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Expenditures (Revised: Dec 16, 2013)
General principles
Overall, you should aim to achieve an accuracy of plus or minus one half of one
percent (0.5%) of net revenue in your financial statements. Please note that
whenever our recommendations conflict with mandated requirements or the
advice of your auditors then the latter should prevail.
The matching principle.
According to the matching principle, expenses are recognized when obligations
are incurred (usually when services rendered), and offset against recognized
revenues, which were generated from those expenses (related on the causeand-effect basis), no matter when invoices are received and cash is paid out.
Simply, the matching principle requires expenses to be reported in the same
period as the revenues that were earned as a result of the expenses. The
matching principle allows better evaluation of actual profitability and performance
(shows how much was spent to earn revenue), and reduces noise from timing
mismatch between when costs are incurred and when revenue is realized. By
way of example, if your CSB contracts for PRN nursing staff via a staffing
agency, then these expenditures should be recorded in the accounting period
when the nurses worked for you, even if the staffing agency only sends you their
invoice some months later.
Accruing expenditure examples.
The following is a non-exhaustive list of expenditure that you should accrue (if
material and applicable).
 Hourly paid workers
 Bi-weekly pay-roll
 Utilities
 Telephone accounts
 Credit card bills
 Fleet expenses – including ARI
 Lease, rent, loan or bond payments
 Pharmacy supplies
 Staffing agency fees
Asset Accounts. Assets are the resources owned by an agency which benefit its
future operations and are convertible to cash (cash itself is also an asset).
Assets generate recordable expenditures when they depreciate in value over
time.
The following are common asset accounts:
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Cash: In accounting, cash includes physical money such as bank notes
and coins as well as amount deposited in bank for current use.
Accounts Receivable: It includes the money owed to the business by
outsiders such as customers and other businesses. In most cases
accounts receivable arise from sales or services provided on credit. There
is no interest on accounts receivable.
Notes Receivable: Notes receivable includes the money owed to
business by outsiders for which there is a formal document for proof of
debt. In most cases Notes receivable also involve interest.
Prepaid Insurance: The cost of insurance premium paid in advance.
Inventory: These are goods and materials such as pharmacy inventory
held by the agency for purpose of sale.
Equipment: Equipment having life more than a year. Examples are
vehicles, office equipment, furniture, computers etc.
Buildings: Buildings owned by the business. Examples are office
building, clinic Building, building used as group home, etc.
Land: Includes cost of all the land owned by the business. Also includes
cost of the land with building on it.
It would be impossible to itemize every single asset of an agency, so it is
necessary to determine a threshold asset value above which a particular asset is
recorded and its depreciating value included in financial statements as an
expense. Currently, we recommend that that threshold be $5000
Depreciation expense.
The cost of acquiring an asset that meets the threshold of materiality (such as
buying a new vehicle) should be recorded as the decrease in asset value over
the period of time that the asset is used. Generally, the expense begins when
the asset is placed in service and the allocation of the cost (depreciation
expense) of assets to periods in which the assets are used (matching principle).
We recommend that the expense be based on the straight-line method; that is to
say, assume that the depreciation takes place at a constant rate over the life of
the asset.
Consult with your auditor on any previously expensed item as to whether or not
that item was capitalized in their audited financial statements.
When should you start booking the depreciation expense? One option is to start
in the first month after the asset is placed into service. Alternatively, you could
use the mid-year convention, which treats all assets acquired during the fiscal
year as being acquired exactly in the middle of the year. This means that only
half of the full-year depreciation is allowed in the first year, with the remaining
balance being deducted in the final year of the depreciation schedule, or the year
that the asset is sold. Whichever approach you adopt you should apply it
consistently.
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If the sale price on disposing of an asset materially exceeds the depreciated
value of that asset you will need to record a gain. Please consult with your
auditor for details of how to record such a gain.
Useful lives of depreciable items1.
The period over which the value of an asset depreciates depends on its useful
life. Obviously computers normally have shorter useable lives than do buildings.
The Tab\le below provides a list of the estimated useful lives of assets commonly
used by CSBs, and which should be used in calculating depreciation expenses.
Lives are given from new, so the remaining useful lives of assets acquired
second hand should adjusted for their age and / or condition on acquisition.
Values and useful lives should also be adjusted when assets are reconditioned
or renovated. As always, the decision whether or not to include information in
financial statements should be based on its materiality.
CATEGORY
USEFUL LIFE
(YEARS)
FROM NEW
BUILDINGS (LAND EXCLUDED)
Masonry building (concrete or steel frame and fire-resistive)
Non-Masonry building (wood and metal frame)
Pre-fabricated and modular buildings
40 +
20 - 25
25
FURNITURE AND FIXTURES
10-20
TELEPHONE SYSTEMS
10
MOBILE PHONES
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EQUIPMENT
Computers / IT
Office
Heating and cooling
Heavy equipment
Facility, kitchen and laundry
Lawn
Other
3-5
5
10-20
7-10
10
5
7
VEHICLES
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Taken from American Hospital Association: “Estimated useful lives of
depreciable hospital assets, revised 2013 edition”.
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SOFTWARE
3
CAPITAL IMPROVEMENTS
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Depreciation Expense should be recorded at least quarterly, calculated from the
Capitalized Cost of Asset minus Residual Value divided by its Useful Life:
(Capitalized cost – Residual Value)/Useful Life
Recording liabilities.
Current liabilities are often understood as all liabilities of the business that are to
be settled in cash within 12 months. These liabilities include accounts payable for
supplies and services, rent, etc. but also payments made when employees cash
out their leave balances (see section on accumulated leave balances below).
Long-term liabilities (aka fixed liabilities) are debts payable over a term
exceeding one year.
Examples of long-term liabilities are repayments on bonds, mortgage
loans, and other bank loans. Note: A short-term (bridging) loan payable
over a period of less than one year would be a current liability, not a longterm one.
The portion of long-term liabilities that must be paid in the coming 12month period are normally classified as current liabilities. For example, a
loan for which five payments of $10,000 are due, the first in the current
fiscal year, and the others over the following four years, would be 'split' into
two: the first $10,000 would be classified as a current liability, and the
remaining $40,000 as a long-term liability.
Accumulated leave balances (aka aid time off). For CSBs, one category of
liability would be accumulated leave balances that employees can cash out
on leaving the agency. We recommended that this liability be recorded
quarterly, using your historical data to estimate the current liability (the
amount you expect to pay out in the current year) and the long-term liability
(the current value of the accumulated leave balance which you will
eventually have to pay out in the future). If your agency allows employees
to “buy out” a portion of their accumulated leave balance for immediate
cash (say at 50%), this will tend to increase the portion of leave balances
to be recorded as a current liability, and correspondingly reduce the portion
to be recorded as long-term liability.
Direct costs are those expenditures incurred directly in providing a service;
examples include the salaries of the clinic staff who provided the service,
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the support staff at the clinic, the rent and utilities at the clinic, the cost of
furniture computers, photocopiers, vehicles, telephones and all the other
items directly involved in the clinic and its services.
Indirect costs are expenditures that the agency has to make to keep
running and maintain the infrastructure necessary for the clinics to operate
and clients to receive services. Many of these expenditures are described
as overheads or central administrative expenses. Examples include the
cost of the Executive Director and her / his office, the finance office and
billing department, the personnel department, information technology (IT
personnel, servers, networks), the quality improvement department,
maintenance department, shared vehicle fleet costs.
Overhead must be paid for on an ongoing basis, regardless of whether a
company is doing a high or low volume of business. Overhead expenses
can be fixed, meaning they are the same from month to month, or variable,
meaning they increase or decrease depending on the business's activity
level. They can also be semi-variable, meaning that some portion of the
expense will be incurred no matter what, and some portion depends on the
level of business activity. (Utility bills are an everyday example, where the
customer may pay a fixed standing charge plus a variable charge based
on usage.) Overhead can also be applied, meaning that it can be allocated
to a specific project or department, or general, meaning that it applies to
the company's operations as a whole. In the latter case it is necessary to
have some consistent formula for sharing these general overhead costs
across the various budget centers within an organization.
To be able to estimate accurately the cost of providing services at each
location you will need some sort of formula for sharing (allocating) these
central overhead costs across all the various programs / clinics delivering
services. There is no one correct formula, but you should be aware that
the formula you choose may create incentives or disincentives for program
managers who are trying to manage their costs. The following are some
examples:
 Overhead allocation based on payroll. With this formula, programs
with higher total payroll costs pick up more of the central
administrative expense. This formula tends to favor programs where
services are delivered by lower paid paraprofessionals, and given
that under fee for service such programs tend to receive less
generous reimbursement rates, the formula may give a fairer
indication of the costs of that program.
 Overhead allocation based on employee headcount: This formula
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favors programs with smaller numbers of higher paid practitioners
(such as individual therapy), and could be defended in that the cost
of supporting employees (IT support, HR and QI functions) is
independent of the salary cost of those employees.
 Overhead allocation based on the direct costs of the program. This
formula will include the payroll costs incurred by a program, but will
also take account of other direct costs such as travel, transportation,
accommodation and utilities. This formula will tend to favor
programs that keep the totality of their direct costs low.
Some decisions will probably have to be taken over the costs of senior
management who have responsibility for a specific set of programs, but
also a more general responsibility for senior management of the agency as
a whole (e.g., Directors for Developmental Disability and Mental Health
and Addictive Disease Programs respectively). One solution is to allocate
a set percentage of their costs to central administration (say 25%) and
allocate the balance of their cost (75%) across the programs they directly
supervise (perhaps using payroll cost or headcount as a formula).
We recommend that you adopt a consistent methodology for overhead
allocation, and share it with your auditor.