How to Best Optimize Depreciation Components

Did you know that the depreciation of building costs over 40 or 50 years of composite life doesn’t take into account that many of the structure’s individual components won’t last that long? 

When the depreciation method is used for buildings, a building may be divided and rolled up into three general components, Building Structure, Building Systems and Building Contractor Installed Fixed Equipment.  Sub-components of these three general components are allowable. Each component item must then be depreciated over its estimated useful life. 

With the introduction of the Uniform Guidance (UG), there have been some changes that have impacted building & equipment depreciation. 

Here are a few of the changes to keep in mind when optimizing depreciation components: 

OMB 2 CFR 200 

  • Combines 8 circulars into one document
  • Replaces OMB Circular A-21, 2 CFR 220 
  • Additional emphasis is placed on stewardship and accountability 

 2 CFR 200 – 200.12 

  • Reconciled to Financial System Fixed Asset Detail
  • Interest Expenses for Buildings follows Building Cost
  • Not intended to impose on an institution with specific accounting practices if compliant with generally accepted accounting practices

Here are some of the best practices for optimizing building depreciation components:

1. Building Depreciation represents a significant portion of the University’s F&A rate, typically as the second biggest component.

2. A  building provides the most benefit when:

  • Lots of research activity
  • Expensive
  • University paid

3. Keep an eye for major construction projects since the last proposal

  • Importance of communication with Space Management/Facilities

4. Know when new research-intensive buildings are coming online

  • Completion Date
  • Occupancy Date

5. Know which departments are moving into new space and what will happen to the space they vacate

  • “Decompression” is great!
  • Same dollars, more space

6. Know the nature of research activity

  • PIs with established research portfolio vs. new faculty

Here are some of the best practices for optimizing equipment depreciation components: 

1. Ideally want to match 90% of equipment to a valid building and room

  • Importance of accurate space inventory, floor plans
  • Review space functionalization result

2. Element of risk during on-site visit

  • Equipment is moveable by nature

3. Complete inventory in the shortest amount of time to minimize the effect of movement

4. Timely additions and tag application

5. Make it easy for departments to communicate dispositions, transfers to the central office

  • Communicate and educate
  • Simplify policies and procedures
  • Clarify roles and responsibilities

6. Have a robust asset system

7. Confirm that proper exclusions are in place

  • Federal funds, service centers

8. Track split-funded and fabricated assets

Have any questions about optimizing building depreciation components? We’re here to answer all of them and get you the support and accurate data that you need. Get started by reaching out to us here.