New Guidance for Nonprofits on Uniform Administrative Requirements, Cost Principles, and Audit Requirement for Federal Awards

The Office of Management and Budget (OMB) issued an omnibus OMB Circular – colloquially referred to as the “Supercircular” – to streamline the Federal government’s guidance on administrative requirements, cost principles, and audit requirements for Federal awards.  The objective of this reform is to reduce both administrative burden and risk of waste, fraud, and abuse while improving program outcomes.   Characteristics of this reform include:

• Eliminating duplicative and conflicting provisions of guidance that were written separately
• Focusing on performance over compliance to provide accountability for Federal funds
• Encouraging efficient use of information technology and shared services
• Providing for consistent and transparent treatment of costs
• Limiting allowable costs to make best use of Federal resource
• Setting standard business processes using data definitions
• Encouraging non-Federal entities to have family-friendly policies
• Strengthening oversight
• Targeting audit requirements on risk of waste, fraud, and abuse

The Supercircular imposes common requirements for both administrative and accounting functions and these are outlined in three main categories:

• Reforms to Administrative Requirement (Circulars A-89, A-102 and A-110) – The Supercircular supersedes three circulars previously defined the administrative requirements and provides across-the-board deadlines and thresholds for notice requirements, small purchase limits and the like, as well as requiring new quality control and efficiency measures.  The administrative requirements are included in the Subparts A through E of the Supercircular.
• Reforms to Cost Principles (Circulars A-21, A-87 and A-122) – The Supercircular consolidates the cost principles in OMB Circulars A-21, A-87 and A-122.   As it relates to selected items of cost, the final guidance provides recipients more opportunity for cost recovery.  For example, the guidance allows recipients to:
  • Be reimbursed for the effort to collect improper payment recoveries (when time elapses between the collection of funds from entities and their expenditure) or related activities.   As such, the Federal recipient may consider these either indirect or direct costs.
  • Include the cost of certain computing devices as allowable direct cost supplies.  This means entities can charge and treat computing devices not considered depreciable assets based on their capitalization policy as direct costs.  Entities must follow practices for determining allocability of direct versus indirect costs to Federal awards for computing devices.
  • Include the cost increases from fluctuations in exchange rates as allowable costs subject to the availability of funds.
  • Charge Federal awards for the cost of agreed upon procedure engagements for subrecipient monitoring.

The new circular addresses cost principles in Subpart E, Appendix III for Educational Institutions and Appendix IV for Nonprofit Organizations.   The most profound change for educational institutions and nonprofit organizations will be the options available for calculating and negotiating indirect rates for non-Federal entities. The Supercircular introduces several methods for streamlining the process and reduces the burden for the agency and also notes that award levels for Federal awards will not be adjusted throughout the “life” of the award due to changes in negotiated rates.

• Reforms to Audit Requirements (Circulars A-133 and A-50) – Generally, the basic structure of single audit process remain unchanged. The most favorable requirement change is an increase to $750,000 from $500,000 in the dollar threshold for the A-133 audit.  Organizations that fall below the new threshold should also be aware of the strengthened level of oversight in the reform, including pre-award review of risks, standards for financial and program management, subrecipient monitoring and remedies for noncompliance.  The audit requirements are included in the Subpart F of the Supercircular.

Effective and Applicability Dates
This final guidance is effective and applicable on December 26, 2013, for Federal agencies and will be effective on December 26, 2014, for non-Federal entities.  Subpart F –audit requirements are effective for fiscal years beginning on or after January 1, 2015. Early implementation is not allowed.  An auditee that conducts a biennial audit and has a biennial period beginning before January 1, 2015, should apply the provisions of OMB Circular A-133.
Please contact your AAF Partner or Robin Kelley, Partner, at 774.512.4011 – rkelley@aafcpa.com if you have any questions.