Clarifying Definitions

Equipment is any article of tangible, nonexpendable, personal property having a useful life of more than one year and an acquisition cost of $5,000 or more per unit (45 CFR 74.2 or 45 CFR 92.3). This dollar figure is called the capitalization level or threshold. Purchases of equipment above the capitalization threshold are often referred to as capital expenditures or capital equipment items. All items with an acquisition cost per unit less than the capitalization threshold are considered supplies (unless the terms and conditions of the Federal award specifically establishes a lower amount). In the case of nonprofit grantee agency may use a lower capitalization level, provided it uses this limit consistently on an organization-wide basis for the purpose of preparing the agency's financial statement (45 CFR 74.34). Agencies governed by 45 CFR Part 92 (State, Local, and Tribal governments grantees/organizations) may use their own definition of equipment provided that the definition at least includes all equipment as defined above (45 CFR 92.3). If a grantee agency chooses to define equipment using a lower threshold, such as $1,000, then an item purchased for $1,800 will appear as supplies for Federal purposes but as equipment in the grantee agency's records. Moreover, this lower threshold should prevail when guiding the grantee agency in its administration of equipment.

Federal regulations also distinguish between special-purpose equipment and general-purpose equipment. However, in almost all cases, equipment purchased with Head Start funds is considered general-purpose equipment because special-purpose equipment means equipment that is used only for research, medical or scientific purposes.

The acquisition cost per unit of equipment equals the invoice purchase cost of that item minus any discounts. The unit cost may also include the cost of modifications, attachments, accessories or auxiliary apparatus that are needed to make the item of equipment usable for its acquired purpose. Although Federal regulations state that other ancillary charges, such as taxes, duty, in-transit insurance, freight, and installation can be included or excluded based on the agency's established written accounting policies and procedures (2 CFR 225, Appendix B (15)(B)(1)), these charges may need to be included in order to be in compliance with Generally Accepted Accounting Principles (GAAP). GAAP requires that the cost of putting a fixed asset into use includes all costs associated with the purchase, including freight, tax and installation.

Narrative

Equipment purchases and prior approval for equipment purchases

Capital expenditures for general-purpose equipment ($5,000 or more) are unallowable as a direct cost except with the prior approval of the Federal grant awarding office (2 CFR 230, Appendix B(15)(B)(1)). For equipment purchases specifically included in the grantee agency's Financial Assistance Award (FAA), prior approval is not necessary. Although grantees may transfer funds between object class categories without prior approval (45 CFR 74.25 or 45 CFR 92.30), if the transferred funds will be used to buy equipment with an acquisition cost of $5,000 or more per unit, the agency must first obtain prior approval.

Prior approval consists of obtaining written permission by an authorized grants office official in advance of an act that would result in the obligation or expenditure of funds, where such approval is required. As provided in 45 CFR 74.25(k) and 45 CFR 92.30(a)(1), all approval notifications must be in writing and signed either by the Grants Officer, the ACF Regional Administrator or the ACF Assistant Secretary. In situations where prior approval by the Federal grant awarding office is not needed, grantee agencies should still comply with their own internal approval process for equipment purchases.

Equipment should not be purchased simply to use an unobligated balance remaining at the end of the budget period. Prior approval for equipment purchases is required from the Federal grant awarding office regardless of when in the budget period the purchase is considered. However, all charges to the grant must be allowable and allocable as a direct cost to the grant, and be reasonable and necessary for the conduct of grant activities.

Although equipment may be purchased with prior approval any time during the budget period, sound budget and financial management practices will eliminate the need to rush purchases at the end of the year. Also, as part of routine audit procedures, auditors may examine the level of spending during the last quarter to establish whether the grant was sufficiently managed from a financial standpoint throughout the year.

Ownership or transfer of ownership

The title to equipment acquired with Federal funds vests in the organization that received the Federal assistance award directly from the Federal awarding agency to carry out program activities, subject to certain restrictions (45 CFR 74.34(a) or 45 CFR 92.32(a)). When a grantee agency's grant budget includes equipment, title vests in the grantee agency. Similarly, when a subgrantee's budget includes equipment, title vests in the subgrantee. Determining who has title to equipment therefore depends on whose grant or subgrant account was used to acquire it.

The Federal awarding agency has the right to require that equipment (including title) purchased with grant funds be transferred to the Federal government or an eligible third party named by the Federal awarding office (45 CFR 74.34(h) or 45 CFR 92.32(g)).

Insuring equipment

Grant recipients are expected to provide the same insurance coverage for equipment acquired with Head Start funds as for other equipment bought using the agency's own funds. The cost of insuring equipment is an allowable expense. Insurance costs may be allocated as a direct cost if the cost can be associated with a direct program expense (e.g., insurance for Head Start buses), or it may be included in the organization's indirect cost base.

Control system safeguarding equipment

For Federally owned equipment, or equipment acquired with Federal funds, grantee agencies must ensure that (45 CFR 74.34(f) or 45 CFR 92.32(d)):

• Equipment records are maintained accurately.
• Equipment owned by the government is identified and appropriately described.
• A physical inventory of equipment is taken and reconciled with equipment records at least every two years.
• An internal control system is maintained to insure safeguards to prevent loss, damage, or theft of equipment.
• Adequate maintenance procedures are in place to keep the equipment in good working order.

To ensure these requirements are met, grant recipients should maintain an equipment management system. The foundation of such a system may be a computerized database of all equipment for which the grantee agency has inventory and reporting responsibility. The record for each item of equipment in this system must contain the following information: (45 CFR 74.34(f)(1) or 45 CFR 92.32(d)(1))

• Identification: Description, model number, and manufacturer's serial number or other identification number.
• Location: Location and condition of the equipment, and the date the information was reported.
• Award: Source (sponsoring agency), including award number, whether title vests in the grantee or the Federal government, and the percentage of Federal participation in the cost of the equipment.
• Acquisition, use and inventory: Date acquired or received, unit acquisition cost, and percentage of Federal participation in the cost.
• Disposal: Date of disposal, reason, sales price, and method used to determine current fair market price (where the grantee agency compensates the ACF awarding agency for its share)

An agency's equipment management system also may record financial accounting data, such as useful life and book value.

At least once every two years, a physical inventory of all equipment must be conducted. While taking the inventory, the continued need for the equipment should be verified. Items in the biennial inventory should be compared to those shown in the agency's accounting records (or equipment management database). To facilitate this process, the grantee agency should reconcile information in the equipment management system with the general ledger for all equipment acquisitions. Any differences between the inventory and the accounting/equipment database should be investigated.

Grantee agencies should have an established mechanism for reporting and investigating damaged, lost or stolen equipment. If damage, loss or theft occurs despite the fact that the grantee has the required control system in place, there will be no obligation to the Federal awarding agency for the equipment, unless the grantee agency receives compensation for the damage, loss, or theft from insurance or some other source. If the grantee agency is compensated for the damage, loss or theft, but does not replace the equipment for use by the program, the regulations regarding sale of equipment apply (45 CFR 74.34(f)(6) or 45 CFR 92.32(e)).

Nonprofit grantee agencies have an obligation to investigate and fully document any loss, damage or theft of equipment. If the government owned the equipment, the Federal grant awarding office should be notified promptly (45 CFR 74.34(f)(4)). A State will manage equipment acquired under a grant by the State in accordance with State laws and procedures (45 CFR 92.32(b)). Other grantees subject to 45 CFR Part 92 shall investigate any loss, damage or theft of equipment (45 CFR 92.32(d)(3)).

Use of equipment

Grant recipients hold title and shall use the equipment in the program as long as needed, whether or not the program continues to be supported by Federal funds. However, the grantee must not encumber the property without approval of the Federal grant awarding agency.

Grant recipients may use equipment acquired with Head Start funds to provide services to non-Federal organizations. However, for as long as the Federal government retains an interest in the equipment, grantee agencies are specifically prohibited from doing so for a fee that is less than private companies charge for equivalent services (unless specifically authorized by Federal statute) (45 CFR 74.34(b)(1) or 45 CFR 92.32(c)(3)). Any such user charges will accrue as program income and must be reported as such on the Financial Status Report (SF 269) (45 CFR 74.24 or 45 CFR 92.25).

When no longer needed for the original program, grantee agencies shall use the equipment in connection with its other federally sponsored activities, if any, in the following priority order:

1. Programs, projects or activities sponsored by the HHS awarding agency.
2. Programs, projects or activities sponsored by other HHS awarding agencies.
3. Programs, projects or activities sponsored by other Federal agencies.

If the grantee agency no longer needs the equipment for the above purposes, it may retain the equipment for other uses provided that compensation is made to the original Federal awarding agency or its successor (see the section below on Equipment disposal or sale).

Equipment repair or replacement

Grantee agencies are expected to care for the equipment in their custody and keep the equipment in good working order. Basic maintenance procedures include ensuring that warranty cards are returned and that regular or periodic maintenance is scheduled and conducted. Records should be kept of any deficiencies discovered as a result of inspections, as well as any maintenance actions performed. Repair costs may not be included as an equipment cost (or treated as a capital expenditure) unless (2 CFR 230, Appendix B(27) or 2 CFR 225, Appendix B(25)),

• The repair will appreciably prolong the item's intended life.
• The repair adds to the permanent value of the item.

When acquiring replacement equipment, grantee agencies, with the written approval of the Federal awarding agency, may use the equipment that will be replaced as trade-in, or sell the equipment, and use the proceeds to offset the costs of the replacement equipment (45 CFR 74.34(d) or 45 CFR 92.32(c)(4)). When trading-in or selling equipment, the grant recipient should provide for competition to the extent practicable in order to obtain the maximum possible proceeds from the trade-in or re-sale (45 CFR 74.34(f)(6) or 45 CFR 92.32(e)).

Equipment disposal or sale

If a grant recipient has no further need for equipment with a current per unit fair market value of $5,000 or more, nonprofit agencies must request disposition instructions from the Federal grant awarding office (45 CFR 74.34(g)). The awarding agency must issue such instructions no later than 120 days after receiving the agency's request. There is no requirement under 45 CFR Part 74 for items of equipment with a current market value below $5,000. For agencies subject to 45 CFR Part 92 (grants awarded to State, local, and Indian tribal governments), items of equipment with a current per unit fair market value of less than $5,000 may be retained, sold or otherwise disposed of with no further obligations to the awarding agency (45 CFR 92.32(e)(1)). Among these same agencies, items of equipment with a current per unit fair market value in excess of $5,000 may be retained or sold. However, in these circumstances, the awarding agency has the right to an amount equal to the current market value or proceeds from the sale multiplied by the awarding agency's share of the equipment (45 CFR 92.32(e)(2)).

The records for equipment acquired with Federal funds should be retained for three years after final disposal 45 CFR 74.53(b)(2) or 45 CFR 92.42(c)(2)).

The scenarios below illustrate how grant recipients in nonprofit organizations will be reimbursed in different situations for costs associated with the disposal of equipment that is no longer needed 45 CFR 74.34(g)).

Scenario 1

The nonprofit grantee agency is instructed to sell the equipment; or The nonprofit grantee agency does not receive disposition instructions within 120 calendar days of the request:

• Establish the proceeds from the sale.
• Multiply the sale proceeds by the percentage of the Federal share of the original cost. The agency may retain the lower of either:
  1. $500, or
  2. 10 percent of the sale proceeds (i.e., the proceeds due to the Federal awarding agency)

Scenario 2

The nonprofit grantee agency is instructed to ship the equipment elsewhere:

The agency may retain the current fair market value of the equipment multiplied by your agency's percentage share of the original cost plus reasonable shipping or interim storage costs

Scenario 3

The nonprofit grantee agency is instructed to otherwise dispose of the equipment (e.g., have it hauled away):

The agency will be reimbursed for reasonable costs incurred in disposing of the equipment.

Audit Requirements

In the area of equipment management, an annual external audit may have the following objectives:

• To obtain an understanding of the agency's internal control, and to test its internal control.
• To determine whether the agency maintains proper records for equipment and adequately safeguards and maintains equipment.
• To determine whether the disposition or encumbrance of any equipment acquired under Federal awards is in accordance with Federal requirements and if the awarding agency was compensated for its share of any equipment sold or converted to non-Federal use.

Audit (testing) procedures

To determine whether the above objectives are being achieved, the following audit procedures most likely will be used.

Internal control

Proper internal control procedures provide an assurance that grant awards are adequately managed and should reduce deficiencies found in audits of the organization. An auditor may test internal controls in the equipment management area in the following ways:

• By performing procedures to obtain an understanding of internal control.
• By planning a test of internal control and by performing the test as planned.
• By considering the results of the testing of internal control to determine the nature, timing, and extent of substantive tests of compliance.

An auditor may examine compliance in inventory management and disposition of equipment and, in doing so, may adopt procedures similar to the following:

Inventory management of equipment

• Inquiring whether a physical inventory of equipment acquired under Federal awards was taken in the last two years and testing whether differences between the physical inventory and equipment records were resolved.
• Identifying equipment acquired under Federal awards during the audit period, and tracing selected purchases to the property records to verify that the property records contain the required information about the equipment.
• Selecting a sample of equipment identified as acquired under Federal awards from the property records and physically inspecting the equipment, including whether the equipment is appropriately safeguarded and maintained.

Dispositions of equipment

• Determining the amount of equipment dispositions for the audit period and performing procedures to verify that dispositions were properly classified between equipment acquired under Federal awards and equipment otherwise acquired.
• For dispositions of equipment acquired under Federal awards, performing procedures to verify that the dispositions were properly reflected in the property records.
• For dispositions of equipment acquired under Federal awards with a current market value in excess of $5,000, testing whether the awarding agency was reimbursed for the appropriate Federal share.

Related Links

Federal requirements related to equipment for nonprofit organizations

Federal requirements related to equipment for State, local and tribal governments

Related Program Instructions, Information Memorandums, and Departmental Appeals Board Decisions