Michigan State University
Controller's Office

Administration Bldg
426 Auditorium Rd, Rm 305
East Lansing, MI 48824
517 355-5020

SECTION 19: Equipment Depreciation Policy For Revolving Accounts

Last updated: December 2010

I. Background

Most revolving accounts should have the funding capability to meet normal equipment needs on an ongoing basis. Revolving accounts may carry amounts to accumulate funds for the purchase or replacement of more costly equipment.

There are certain revolving account operations that require very costly equipment. The high cost may be for a single piece of equipment or for a pool of equipment. Under these conditions, it may be necessary to establish a depreciation reserve in the Plant Fund to accumulate funds over an extended period of time to be used for equipment replacement.

Depreciation is a legitimate expense that may be passed on to users of a service or purchasers of a product. Operations that service other accounts of the University are obligated to limit rates so as to essentially maintain a breakeven status, particularly if federal project accounts are charged for the service or product. This obligation creates a dilemma unique to university accounting.

For purposes of federal projects, internal finance charges applicable to loans are not allowable. External finance charges or finance charges included as a part of lease purchase agreements may be allowable. The principal portion of a loan repayment may be allowable for federal projects if the payments are not greater than comparable and reasonable depreciation rates. Questions relating to allowable charges to federal projects should be directed to the Contract and Grant Administration office.

Depreciation charged as an expense to operations may be an acceptable inclusion to the rate for federal project purposes. However, a rate for federal project purposes may not include both the depreciation expense and the cost of internal loan repayments or purchase lease payments. In other words, duplicate costs cannot be assessed against federal projects.

It is with this brief background that the following equipment depreciation policy has been developed.

II. Policy

Equipment depreciation may be charged to a revolving account under the following conditions:

  1. To be eligible under this policy, the following criteria will be used. Other amounts may be considered when deemed appropriate.
    1. For a single piece of equipment to be depreciated, the cost must exceed $50,000.
    2. For a pool of equipment to be depreciated, the total cost of the group must exceed $100,000 and each component of the group must exceed $5,000.
  2. The depreciation is to be calculated over the estimated useful life of the equipment. The rate of depreciation will generally be restricted to the straight-line method although the machine-hour or other similar methods may be appropriate. Any accelerated method will not be allowable.
  3. A revolving account operation may not depreciate assets if that unit is including debt service charges in lieu of depreciation charges in its rate structure.

    Consideration will be given for units to recover both depreciation and related debt service charges provided that the revenues are generated by predominantly non-University users.

  4. Depreciation may not be included in the rate structure unless the funds generated by the depreciation charge are set aside in a depreciation reserve. Depreciation will be a charge against the operating unit and a credit to a separate reserve account maintained in the Plant Fund. The purchase of replacement equipment will be charged against the reserve to the extent of the balance. Purchase of equipment which is not a replacement of the depreciable equipment will be charged to the operating account.
  5. Once the decision to depreciate equipment is made, an appropriate charge to the operating account will be made as scheduled, regardless of the status of the operating account. The transfer will be made at least quarterly. If an overdraft is created in the operating account as a result of the depreciation charge, adjustments to the operating account must be made to solve the problem other than by using the reserve account or adjusting the depreciation rate.
  6. In the event that an operation ceases business, the reserve will revert in accordance with provisions for the revolving account reversion.
  7. Any request to establish a depreciation reserve should be presented through appropriate administrative channels to the Controller for approval. The request needs the approval of a Dean or Vice President.
  8. An exception to any portion of the policy must be approved by the Vice President for Finance and Operations or designee.