You may have heard this from us before: Your government award is not free money and, in truth, it’s not your money. It is very much the government’s money and your federal funding agency has specific expectations about how their money will be handled—including an SBIR-compliant accounting system
For this blog, we’ll talk about the NIH’s expectations and explore one of the ways you meet them—proper numbering when setting up your compliant accounting system using QuickBooks.
NIH grant management and reporting. The expectations are crystal clear.
When you get your award from the NIH you agree to the following:
Recipients are required to meet the standards and requirements for financial management systems set forth or referenced in 45 CFR 75.302, as applicable. The standards and requirements for a financial management system are essential to the grant relationship. NIH cannot support the research unless it has assurance that its funds will be used appropriately, adequate documentation of transactions will be maintained, and assets will be safeguarded.
Recipients must have in place accounting and internal control systems that provide for appropriate monitoring of grant accounts to ensure that obligations and expenditures are reasonable, allocable, and allowable. In addition, the systems must be able to identify large unobligated balances, accelerated expenditures, inappropriate cost transfers, and other inappropriate obligation and expenditure of funds. Recipients must notify NIH when problems are identified.
A recipient’s failure to establish adequate control systems constitutes a material violation of the terms of the award. Under these circumstances, NIH may include special conditions on awards or take any of the range of actions specified in Administrative Requirements-Enforcement Actions, as necessary and appropriate.
Setting up a FAR-compliant accounting system that meets the NIH’s expectations
When you read the section above, it may seem a bit intimidating, even impossible. Please know that a well-designed financial management system will satisfy the requirements above.
At the core of the accounting component of the financial management system is the chart of accounts, a numbered list of the accounts that comprise your company’s general ledger.
Your chart of accounts should:
- Be well-organized
- Allow for segmenting
- Control against redundancy
- Use a numbering system that allows you to group major categories of accounts together and allow for subdividing each group of accounts.
How to group major categories of accounts together using a numbering system
When you use a numbering system, you can organize your chart of accounts in groupings that replicate the cost pools as defined in your award.
For example, if you use a two-tier indirect cost rate structure with a fringe rate and an F&A rate, the chart of account groupings or cost pools should be organized as:
- Direct costs (5000 series accounts)
- Costs that apply to your project directly, such as direct labor, direct materials and direct consultants
- Fringe expenses (6000 series accounts)
- Costs that relate to employee fringe benefits, such as payroll taxes, health care insurance, vacation time, sick time and so on
- Indirect expenses (7000 series accounts)
- Costs that relate to your business, of which your project is a part, such as rent, administrative costs, utilities and so on
You must also segregate unallowable expenses from allowable expenses by setting up an account grouping for your unallowable expenses (9000 series accounts.)
The benefits of using a numbering system
As we mentioned in the beginning, this is the government’s money and it’s not free. You will have to show how you spent it and that you spent it properly. You also need to know where you stand with direct costs and indirect expenses on an ongoing basis and on each project. This known as “job cost.”
Using a numbering system to group major categories of accounts is the answer.
As long as you are attentive to proper coding of transactions, you’ll be able to easily verify you are charging the government for allowable expenses only. Plus, you can easily calculate your actual rates at any point in time.
Of course, if you have any questions about government grant accounting and your provisional or other rates, contact Ryan at [email protected] or 781.862.5170 ext. 2106.
If you want to learn more about FAR Part 31 Compliant Job Cost Reports, here’s another blog post you may find interesting.
About the Author:
Caroline Crosby, CPA, MST, Manager, is a tax specialist with over 29 years of experience working with regional and national accounting firms in tax and accounting, helping small privately held C and S Corporations.
She frequently works with small business clients to design, implement, automate and improve their FAR Part 31 accounting function, as well as provide year-end analysis to ensure complete and accurate financial reporting. Caroline is one of our go-to trainers for new clients that need to get their accounting systems up to speed quickly.