Example No. 1. The provider keeps its records on a calendar year basis. The current year's actual allowable cost and the actual operating cost for 1965 do not include any actual depreciation or rentals on depreciable-type assets. The current year's allowable cost also does not include any allowance in lieu of specific recognition of other costs or return on equity capital.
Year 1966
Current year's allowable cost | $1,100,000 |
Operating cost for 19651 | $1,000,000 |
Percent for determining the allowance | 5 |
Allowance | $50,000 |
1 1965 operating cost was used in computing the allowance for depreciation based on a percentage of operating costs because it was lower than 1966 allowable cost.
Year 1967
Current year's allowable cost | $1,200,000 |
Operating cost for 19651 | $1,000,000 |
Percent for determining the allowance2 | 5 |
Allowance | $50,000 |
1 1965 Operating cost was used in computing the allowance for depreciation based on a percentage of operating costs because it was lower than 1967 allowable cost.
2 Since the reporting period began during the year 1966-1967 (July 1, 1966-June 30, 1967) 5 percent is the percentage to be used.
Year 1968
Operating cost for 1965 | $1,000,000 |
Current year's allowable cost1 | $900,000 |
Percent for determining the allowance2 | 41/2 |
Allowance | $40,500 |
1 The current year's allowable cost was used in computing the allowance for depreciation based on percentage of operating costs because it was lower than 1965 operating cost.
2 Since the reporting period began during the year 1967-1968 (July 1, 1967-June 30, 1968) 41/2 percent is the percentage to be used.
Example No. 2. When the provider pays rent for depreciable-type assets rented prior to 1966, the estimated depreciation on such assets must be deducted from the allowance. The following illustration demonstrates how the allowance is determined.
The provider keeps its records on a calendar year basis. The current year's actual allowable cost and the actual operating cost for 1965 did not include any actual depreciation, allowance in lieu of specific recognition of other costs, or return on equity capital. However, such costs have been adjusted to exclude estimated depreciation on rented depreciable-type assets.
Year 1966
Adjusted current year's allowable cost | $1,100,000 |
Adjusted operating cost for 19651 | $1,000,000 |
Percent for determining the allowance | 5 |
Allowance | $50,000 |
Less estimated depreciation for depreciable-type assets rented prior to 1966 on which rental is paid in 1966 | $3,000 |
Adjusted allowance | $47,000 |
1 1965 operating cost was used in computing the allowance for depreciation based on a percentage of operating costs because it was lower than 1966 allowable cost.
Example No. 1. The following illustration demonstrates how this limitation would be determined.
Year 1966
[The provider keeps its records on a calendar year basis. The current year's actual allowable cost and the actual operating cost for 1965 have been adjusted to exclude actual depreciation, the estimated depreciation on rented depreciable-type assets, allowance in lieu of specific recognition of other costs, and return on equity capital.]
Adjusted operating cost for 1965 | $1,000,000 |
Percent for determining the allowance | 5 |
In 1966 assets were acquired which produce a straight-line depreciation of | $18,000 |
Estimated depreciation on assets rented in 1966 | $2,000 |
Adjusted allowable operating cost for 1966 | $1,100,000 |
CALCULATION OF ALLOWANCE FOR DEPRECIATION BASED ON A PERCENTAGE OF OPERATING COSTS | |
Gross allowance | |
5 percent times adjusted 1965 operating costs ($1,000,000) | $50,000 |
Estimated depreciation on assets rented in 1966 | 2,000 |
Straight-line depreciation on post-1965 assets | 18,000 |
Total | 70,000 |
6 percent of adjusted 1966 allowable operating cost | 66,000 |
Reduction in allowance | 4,000 |
Allowance | 50,000 |
Reduction | 4,000 |
Adjusted allowance | 46,000 |
Total depreciation allowance for 1966 ($18,000 actual depreciation plus $46,000 allowance based on operating cost) | 64,000 |
Assume in this illustration that the provider had elected to use the declining balance method in computing its allowable depreciation and the rental expense for depreciable-type assets was $3,500. In that case, it would include in its 1966 allowable cost not only the $46,000 allowance based on operating costs but also $36,000 (in this instance 2 * straight-line rate is used) in actual depreciation and the rental expense of $3,500-or a total of $85,500 covering all its depreciable assets.
42 C.F.R. §413.139