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Equipment Purchases and Depreciation
According to UMB policy, equipment is defined as "any item not permanently affixed to buildings which has a useful life greater than one year, and a unit cost of $5,000 or more, except for items predominantly composed of glass, rubber, cloth and equipment held for resale."
In order to properly develop rates for a service center, the cost of equipment should be recovered throughout the life of the asset through depreciation as opposed to the year in which the equipment is purchased. This allocates the cost of the equipment to the users of the service center who benefit from the equipment. As this is a significant departure from the accounting for equipment on all other types of University chartstrings, this section describes the accounting for equipment.
Equipment Reserve Chartstrings
Each service center should establish a companion chartstring for equipment when the service center chartstring is established. This chartstring should be identical to the service center chartstring except the fund should be 139 - "Service Center Equipment". The purpose of this chartstring is to record equipment purchases, record the funding of equipment purchases, and to provide an offset to the depreciation charged to the service center chartstring.
Identifying Equipment to a Service Center
Service centers can acquire the use of equipment through several means; therefore, the treatment in the rate calculation for the service center will depend upon, the manner in which the asset was originally acquired. See Appendix G for a comprehensive example of journal entries related to equipment purchases, fundings, and depreciation entries.
Originally purchased by the service center
When a piece of equipment is originally purchased by a service center, the purchase should be made in the companion chartstring. These assets will be charged to the service center chartstring through depreciation over the life of the asset.
Originally purchased from another nonsponsored sources
When a piece of equipment is originally purchased on nonsponsored funds for the purpose and use of service center operation, it may be possible to recover a portion of the original cost of the equipment through future service center rates. If the service center began utilizing the equipment in the same fiscal year in which the asset was purchased, a cost transfer should be performed to transfer the purchase to the equipment reserve chartstring. If a fiscal year has closed since the purchase but the asset is still within its useful life and is still being depreciating, the portion still left to be depreciated can be recovered through depreciation charges on the service center.
Originally purchased on an instrumentation grant
When a piece of equipment is purchased on an instrumentation grant, there is often a match requirement. When negotiating instrumentation awards, every attempt should be made to negotiate out any terms that would restrict UMB's ability to recover the match portion of the award through service center rates. The portion of the equipment costs that is recoverable on the instrumentation grant should be charged to the instrumentation grant. This portion of the cost will not be included in future service center rates. The match portion of the instrumentation grant should be charged to the companion chartstring. This portion of the cost will be charged to the service center chartstring through depreciation over the life of the asset.
Originally purchased on a research grant
If a piece of equipment was originally purchased by a research grant and the grant is no longer using the equipment or there is surplus time available for the service center, the service center may use that piece of equipment in its operations. Since the cost of the equipment has already been recovered from an external sponsor, no depreciation will be charged to the service center for these assets.
Originally purchased on a capital project
A capital project is a project to build new campus facilities or renovate existing facilities. Movable equipment is often purchased on these projects. These projects are generally part of the capital budgeting process. Therefore, it is important that the equipment purchases consume capital project budgets. However, the University should still be able to recover the cost of this equipment through service center rates. If a piece of equipment was originally purchased on a capital project, the acquisition cost will remain on the capital project. Depreciation entries will be made for these items as if they had been purchased on the equipment reserve chartstring.
Originally purchased through the Revolving Equipment Loan Program
The Revolving Equipment Loan Program is a loan program run by the University of Maryland System to allow campuses to purchase equipment and finance them through the System's Commercial Paper program. Instead of paying for the equipment in the year of acquisition, the purchasing entity will make debt payments (principle and interest) semiannually over the life of the loan agreement. These payments should be charged to the service center chartstring (not the equipment reserve chartstring). No depreciation entries will be made for these items.
Equipment gifted to the service center
If equipment is gifted to the service center the entry to record the gift should be recorded to the equipment reserve chartstring. This entry will debit an equipment expense account, for example 4344, and credit a gift revenue account, for example 0321. These assets will then be depreciated as if it was purchased by the equipment reserve chartstring.
Depreciation Journal Entries
Depreciation expense is calculated as the portion of the cost of the asset funded by UMB divided by the estimated useful life of the asset. Useful lives are determined by Quality Assurance in Financial Services. On a quarterly basis, Cost Analysis and Studies will perform a journal entry to record depreciation for the appropriate assets. This entry will debit (charge) the service center chartstring in account code 5506 - Service Center Depreciation and credit the service center companion chartstring in account code 5506 - Service Center Depreciation.
On an annual basis, Cost Analysis and Studies will provide a depreciation schedule to the unit in time for the development of the annual rate calculation. This schedule will list all assets still being depreciated into the service center and summarize depreciation expense per year for the remaining useful lives of the assets.
See Appendix F for a listing of equipment useful lives.
Disposition of Equipment
All equipment dispositions must follow UMB's Policy on Disposal of Surplus Property. This policy can be found at: https://cits-cfdev.umaryland.edu/hrpolicies/section8/t80120Asa.html
Once the asset has been disposed or transferred to another function in the fixed asset system, depreciation will no longer be charged to the service center for the item. If there was a loss on disposal, this should be charged to the service center chartstring at the time of disposition. A loss on disposal occurs when the asset is disposed of prior to the end of its useful life and the proceeds from the sale or insurance recovery (if any) are less than what remains to be depreciated. The loss is calculated as the amount left to be depreciated less any proceeds from the sale or insurance recovery.
Equipment Reserve Chartstring Balances
Equipment reserve chartstrings cannot run a deficit balance. This means funding must be transferred in to fund purchases if there is not enough of a surplus in the equipment reserve chartstring to fund the purchase. This funding must come from a non-state, nonsponsored chartstring (i.e. chartstrings with a fund of 116 may not be used). Designated Research Initiative Funds (DRIF) may also be used. Units without any appropriate funding sources should work with their Dean's Office to make funding arrangements. This funding is accomplished through a journal entry that credits the equipment reserve chartstring in revenue account 0999 - Internal Revenue Transfers and debits the funding chartstring in the same account.
If a surplus exists in the equipment reserve chartstring, this may be:
- Transferred back to the original funding source
- Used to fund future equipment purchases
- Used to fund operating deficits in the service center chartstring
See Appendix G for a comprehensive example of equipment purchases, funding entries, and depreciation entries.