GAQC Alert No. 250 

GAQC Alert
OMB's New Uniform Grant Guidance Subpart E and Other Key Related Information
May 14, 2014
GAQC Alert #250
In This Alert
Quick Refresher on the Uniform Grant Guidance
Effective Date
What's New in Subpart E
Key Communication Points With Clients
Preparing Audit Staff for Changes
Archive of Required Webcast Available
The GAQC annual required Webcast, GAQC Annual Update, is now available in a no-CPE archived format. Access the Webcast using the no-CPE option. However, if you wish to receive CPE for viewing the Webcast, look for a future announcement about various CPE rebroadcast dates that we will be offering.
Archived Event Available
If you missed the GAQC March Web Event titled, Don't be the last to Know - Fraud in the Governmental Environment, it is now available in a no-CPE archived format. Access the archived event.
Additional Resources
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HUD Information
Dear Center Members
In late December, we sent GAQC Alert #236 alerting you that the U.S. Office of Management and Budget (OMB) issued Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Grant Guidance or Guidance). Since that time, Governmental Audit Quality Center (GAQC) staff and Executive Committee members have been working to analyze the Guidance. This GAQC Alert is the second of several that is intended to inform you about important areas of focus in the Uniform Grant Guidance. The first alert in this series, GAQC Alert #241, focused primarily on the new sections of the Guidance covering acronyms and definitions; general provisions; and changes in the administrative requirements affecting both federal agencies and non-federal entities. This GAQC Alert focuses on the changes to the OMB Cost Principles. A future GAQC Alert will cover changes to the new single audit requirements. In this GAQC Alert you'll learn about:
  A quick refresher on the Uniform Grant Guidance;
  Effective date information;
  Summary of significant changes to the OMB Cost Principles;
  Key communication points with clients; and
  How to begin preparing your staff for these changes.
Quick Refresher on the Uniform Grant Guidance
The Uniform Grant Guidance supersedes and streamlines requirements from eight different grant circulars into one set of guidance contained in Title 2 of the Code of Federal Regulations (CFR) (see Subtitle A, Chapter II, Part 200) as follows:
  Subpart A, covered in GAQC Alert #241, contains acronyms and definitions used throughout the Guidance.
  Subpart B, covered in GAQC Alert #241, discusses general provisions including the purpose of the Guidance, its applicability, and effective date.
  Subpart C, covered in GAQC Alert #241, covers administrative requirements directed primarily at federal agencies including pre-award activities and requirements for the contents of federal awards.
  Subpart D, covered in GAQC Alert #241, includes many of the administrative requirements that will be areas of focus for your clients including procurement, internal control, and subrecipient monitoring.
  Subpart E, included in this GAQC Alert, includes reforms to the Cost Principles previously found in Circulars A-21, A-87, and A-122.
  Subpart F, to be included in a future GAQC Alert, includes the reforms to single audit requirements which were previously found in Circulars A-133 and A-50.
Effective Date
Non-federal entities (i.e., states, local governments, Indian tribes, institutions of higher education, and not-for-profit organizations) will need to implement the new administrative requirements (discussed in GAQC Alert #241) and Cost Principles for all new federal awards and to additional funding to existing awards (referred to as funding increments) made after December 26, 2014. Based on the number of questions we have received, we believe this effective date may be challenging both from an auditee and auditor perspective. For example, some non-federal entities may end up having funding subject to the old Cost Principles and the new Cost Principles within the same fiscal year. OMB issued additional clarifying guidance relating to the effective date for non-federal entities in the frequently asked questions document (FAQ) described below. That FAQ indicates that once the Uniform Grant Guidance goes into effect for non-federal entities, it will apply to awards or funding increments after that date. It will not retroactively change the terms and conditions for funds a non-federal entity has already received.

The bottom line is that the effective date for your clients to implement needed policy and procedure changes is fast approaching. Anecdotally, we are hearing that many non-federal entities are not as far along in this process as they need to be for a successful implementation. See the section below titled, "Key Communication Points With Clients," for information on how auditors can help educate clients in this area.
What's New in Subpart E
Subpart E (Sections 200.400 through 200.475 and Appendices III through IX) includes revisions to the Cost Principles that were previously found in Circulars A-21, A-87 and A-122. The goal in combining these three circulars was to provide consistency across entities in policies and eliminate duplicative language. It is important to note that the Cost Principles for hospitals are not included in the Uniform Grant Guidance. OMB has stated that they will be added at a later date.

Be sure to carefully read the full text of Subpart E as there are too many changes and details to fully describe in a summary. You should read the Cost Principles with your own clients in mind as some of the changes will likely change how you ultimately audit this information in the future. Additionally, implementation of the revised Cost Principles and other Uniform Grant Guidance is the responsibility of your clients. You should ensure that you do not perform nonaudit services related to implementation that would impair your independence.

We have included below a description of several of the more significant changes that are relevant to indirect costs and time and effort reporting, as well as several other changes that auditors need to be aware of. As noted above, this is not a complete list of changes and auditors are cautioned that they should read Subpart E in its entirety. To learn more about numerous other Cost Principles changes, refer to a useful tool that OMB issued titled, Uniform Guidance Cost Principles Text Comparison. This tool shows, in a side-by-side comparison, how the wording from OMB Circulars A-21, A-87, and A-122, compare to the new Guidance.
  Sections 200.412 through .415, Direct and Indirect (F & A) Costs. The most significant change to this section relates to the indirect cost rates. Overall, the Guidance will allow for more consistency as it will require federal agencies to accept a non-federal entity's negotiated indirect cost rate unless a statute or regulation allows for an exception or if the federal agency head approves an exception based on justification that has been publically documented. Non-federal entities will have the option to extend their negotiated rate for up to four years and can only use this one-time extension if there have been no major changes to their indirect costs and they receive approval from the cognizant agency responsible for their indirect cost rate. If an extension is approved, the non-federal entity may not request a review of the rate until the extension period is up. After the extension period ends, the entity will need to re-apply for a negotiated rate.

For non-federal entities that have never received a negotiated indirect cost rate, the Guidance allows the non-federal entity to charge a de minimis rate of 10% of modified total direct costs which may be used indefinitely. If elected, this methodology must be used consistently for all federal awards until such time as a non-federal entity chooses to negotiate for a rate, which the non-federal entity may apply to do at any time. The Guidance also requires that pass-through entities honor the negotiated indirect cost rates, negotiate a rate in accordance with federal guidelines, or provide a minimum flat rate.
  Section 200.430, Compensation – Personal Services (Time and Effort Reporting). The Guidance related to compensation is more principles based than the current requirements. For example, all of the illustrations contained in the existing Cost Principles have been removed from the Guidance. Further, the Guidance is less prescriptive on documentation and places more emphasis on internal controls over personnel-related costs. Because of the far-reaching changes in this area, auditors will need to focus on understanding how the move to broad principles will impact their clients and consider how this area will be audited in the future.

The changes made by OMB in this area were aimed at reducing the administrative burden of documenting time and effort. Included in the Guidance is a requirement that changes must be based on records that accurately reflect the work performed. These records must:
  • Be supported by a system of internal control which provides reasonable assurance that the charges are accurate, allowable, and properly allocated
  • Reasonably reflect the total activity for which the employee is compensated by the non-federal entity, not exceeding 100% of compensated activities
  • Comply with the established accounting policies and practices of the non-federal entity
  • Support the distribution of the employee's salary or wages among specific activities or cost objectives if the employee works on more than one federal award; a federal award and non-federal award; an indirect cost activity and a direct cost activity; two or more indirect activities which are allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity
  Support for payroll costs cannot be based on budget estimates made before the services are performed but the estimates may be used for interim accounting purposes in certain circumstances. For a non-federal entity where the records do not meet the standards described in this section, the federal government may require personnel activity reports, including prescribed certifications, or equivalent documentation that support the records.

The Guidance will allow entities to replace detailed time-and-effort reports with performance-based reporting (based on milestones). The appropriate agency will have to approve the use of such an approach, but entities could use performance-oriented metrics to account for multiple awards and their combined use.
  Section 200.400, Policy Guide. This section discusses the fundamental premises of the Cost Principles and makes several changes including recognizing the dual role of students for non-federal entities that educate and engage students in research and explicitly stating what has been the longstanding practice that non-federal entities are not permitted to keep profit unless expressly authorized by the terms and conditions of the award.
  Section 200.407, Prior Written Approval. Provides one place for non-federal entities to consult regarding the circumstances under which they should seek prior approval from the federal awarding agency.
  Section 200.415, Required Certifications. To assure that expenditures are proper and in accordance with the terms and conditions of the federal award and approved project budgets, this section clarifies that the annual and final fiscal reports or vouchers requesting payment under the agreements must include a certification that is signed by an official that can legally bind the organization.
  Section 200.419, Cost Accounting Standards and Disclosure Statement. Increases the threshold to $50 million from $25 million for filing a cost-accounting disclosure statement for approval by the funding agency.
  Section 200.428 Collections of improper payments. Provides guidance that will allow entities to keep amounts collected to cover expenses related to the collection effort to recover improper payments.
  Section 200.433. Contingency Provisions. This section addresses contingency provisions relating to large construction or other significant projects that include budget estimates of future costs. It has been enhanced to include specific guidance on accepted estimating methodology.
  Section 200.446, Idle Facilities and Idle Capacity. This section now allows for the costs of idle facilities when they are necessary to fluctuations in workload, such as those which may be typical of developing shared service arrangements.
  200.449, Interest. Non-federal entities whose fiscal year starts on or after January 1, 2016, may now be reimbursed for financing costs associated with patents and computer software.
  Appendices III through IX. The Cost Principles section is supplemented by Appendices III through IX that provide specific guidance on Indirect Costs Identification and Assignment, and Rate Determination for Institutions of Higher Education (Appendix III), Nonprofit Organizations (Appendix IV), State/Local Government and Indian Tribe Allocation Plans (Appendix V), Public Assistance Cost Allocation Plans (Appendix VI), States and Local Government and Indian Tribe Indirect Cost Proposals (Appendix VII) and a list of nonprofit organizations exempted from Subpart E (Appendix VIII).
Key Communication Points With Clients
As noted earlier, we are hearing anecdotally that many entities have yet to delve into the Uniform Grant Guidance, including the new Cost Principles. Time is of the essence for them to begin reviewing the Guidance and determining what they need to do to implement the Guidance in such a way to ensure compliance. As a client service, the following are key message points you and your staff should consider including in your discussions with clients during this upcoming year's audit season.

Ensure an Appropriate Understanding of Effective Dates. For your clients to implement the new Guidance, they need to understand the effective dates. For example, they need to be ready to implement the revised Cost Principles for all new federal awards and to additional funding to existing awards made after December 26, 2014. The bottom line message is that they should have started preparing already and, if not, they need to do so soon.

Obtain an Understanding of the New Requirements. There is no getting around reading the new requirements in order to become familiar with them. Additionally, an OMB tool titled, Uniform Guidance Cost Principles Text Comparison, is available to assist in understanding the changes in the Cost Principles.

Focus on Areas of Most Significance First. There are aspects of the Guidance that may be more pervasive to certain clients. You should advise your clients that these should be areas of focus from the outset. For example, within the Cost Principles, time and effort reporting and allocating indirect costs will likely be important areas for many clients. Additionally, if your clients pass significant funds through to subrecipients, the new subrecipient monitoring requirements might be another area to focus on (see GAQC Alert #241). There are certain to be other focus areas depending on the types of grants and awards of your individual clients.

Developing a Plan to Become Compliant. Due to the comprehensive nature of the Uniform Grant Guidance and the scope of the changes to the Cost Principles and other areas of importance, management should consider developing a comprehensive plan to formalize a strategy for how the entity is going to become compliant by the effective date(s). This plan could include matters such as determination of needed policy and procedure changes; internal controls that might need to be established or modified; action items that will be needed to implement needed changes; identification of who within the entity is responsible for each action item; and timing deadlines.

Senior Management Should Be Involved. The tone at the top is important as it relates to major changes like this. Therefore, senior management of the organization should be actively involved in overseeing the planning and implementation of the Guidance. Such involvement is also important so that senior management understands the risks to the organization if implementation is not adequately addressed and that such a lack of preparation could result in future audit findings.

Access Available Resources. OMB has various resources available to help auditees and auditors to understand the Guidance. Encourage your clients to access these resources on the OMB Final Policy page. Additionally, the Council on Financial Assistance Reform (COFAR) has posted an archive of a previous OMB Web event and the related presentation materials that will help clients understand the contents of the various Subparts and requirements contained in the Uniform Grant Guidance, including the information contained in Subpart E described above. Look for the heading, "Links to the Uniform Guidance 1-27-14 Training Webcast," on the COFAR Home Page to access the archive. Additionally, clients can go to the COFAR Mailing List link to register for the COFAR mailing list to receive future announcements and access a Frequently Asked Questions for New Uniform Guidance at 2 CFR 200 document.

Training is Important. Management also needs to consider how it will train staff that work in the grant function about the Uniform Grant Guidance, as well as any new entity-specific policies and procedures that are developed or modified. The COFAR Web event described in the previous section would be a good place to gain a broad overview. More detailed training should also be developed for client staff in areas of particular relevance.
Preparing Staff for Changes
We hope you found the information in this GAQC Alert useful. The GAQC will continue to analyze the Uniform Grant Guidance and communicate with you on the remaining Subpart (containing the audit requirements) and sections in a future GAQC Alert. While the audit requirements do not become effective for a while, in addition to educating clients, you should also be taking steps to begin preparing your staff for implementation. The following are a few tips.
  As it relates to the information described in this GAQC Alert, spend some time really focusing on the information contained in the Uniform Grant Guidance and consider discussing the main areas of emphasis with your staff.
  Access the information described in the previous section that describes the COFAR Web site and sign up for the COFAR Mailing List link.
  Provide staff with high-level training to ensure they are knowledgeable in the event clients have questions during the 2014 audit process. To assist with this endeavor, save Wednesday, June 18, 2014, from 1:00 PM – 3:00 PM (Eastern Time) for a GAQC Web event that will cover the 2014 Compliance Supplement and other important updates relating to the Uniform Grant Guidance. A registration alert will be coming soon.
  Establish internal policies for practice areas that will be affected now (e.g., ensuring that current responses to requests for proposal and audit contracts contemplate new requirements).
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