allowable
• Costs of part-time education, some
full-time education, and specialized
training courses (whether degree-
oriented or not) are allowable, with
limitations
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49. TRANSPORTATION COSTS
• Allowable as direct if provided for in
the award
• Allowable as indirect for equitable
distribution to all benefiting activities
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50. TRAVEL COSTS
• Expenses for transportation, lodging,
subsistence, and related items incurred by
employees on official business are allowable
• Such costs may be charged on an actual basis,
per diem or mileage basis or a combination,
but must be consistent with those normally
allowed by the organization
• The difference between first class and less
than first class air accommodations is
unallowable except when the lesser would
− Require circuitous routing
− Require travel during unreasonable hours
− Greatly increase the duration of the flight
− Result in additional costs offsetting the savings
− Not meet the medical needs of the traveler
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51. TRUSTEES
• Travel and subsistence of trustees(or
directors) are allowable
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52. QUESTIONS?
Julie L. Jones Phone: 202-822-5000
Raffa, P.C. Fax: 202-822-0669
1899 L Street, NW,
Suite 900 Direct: 202-955-6724
Washington, DC 20036 e-mail: jjones@raffa.com
Visit our Web Site at: www.raffa.com
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