Nonprofit Accounting Basics
OMB Circular A-122
What is OMB Circular A-122?
OMB Circular A-122 ("A-122") is officially named "Cost Principles for Non-Profit Organizations". This Circular establishes principles for determining costs of grants, contracts and other agreements with non-profit organizations. The principles are designed to provide that the Federal Government bear its fair share of costs except where restricted or prohibited by law. The principles do not attempt to prescribe the extent of cost sharing or matching on grants, contracts, or other agreements. However, such cost sharing or matching shall not be accomplished through arbitrary limitations on individual cost elements by Federal agencies. Provision for profit or other increment above cost is outside the scope of this Circular.
Who is covered by A-122?
A-122 is applicable to all not-for-profit organizations, except universities which have their own circular - (A-21), and a few others named at the end of this circular.
Importance of A-122?
A-122 provides specific guidelines of items that are considered allowable and unallowable costs, and can therefore be charged to the federal government under a federal award. Further, compliance with A-122 is required for all award recipients and testing that compliance is a component of an A-133 audit.
Certain items of the circular are discussed here, however the full text of the circular can be found at http://www.whitehouse.gov/omb/search/?keywords=circular%20A-122.
How is A-122 organized?
A-122 is organized into 3 sections:
- General Principles
- Selected Items of Cost
- Non-Profit Organizations Not Subject To This Circular
This section provides definitions of the terms used in A-122. One key item included in this section is the factors that affect the allowability of costs:
Factors affecting allowability of costs. To be allowable under an award, costs must meet the following general criteria:
- Be reasonable for the performance of the award and be allocable thereto under these principles.
- Conform to any limitations or exclusions set forth in these principles or in the award as to types or amount of cost items.
- Be consistent with policies and procedures that apply uniformly to both federally-financed and other activities of the organization.
- Be accorded consistent treatment.
- Be determined in accordance with generally accepted accounting principles (GAAP).
- Not be included as a cost or used to meet cost sharing or matching requirements of any other federally-financed program in either the current or a prior period.
- Be adequately documented.
The circular goes on to further define a "reasonable cost" as a that 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.
This section also discusses direct costs and indirect costs and included guidance on various methods of allocating indirect costs.
Selected Items of Cost
This section discusses the allowability of certain common expense items that are incurred. Some of the key items that are included are:
- Alcoholic beverages. Costs of alcoholic beverages are unallowable.
- Bad debts. Bad debts, including losses (whether actual or estimated) arising from uncollectible accounts and other claims, related collection costs, and related legal costs, are unallowable.
- Compensation for personal services.
- Definition. Compensation for personal services includes all compensation paid currently or accrued by the organization for services of employees rendered during the period of the award (except as otherwise provided in subparagraph h). It includes, but is not limited to, salaries, wages, director's and executive committee member's fees, incentive awards, fringe benefits, pension plan costs, allowances for off-site pay, incentive pay, location allowances, hardship pay, and cost of living differentials.
- Allowability. Except as otherwise specifically provided in this paragraph, the costs of such compensation are allowable to the extent that:
- Total compensation to individual employees is reasonable for the services rendered and conforms to the established policy of the organization consistently applied to both Federal and non-Federal activities; and
- Charges to awards whether treated as direct or indirect costs are determined and supported as required in this paragraph.
- Organization-furnished automobiles. That portion of the cost of organization-furnished automobiles that relates to personal use by employees (including transportation to and from work) is unallowable as fringe benefit or indirect costs regardless of whether the cost is reported as taxable income to the employees. These costs are allowable as direct costs to sponsored award when necessary for the performance of the sponsored award and approved by awarding agencies.
- Contributions. Contributions and donations by the organization to others are unallowable.
- Interest. (1) Costs incurred for interest on borrowed capital or temporary use of endowment funds, however represented, are unallowable. However, interest on debt incurred after the effective date of this revision to acquire or replace capital assets (including renovations, alterations, equipment, land, and capital assets acquired through capital leases), acquired after the effective date of this revision and used in support of sponsored agreements is allowable,
- Lobbying. Notwithstanding other provisions of this Circular, costs associated with lobbying activities are unallowable.
- 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, when reasonable in relation to the services rendered and when not contingent upon recovery of the costs from the Federal Government.
Non-Profit Organizations not Subject to this Circular
This section contains a listing of specific organizations that are not subject to Circular A-122.