Depreciation

1. Ratesetting principles require that payment for services should 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 center, but are in use at the time the center enters the program. The useful lives of such assets are considered not to have ended and depreciation calculated on the revised extended useful life is allowable. Likewise, a depreciation allowance is permitted on assets that are used in a normal standby or emergency capacity. 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 center and must be included as a gain or loss on the cost report. 2. Depreciation methods. a. The straight-line method of depreciation must be used. 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 method and procedure for computing depreciation must be applied on a basis consistent from year to year, and detailed schedules of individual assets must be maintained. If the books of account reflect depreciation different than that submitted on the cost report, a reconciliation must be prepared by the center. b. Centers must use a composite useful life of ten years for all equipment and land improvements, and four years for vehicles. Buildings and improvements to buildings are to be depreciated 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 historical cost of at least one thousand dollars for each item, its cost must be capitalized and depreciated over the estimated useful life of the asset except as provided for in subsection 3 of section 75-03-20-11. Costs, such as architectural, consulting and legal fees, and interest, incurred during the construction of an asset must be capitalized as a part of the cost of the asset. b. All repair or maintenance costs in excess of five thousand dollars per project on equipment or buildings must be capitalized and depreciated over the remaining useful life of the equipment or building or one-half of the original estimated useful life, whichever is greater. 4. Proper records must provide accountability for the fixed assets and also provide adequate means by which depreciation can be computed and established as an allowable client-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. For purposes of this chapter, donated assets may be recorded and depreciated based on their fair market value. In the case where the center's records do not contain the fair market value of the donated asset as of the date of the donation, an appraisal must be made. The appraisal will be made by a recognized appraisal expert and will be accepted for depreciation purposes. The center may elect to forego depreciation on donated assets thereby negating the need for a fair market value determination. 6. Basis for depreciation. a. Determination of the cost basis of a center 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. Should the issue arise, 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 will be the actual cost of the buyer. (2) If the sale is not bona fide, the cost basis will be the seller's cost basis less accumulated depreciation. b. Cost basis of a center and its depreciable assets which are purchased as an ongoing operation will be the seller's cost basis less accumulated depreciation. c. Cost basis of a center and its depreciable assets which have been used in any programs which are funded in whole or in part by the department will be the cost basis used by the other program less accumulated depreciation. d. Sale and leaseback transactions will be considered a related party transaction. The cost basis of a center and its depreciable assets purchased and subsequently leased to a provider who will operate the center will be the seller's cost basis less accumulated depreciation.