The Adjusted Fund Balance – What is it? And why is it necessary?
- Did you know that the end-of-year fund balance may not be the correct amount to include in your 3E rate calculation?
- Do you know how to properly adjust the amount included?
Service activities must operate on a break-even basis. Therefore, the over or under-recovery balance must be included in the rate calculation. The fund balance should be adjusted by these items:
- Net asset value (NAV) of equipment purchased on the 3E fund
- Accumulated depreciation of non-3E equipment included in the rates
- 60-day working capital reserve (if the AFB is in surplus after adjusting for these amounts)
But why do we make these adjustments?
Net Asset Value (NAV)
When a capital asset is purchased using a self-supporting fund, the entire amount of the asset is expensed to the service center fund. Only the annual depreciation can be included as an expense for rate calculation purposes. At the U of I, the depreciation is not recorded at the CFOP level. Therefore, we must adjust the fund balance by the amount of NAV to accurately include it in our rate calculations. NAV is the original purchase price of the asset less accumulated depreciation.
- For example, let’s say that service center A has a fund balance of $0, and it purchased $50,000 of capital equipment. Then the fund balance will be -$50,000 (under recovered). However, the entire amount can not be expensed as it is a capital asset, since it still has equity. If the asset had $5,000 of depreciation that fiscal year, we would adjust (increase) the fund balance by $45,000 of NAV. This allows the service center to account for the value of the equipment that will be recovered over the life of the asset. For rate calculation purposes, the deficit would be $5,000 even though the EOY FB in Banner reflects a $50,000 deficit.
Non-3E Accumulated Depreciation
At times equipment is purchased for a service center using other non-3E funding sources. When this happens the annual depreciation of these assets can be included in the rate calculation to recover that expense. This depreciation may be transferred to a plant fund at the end of each fiscal year. But, if it is not moved to a plant fund, then the amount must be adjusted out of the fund balance for the rate calculation, as there is no corresponding expense on the fund.
- For example, let’s say that service center B has a fund balance of $0, and it purchased $50,000 of capital equipment for the service center, using state funds. The rate calculation included $5,000 of annual depreciation. At the end of that fiscal year, an additional $5,000 was collected from customers for which there was no expense on the 3E fund, as the asset was purchased using state funds. So, at the end of the year, we would adjust (decrease) the fund balance by $5,000 for the rate calculation. If a plant fund transfer is completed for this amount, the adjustment would not be necessary fund. Therefore, the fund balance for the rate calculation would be $0 even though the end-of-year fund balance in Banner says $5,000 surplus.
***NOTE*** If you have a rate calculation that includes non-3E equipment depreciation, please contact Government Costing to make sure the correct amount is being used to adjust the fund balance.
60-Day Working Capital Reserve
Federal guidelines provide that service centers may retain a working capital reserve as part of retained earnings of up to 60 days of cash expenses. The 60-day working capital reserve is calculated by taking the last 12 months of cash expenditures divided by 6. The adjusted fund balance would then be compared to this amount to determine the amount of over/under recovery that should be incorporated into the rate calculation. You may also have to make an adjustment to remove unallowable expenses if those are reflected in the fund balance.
- For example, let’s say that service center C has an end-of-the-year fund balance of $10,000 surplus and that it had a total of cash expenses of $60,000 during the year. The 60-day working capital reserve would be $60,000 / 6 = $10,000. The $10,000 surplus meets the working capital reserve and is allowable to be carried forward with no reduction to the rates for the surplus balance. The fund would be considered break-even in this case.
Easy Right?
Costing principles and best practices involve abstract concepts such as equipment depreciation and the Adjusted Fund Balance, which can be difficult to understand and apply to your service center. If you have any questions or would like any clarification on these topics, please reach out to System Government Costing and we would be happy to work with you.
Contact
Additional information related to managing self-supporting funds can be found on System Government Costing’s Rates page and the Who to Ask page to request further assistance.
