New asset capitalization criteria for Medicaid cost reports
Earlier this year, the Ohio Department of Medicaid (ODM) issued Rule 5160-3-42.3, Nursing Facilities (NF) Capital Asset and Depreciation Guideline. The rule changes how a nursing home should report its property and equipment (capital assets) for Medicaid cost reporting. This memo will summarize a few issues for your organization’s consideration.
The new criteria from the ODM calls for the following: any expenditure for an item, or a group of items invoiced together, i.e., laptops, that costs $5,000 or more and has a useful life of two or more years must be capitalized and depreciated over the asset’s useful life. The previous criteria was $500. A provider may use a capitalization policy less than $5,000, but is required to obtain prior approval from the ODM before doing so. Technically, if you keep your current policy in place, no prior approval is needed.
Nursing home providers shall use the 2013 edition of the American Hospital Association (AHA) publication entitled “Estimated Useful Lives of Depreciate Hospital Assets,” which is available here >>
In addition, all assets capitalized should be depreciated using the straight-line method of depreciation (current practice) and the salvage value shall be used to calculate depreciation (new practice for cost reporting).
The salvage value is the estimated resale value of an asset at the end of its useful life. The salvage value is subtracted from the cost of a fixed asset to determine the amount of the asset cost that will be depreciated. Thus, the salvage value is used as a component of the depreciation calculation.
Annual depreciation = Cost less salvage value/useful life.
A few items to consider:
- This rule only applies to nursing homes and not for the providers in the ICF/IID program.
- The effective date of the change in capitalization limits ($5,000) was March 22, 2015. Thus, any asset capitalized after April 1, 2015, could fall into this process.
- Before changing your policy, consider any debt covenant issues, financial statement impact, or tax compliance matters before implementing a higher capitalization level. Please note that separate depreciation schedules will need to be maintained for tax reporting purposes and a written capitalization policy needs to be in place to qualify for the $5,000 de minimis safe harbor election under the new IRS tangible property regulations.
- Salvage value: A new rule to comply with. Technically, the ODM wants the salvage value applied to all capital assets going forward. We believe there are some practical approaches to determine the salvage value as follows:
- Evaluate the recent history of capital assets sold to determine which assets have held residual value beyond its depreciable life (assets that were sold and resulted in a gain on sale that were fully depreciated).
- Based on that history, determine which capital assets should have a salvage value, and apply that salvage in the calculation of depreciation for capital assets.
- The state of Ohio is suggesting a 10 percent threshold for the salvage value estimate to apply to all capital assets. However, if your historical review of capital assets sold by your organization contradicts this 10 percent estimate provided by the state, we believe the historical results would be a stronger indicator of estimated salvage value.
- All purchases of capital assets from the effective date and forward should be evaluated to determine if a salvage value should be applied.
- For financial statement reporting purposes under generally accepted accounting principles (GAAP), depreciable basis and methods of determining depreciation may vary from those used for Medicaid purposes; however, in our experience those differences are rare. This new ruling does not change GAAP.
- Under GAAP, the salvage value has always been a required consideration, but in practice, most entities have determined that salvage value is not applicable.
- If salvage value is determined to be applicable for Medicaid purposes, that same salvage value should also be applied for GAAP.
We would be happy to discuss this matter as you head into the 2015 year-end and begin planning for 2016 and beyond. Please feel free to reach out to your Plante Moran advisor at your convenience.