Costs relating to the purchase or leasing with option to buy, of durable equipment shall be charged to the contract pursuant to the contractors' own accounting practices.
However complying with the principle of sound financial management, the cost claimed for durable equipment leased with option to buy cannot exceed the costs that would have been incurred if the equipment had been purchased and depreciated under normal practices. (i.e. interest element must be excluded).
The following formula gives an indication on how to calculate depreciation that could be charged to the project, for contractors using accrual based accounting system:
Depreciation = A/B x C x D
A = the period in months during which the durable equipment is used for the project after invoicing,
B = the depreciation period for the durable equipment: as per regular accounting practice for the organisation within its published accounts
C = the actual cost of the durable equipment,
D = the percentage of usage of the durable equipment for the project.
The durable equipment may be purchased or leased with option to buy.
The depreciation should be a linear and contractors cannot charge the total depreciation cost of the durable equipment in their first financial statement.
On the other hand, those contractors using cash based accounting system, they may charge the total depreciation cost of the durable equipment in the first financial statement, providing that they buy and use it for the project this durable equipment during this first financial/scientific period.
Many Universities and Public Research Institutes operate cash based accounting system. In this system, there is no accrued accounting for depreciation. Consequently an appropriate charge (the proportion of the cost of equipment used on the project) for depreciation is normally made on a one-off basis in the same year of the purchase of the equipment.
As a consequence, contractors using a cash based accounting system may have their depreciation costs of durable equipment reimbursed in a single amount in line with their normal accounting system. In other words, they may charge the total depreciation cost of durable equipment in the financial statement covering the period of purchase of this durable equipment.
To avoid misunderstandings, such contractors must declare in their financial statement that they use cash based accounting system.