Michael, my subconscious has been working on this, and the answer popped up!

Your auditors are completely off track.

Federals grants are, by federal law, ASSISTANCE, rather than
procurement.  Their purpose is to assist an organization doing what it
wishes to do, but for which it does not have the resources.  By law, the
federal sponsor is not buying services.  It is merely reimbursing you for
some of your expenses incurred doing something you wish to do.  Therefore,
you cannot be suffering a loss if the grant reimburses you for less than
your total costs.  You merely recover less of your expense.

If, in fact, you were selling services to the government and recovered less
than your cost, that could be considered a loss.  But you aren't selling
services.

Your organization's purposes  include (from your web site), "dedicated to
enhancing learning, promoting health, and fostering a deeper understanding
of the world."  One of the things you do is to train people in certain
skills, as part of this goal.  It happens that the federal government has
decided through various process (based in statute) to ASSIST you in doing
this training, by reimbursing you for some of your costs; because it judges
that "the public" benefits from your doing this training.  In some
assistance programs the assistance includes reimbursement of both  direct
costs and of indirect costs.  In many cases the indirect cost reimbursement
rate is based on an agreement between your accountants and the government's
accountants; this rate may actually recover most of your indirect costs
(but I bet your accountants can show you reasonable indirect costs the
government refuses to include in that rate!).  It just happens that the
statutory and regulatory authority related to the training grants includes
a rate for indirect cost recovery that is less than that "full" rate you
are allowed to apply to some other projects.

So you are doing something for the public good, training, and the
government has decided to assist you by reimbursing some of your costs.  It
just happens in this case they reimburse a smaller portion of those costs
than if you were doing something else for the public good, such as
conducting research.

Certainly the training program costs you more than you get back from the
government.  But the training program is a cost of doing your business, and
the grant is a reimbursement to help you do it.  However, no one is
"buying" that training from you, so the difference between cost and
recovery is part of your cost of doing business but NOT a loss.  You never
had any expectation of recovering 100% of the costs.

If your auditors cannot grasp the difference between assistance and
procurement, you should consider another auditor.

Chuck

At 10:11 AM 3/10/2004, you wrote:
>Some time ago I posted a question to the group concerning handling of the
>under-recovery of indirect costs associated with training grants.    Our
>auditors have maintained that the under-recovery has to be recognized on
>the accounting statements as a financial loss, i.e. made up from our
>financial reserves.    I received some information that suggested there may
>be some disagreement on this point.
>
>If you have familiarity or experience with this issue I would very much
>like to hear from you.   I also would like to know where to look for a
>definitive answer if there is one.
>
>Thanks everyone--
>
>Michael Pelletier
>Associate Director, Office of Sponsored Programs
>Education Development Center, Inc.
>(617)618-2227
>
>
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Herbert B. Chermside, CRA
Virginia Commonwealth University
PO BOX 980568
Richmond, VA  23298-0568
Voice:  804-827-6036
Fax     804-828-2051
e-mail xxxxxx@vcu.edu

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