Depreciation

1. General principles. Ratesetting principles require that payment for services must include depreciation on all depreciable type assets that are used to provide necessary services. This includes assets that may have been fully or partially depreciated on the books of the facility, but are in use at the time the facility enters the program. If any depreciated personal property asset is sold or disposed of for an amount different than its undepreciated value, the difference represents an incorrect allocation of the cost of the asset to the facility and the facility shall include it as a gain or loss on the requested financial record. 2. Depreciation methods. a. A facility shall use the straight-line method of depreciation. All accelerated methods of depreciation, including depreciation options made available for income tax purposes, such as those offered under the asset depreciation range system, are unacceptable. The facility shall apply the method and procedure for computing depreciation on a basis consistent from year to year, and shall maintain detailed schedules of individual assets. If the books of account reflect depreciation different from that submitted on the requested financial records, the facility shall prepare a reconciliation. b. A facility shall use a composite useful life of ten years for all equipment and land improvements and four years for vehicles. A facility shall depreciate buildings and improvements to buildings over the length of the mortgage or a minimum of twenty-five years, whichever is greater. 3. Acquisitions. a. If a depreciable asset has, at the time of its acquisition, a historical cost of at least five thousand dollars for each item, the facility shall capitalize and depreciate the cost over the estimated useful life of the asset, except as provided in subsection 3 of section 75-03-15-13. A facility shall capitalize costs, including architectural, consulting, legal fees, and interest, incurred during the construction of an asset, as a part of the cost of the asset. b. A facility shall capitalize and depreciate repair or maintenance costs in excess of five thousand dollars per project on equipment or buildings over the remaining useful life of the equipment or building or one-half of the original estimated useful life, whichever is greater. 4. Recordkeeping. Proper records must provide accountability for the fixed assets and must also provide adequate means by which depreciation may be computed and established as an allowable child-related cost. Tagging of major equipment items is not mandatory, but alternate records must exist to satisfy audit verification of the existence and location of the assets. 5. Donated assets. For purposes of this chapter, a facility may record and depreciate donated assets based on their fair market value. If the facility's records do not contain the fair market value of the donated asset as of the date of the donation, the donated item must be appraised. The appraisal must be performed by a recognized appraisal expert and must be accepted for depreciation purposes. The facility may elect to forego depreciation on donated assets, negating the need for a fair market value determination. 6. Basis for depreciation. a. Determination of the cost basis of a facility and its depreciable assets, which have not been involved in any programs which are funded in whole or in part by the department, depends on whether or not the transaction is a bona fide sale. If the issue arises, the purchaser has the burden of proving that the transaction was a bona fide sale. Purchases where the buyer and seller are related organizations are not bona fide. (1) If the sale is bona fide, the cost basis must be the cost to the buyer. (2) If the sale is not bona fide, the cost basis must be the seller's cost basis less accumulated depreciation. b. The cost basis of a facility, including depreciable assets which are purchased as an ongoing operation, must be the seller's cost basis less accumulated depreciation. c. The cost basis of a facility, including depreciable assets which have been used in any programs which are funded in whole or in part by the department, must be the cost basis used by the other program less accumulated depreciation. d. Sale and leaseback transactions must be considered a related party transaction. The cost basis of a facility, including depreciable assets purchased and subsequently leased to a provider who operates the facility, must be the seller's cost basis less accumulated depreciation.