[Code of Federal Regulations]
[Title 42, Volume 2]
[Revised as of October 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 42CFR413.98]

[Page 613-614]
 
                         TITLE 42--PUBLIC HEALTH
 
                    CHAPTER IV--CENTERS FOR MEDICARE
                          & MEDICAID SERVICES,
                        DEPARTMENT OF HEALTH AND
                             HUMAN SERVICES
 
 PART 413_PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR 
 
                 Subpart F_Specific Categories of Costs
 
Sec. 413.98  Purchase discounts and allowances, and refunds of expenses.

    (a) Principle. Discounts and allowances received on purchases of 
goods or services are reductions of the costs to which they relate. 
Similarly, refunds of previous expense payments are reductions of the 
related expense.
    (b) Definitions--(1) Discounts. Discounts, in general, are 
reductions granted for the settlement of debts.
    (2) Allowances. Allowances are deductions granted for damage, delay, 
shortage, imperfection, or other causes, excluding discounts and 
returns.
    (3) Refunds. Refunds are amounts paid back or a credit allowed on 
account of an overcollection.

[[Page 614]]

    (c) Normal accounting treatment--Reduction of costs. All discounts, 
allowances, and refunds of expenses are reductions in the cost of goods 
or services purchased and are not income. If they are received in the 
same accounting period in which the purchases were made or expenses were 
incurred, they will reduce the purchases or expenses of that period. 
However, if they are received in a later accounting period, they will 
reduce the comparable purchases or expenses in the period in which they 
are received.
    (d) Application. (1) Purchase discounts have been classified as 
cash, trade, or quantity discounts. Cash discounts are reductions 
granted for the settlement of debts before they are due. Trade discounts 
are reductions from list prices granted to a class of customers before 
consideration of credit terms. Quantity discounts are reductions from 
list prices granted because of the size of individual or aggregate 
purchase transactions. Whatever the classification of purchase 
discounts, like treatment in reducing allowable costs is required. In 
the past, purchase discounts were considered as financial management 
income. However, modern accounting theory holds that income is not 
derived from a purchase but rather from a sale or an exchange and that 
purchase discounts are reductions in the cost of whatever was purchased. 
The true cost of the goods or services is the net amount actually paid 
for them. Treating purchase discounts as income would result in an 
overstatement of costs to the extent of the discount.
    (2) As with discounts, allowances, and rebates received from 
purchases of goods or services, refunds of previous expense payments are 
clearly reductions in costs and must be reflected in the determination 
of allowable costs. This treatment is equitable and is in accord with 
that generally followed by other governmental programs and third-party 
payment organizations paying on the basis of cost.