Auxiliary enterprise activities are self-supporting activities which provide non-instructional support primarily to individual students, faculty and staff upon payment of a specific user charge or fee for the goods or services provided, using an approved rate methodology. Although the operation of an auxiliary enterprise is supplemental to the primary educational functions of the University, such enterprises are important to the overall operation of the University. Accordingly, auxiliary enterprise activities will be conducted primarily for the convenience of students, faculty and staff and may only incidentally serve the general public and campus departments.
A bond-indentured auxiliary enterprise project is constructed or renovated using external financing through the sale of revenue bonds. The revenue stream from the activity will be used to pay the bonds, hence the name revenue bonds. In addition to University policy, bond indentured activities are subject to requirements of the bond covenant.
Prior to the establishment of an auxiliary enterprise activity, the need for such goods or services must be identified which, if provided at a reasonable cost and at a convenient location, would enhance and support the University’s instructional, research or public service programs. There must be a regular and continuing demand by students, faculty or staff for the goods or services to be provided by the auxiliary enterprise activities. The demand must be significant, both in dollar amounts and number of transactions. Goods or services will not be sold to the general public unless the goods or services are unique or sales will not compete with commercial sources. If it is anticipated that the enterprise may generate unrelated business income, i.e., related to the sale of goods and services to the general public, the potential tax liability also must be considered in planning and budgeting for the activity.
A rate proposal including the methodology used must be submitted and approved at the proper levels prior to the start date of a new rate or activity. However, in some instances the proposal may be retroactively approved to a date not preceding the beginning of the fiscal year. Certain activities, such as the University of California Housing System, require approvals by campus committees. A proposal to change rates or rate methodology of established activities, or a proposal to add rates for new goods or services of established activities must follow the same procedures as for establishing a new activity.
Costs incurred and assigned to the activity must be essential to the purpose for which the activity was established. Costs are expenditures, benefiting a single period, that are necessary to conduct normal business. Prices are to be established at a level that will provide revenue to cover all direct costs and all indirect costs, including consideration of prior year losses or excess income. Also, prices may be set at a level sufficient to accumulate funds (net worth) required to meet working capital and capital expansion needs such as equipment, structures and renovations. In establishing the pricing structure, the activity should take into account any non-operating revenues (subsidy appropriations) which may be available to cover costs. At the discretion of the activity’s vice-chancellor, unrestricted funds may be used to subsidize an auxiliary enterprise activity. For bond indentured auxiliary enterprises, prices must also cover debt service and other bond indenture requirements. Rates of activities will be stated in measurable units of goods or services and a separate rate will be established for each class of goods or services provided. Depreciation costs are to be included as a cost element for rate determination purposes. All auxiliary enterprise activities must be able to provide a schedule of rates and prices.
Direct costs are those costs that can be identified specifically with a particular service or product, or that can be easily assigned with a high degree of accuracy. Examples of goods or services that may be provided and directly charged to auxiliary enterprise activities include utilities, custodial services, building maintenance, hazardous waste removal, telecommunications and data services.
Indirect costs, or overhead, are those costs that cannot be easily or accurately assigned to a particular service or product or that are incurred for a common or joint objective. Examples include executive management from the Chancellor’s office, Resource Management & Planning and University Relations; staff and faculty resource offices such as the cross cultural center, women’s center, LGBTRO, and Office of the Ombuds and central business offices such as accounting, payroll, human resources, university communications and planning. The campus currently recovers indirect costs through an administrative overhead rate. For new activities, the classification process will determine the appropriate overhead rate, if any. If an external entity prohibits payments for administrative overhead, the activity must produce documentation that demonstrates this exemption.
Goods sold to the general public may be subject to California sales tax. Unrelated business income is a type of income resulting from sales of goods or services to individuals or non-University entities. If sales are not substantially related to University educational or research purposes, proceeds from the sales are considered to be unrelated business income and are subject to Federal income tax reporting requirements. Examples include income from sales of parking fees to the general public for special events and bookstore internet sales to the general public.
Auxiliary enterprise activities will be operated on a no-gain/no-loss basis. Any surplus or deficit occurring in any one year will be corrected by adjustment of rates in the succeeding year to achieve a break-even balance at the succeeding year end. Funds can be accumulated for working capital and can be transferred at fiscal year end to a working capital fund.
Since most auxiliary enterprise activities begin operations without funds and may require working capital to fund inventory, equipment and/or receivables, funds may be borrowed internally or externally. Some activities buy equipment using an APPROVED installment contract/lease (must be processed through BFS Procurement and Contracts). Interest expense is considered to be a direct cost of the operation. However, principal payments must be paid from Renewals and Replacements funds or from some other funding source, such as Vice-Chancellor’s discretionary funds. When borrowing from commercial sources, the campus will first seek financing through lease/purchase, installment purchase contracts, or commercial bank loans to take advantage of the University's ability to borrow on an interest tax-exempt basis. In accordance with Business and Finance Bulletin BUS-43, Materiel Management, Part 8, paragraph II. C., financing through these contracts will first be cleared with the Treasurer's Office to insure that the campus is receiving a competitive, tax-exempt interest rate.
In accordance with Business and Finance Bulletin A-59, “Costing and Working Capital for Auxiliary and Service Enterprises”, federal costing regulations define certain costs as unallowable as a charge to federal funds. Inclusion of interest as a direct cost (except for capital equipment leases), funds accumulated for capital asset replacement in excess of depreciation on current equipment and accumulated surpluses will require refunds to the federal government. The federal government will not accept any markup above cost, even if the purpose of that markup is to accumulate funds for equipment replacement or addition or for inventory expansion. Therefore, at the end of each fiscal year, those activities which provided services to federally-funded contract and grant activities will notify BFS-GA of any interest expenses (except for capital equipment leases), accumulation of funds for capital asset replacement in excess of depreciation expense for currently used assets, and accumulated surplus balance in excess of one month of the recharging unit’s activity. These items are considered excess pricing by the federal government. The portion of those items which can be attributed to federal contract and grant activities will be refunded to individual active grants and contracts or in lump sum to the U.S. Treasury by BFS-GA. There are two alternate ways to comply with federal costing regulations:
- Establish dual-pricing structures for federal and non-federal activities (this can be accomplished by rebating the federal users); or
- Instruct federally-funded activities not to make use of certain auxiliary enterprise activities.
An auxiliary enterprise activity will have a specific fund number. Each activity will be assigned a unique fund number in the appropriate Chart of Accounts (COA) series. The fund number is referred to as the “operating fund”. The operating fund is the accounting mechanism used to record operating costs, income and incidental UC recharges. For sales to non-UC customers, a revenue account code will be established. A revenue account code is also referred to as an “income account” and generally is a 5 in front of the fund number. Recharges are income received from charges for sales and services to campus departments or other UC campuses. For University financial reporting, a recharge is considered to be cost redistribution. Therefore, it appears as a credit in expenditure account code 6939xx. Expenditures for the operations are recorded in the Index, Fund, Organization, Program (xxx030) codes using appropriate expenditure account codes that categorize the type of expense. For cost of goods sold expenditures, activities must use program code xxx070. The cost of goods sold program codes are used to separate expenditures for re-sale vs. operating costs of the activity. A specific expenditure account will be established if departments will be processing recharges. An index code will be associated with the COA elements, a.k.a. IFOAP = Index, Fund, Organization, Account and Program codes.
A working capital fund (75xxxx) may also be established.
In addition to the operating fund and a working capital fund, a renewals and replacement (R&R) reserve fund (76xxxx) will be established if inventorial equipment is acquired. An equipment plant fund will also be established which is the operating fund with a 9 as the last character, e.g., 730009.
An equipment R&R reserve fund is the accounting mechanism used to segregate equipment cost recovery funds from the operating fund. Reserves are accumulated to replace equipment to ensure that the facilities are operated on a continuous basis. The funds may be used to replace or upgrade the inventorial and non-inventorial equipment in the activity but may not be used for operating costs of the activity. R&R reserve funds are also used to record depreciation. Expenditures for salaries, benefits and travel are not allowed. An equipment R&R reserve fund is not allowed to have a deficit balance.
Depreciation expense is a periodic charge for the cost of equipment. Equipment is generally not fully expensed in the operating fund in the year of acquisition. Depreciation will be on a straight-line basis over the remaining life of the equipment unless it can be demonstrated that some other method is more appropriate. Any inventorial equipment, including gifted equipment or equipment purchased from another unrestricted fund, assigned to the activity other than that furnished by the Federal government will be depreciated. Federally funded equipment cannot be depreciated.
A discrete custodial code for the activity will be established for inventorial equipment purchases. The code can be obtained by contacting Equipment Management. If the equipment is in the department’s primary custodial code, a CAMS (Capital Asset Management System) interdepartmental transfer form will need to be processed to transfer the equipment to the new custodial code.
A budget must be established for each auxiliary enterprise activity in accordance with campus budget procedures. Generally, the department prepares a transfer of funds. The department will also request a “BD” index to be set up by the Budget Office.
During the year, the cash balances of all UC funds participate in the Short-Term Investment Pool (STIP). Distribution of the interest earned (surplus balances) or charged (deficit balances) will be in accordance with the procedures set forth in Business and Finance Bullet-in A-60, Short-Term Investment Pool Distribution of Income. Current campus procedures dictate that the STIP be recorded in the respective Vice-Chancellors’ STIP funds. At the discretion of the vice-chancellor, the STIP may be recorded in the operating or reserve funds of the activity.
There may be fiscal closing entries that are required. An instruction document is prepared each fiscal year, “Recharge & Other Income-Producing Activities Fiscal Closing Special Items Instructions”. All auxiliary enterprise activities must refer to this document for entries that may be required.
When an activity is no longer in operation, the activity must notify the BFS-GA contact to coordinate the closing of the fund(s). The funds need to zero-out prior to inactivating the index numbers. If the activity had a renewals and replacement reserve fund and/or working capital reserve fund, those balances have to be zero and the funds and index numbers need to be inactivated. It is imperative to close the funds to avoid additional charges. In addition, if the activity has balance sheet accounts, such as credit card clearing accounts or accounts payable accounts, those accounts must be cleared also. The remaining inventory of an activity that is to be closed should be transferred at cost to another departmental activity or transferred to surplus sales in accordance with campus policy.