OVERVIEW OF Unallowable Expenses for Recharge and Service Centers

This standard outlines the essential criteria that costs must meet to be considered allowable under federal awards, as specific in Uniform Guidance.

Costs must be reasonable and necessary for providing goods or services by the recharge or service center, adhere to limitations or exclusions in cost principles, align with university policies, receive consistent treatment, not be used for cost sharing, and be supported by adequate documentation. The university is prohibited from charging federal funded agreements for certain costs, known as unallowable or non-reimbursable costs. It is crucial for IU employees involved in financial transactions to accurately assess the eligibility of costs for reimbursement and ensure compliance with federal and grantor policies. Review this policy futher information about unallowable expenses, how to identify and account for them, and for examples on how to correct unallowable expenses within a recharge or service center account.

Unallowable Expenses for Recharge and Service Centers

Prerequisites

Prior to reading the standard on the Unallowable Expenses for Recharge and Service Centers, it is beneficial to review the below standards to gain foundational information:

1. Accounting Fundamentals Standards
2. Rate Submission Requirements for Recharge Centers Standard
3. Allocating Costs to Internal and External Activity Standard
4. Distribution of Income and Expense/General Accounting Adjustment Standard

Introduction

Except where otherwise authorized by statute, costs must meet the following general criteria specified under Uniform Guidance section § 200.403 to be allowable under federal awards:

1. Reasonable and necessary to provide goods and/or services by the recharge or service center.
2. Conform to any limitations or exclusions set forth in cost principles in Uniform Guidance or other applicable cost standards established by federal agencies or the university.
3. Consistent with applicable university policies and procedures.
4. Accorded consistent treatment for the same type of cost in like circumstances.
5. Not included as a cost or used to meet cost sharing or matching requirements of any federally financed program in either the current or prior period.
6. Supported by adequate documentation the cost was incurred.

Uniform Guidance CFR 2, Part 200, Subpart E prohibits the university from charging federally funded agreements or requesting federal reimbursement for certain costs. The Office of the University Controller refers to these costs as “unallowable costs” or “non-reimbursable” costs. These costs cannot be included in the Facilities and Administrative (F&A) rate (also referred to as the indirect cost rate) and may not be eligible for direct contract and grant reimbursement. Any employee who initiates and/or approves financial transactions at Indiana University (IU) needs to accurately determine if the cost is eligible for reimbursement per IU policy and if the cost is allowable per federal or grantor policy.

Importance and Impact of Identifying Unallowable Expenses

Correctly identifying and documenting unallowable expenses is an important task for fiscal officers and delegates. Misclassified transactions are likely to be identified in an audit. Intentional misclassification could be considered fraud or fiscal misconduct. The university is prohibited from being reimbursed unallowable expenses from federally sponsored projects, directly or indirectly. Unallowable expenses or activities along with any directly associated costs must be appropriately identified on all documentation in the accounting system.

Should fiscal officers and/or delegates fail to properly identify and document unallowable expenses, the university may be subject to the following:

• The university may receive an unfavorable audit finding which may result in additional audits and/or result in a decrease in future federal funding.
• The university may be required to reimburse the unallowable expenses back to the grantor.
• The university may be charged additional interest and penalties on the unallowable expenses.
• Reputational harm to the department and/or university.

Identification of Unallowable Expenses

While there are some expenses that are always considered unallowable, often it depends on other factors. For a list of common unallowable expenses and the circumstances for when they may be allowable, refer to the Unallowable Expenses for Recharge spreadsheet.

Examples of some unallowable costs include but are not limited to:

• Purchases of alcoholic beverages
• Certain entertainment expenditures
• Certain memberships (except for professional organizations)
• Supplemental pay/bonuses
• Bad debts, fines, and penalties
• Fundraising expenses
• Legal settlement costs
• Charitable contributions

It is important that all unallowable costs be recorded in a manner that makes them identifiable. Proper identification of unallowable activities and expenses ensures that these costs are not charged directly to federally sponsored agreements or indirectly through treatment in the computation of F&A cost rates. As a note, when the F&A rate proposal is being prepared, non-reimbursable costs must be identified when they occur in department budgets to ensure they are not included in the university’s F&A rates. Recharge Accounting identifies unallowable costs and activities by using specific object codes when reviewing the recharge rates, running the unallowable report using those object codes and removing them from the rate calculation. Since recharge and cost center rates are often charged to federally sponsored budgets or programs, these non-reimbursable costs cannot be included in recharge rates charged to internal users or charged to the recharge center operating account.

When a unit submits their rate template(s), it is the responsibility of the department’s support staff and the fiscal officer to ensure that rate submission(s) do not include unallowable costs or activities. Reviewing transactions for unallowable costs or activities are the responsibility of the department fiscal officer, the rate submission preparer, and contract and grant personnel to ensure that transactions have been accounted for properly. The fiscal officer on the recharge account is ultimately responsible for ensuring the accounting is accurate and complete.

Proper Recording of Unallowable Expenses

When an unallowable expense has been identified, it is the responsibility of the fiscal officer to reverse the charge from the 66* account. The following examples are recharge-specific transferring methods for both current and prior year identification of unallowable expenses. For more information about how to correct unallowable charges on recharge accounts, please review the Distribution of Income and Expense/General Accounting Adjustment standard.

• If a recharge activity has an unallowable expense that hits the recharge or service center 66* account in the current year, the unit should initiate a distribution of income and expense (DI) document to move the unallowable expense to a different operating account.
• If a recharge activity has identified a prior year unallowable expense in their recharge or service center 66* account, the unit should initiate a DI document to move the unallowable expense to a different account using the Balance Sheet Adjustment-Unallowable object code (4993) in both the “To” and “From” sections of the Accounting Lines tab. The DI document should refer to the original document where the unallowable expense occurred as well as the object code initially used. See Example 1 below.

Examples of Correcting Entries for Unallowable Expenses

This portion of the standard will present several examples of identifying and correcting an unallowable expense in a 66* account.

Example 1: During the current fiscal year, it is discovered an unallowable membership fee was paid from a recharge or service center 66* account. The expense should be moved to another operating non-66* account prior to fiscal year-end using a DI document and the object code that was used on the original transaction. The DI should refer to the original document where the unallowable expense occurred as well as the original object code used. For this example, the original expense was charged to object code 5050.

Example 2: After fiscal year end, it is determined that an unallowable advertising expense was posted in a recharge or service center 66* account. The expense should be moved to another operating non-66* account in the current year by using a DI document and object code 4993 in both the “To” and “From” sections of the accounting lines tab. The DI should refer to the original document where the unallowable expense occurred as well as the original object code used.

Requirements and Best Practices

Requirements

1. Run the recharge accounting compilation reports annually at minimum. This compilation is a collection of all the reports necessary to populate the recharge rate template, which includes a full listing of all unallowable expenses. Refer to the Recharge Accounting Reports Compilation and the Recharge Accounting Reports Compilation Instructions for more information prior to running the report.

Best Practices

1. Run the Recharge Accounting Reports Compilation semi-annually and review the unallowable expense for accuracy and completeness.

If you have additional questions about how to transfer unallowable costs in either the current year or correct a prior year, please contact rates@iu.edu.