[Federal Register: December 11, 2003 (Volume 68, Number 238)]
[Rules and Regulations]
[Page 69246-69248]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11de03-21]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 2 and 31
[FAC 2001-18; FAR Case 2001-026; Item II]
RIN 9000-AJ56
Federal Acquisition Regulation; Depreciation Cost Principle
AGENCIES: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Final rule.
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SUMMARY: The Civilian Agency Acquisition Council and the Defense
Acquisition Regulations Council (Councils) have agreed on a final rule
amending the Federal Acquisition Regulation (FAR) to revise the
depreciation cost principle to improve clarity and structure, and
remove unnecessary and duplicative language.
DATES: Effective Date: January 12, 2004.
FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, at (202) 501-
4755, for information pertaining to status or publication schedules.
For clarification of content, contact Mr. Edward Loeb, Policy Advisor,
at (202) 501-0650. Please cite FAC 2001-18, FAR case 2001-026.
SUPPLEMENTARY INFORMATION:
A. Background
DoD, GSA, and NASA published a proposed rule in the Federal
Register at 68 FR 4876, January 30, 2003, with request for comments.
Two respondents submitted public comments; a discussion of the major
comments is provided below. The Councils considered all comments and
concluded that the proposed rule should be converted to a final rule
with changes. Differences between the proposed rule and final rule are
discussed below.
B. Public Comments
FAR 31.205-11, Depreciation
FAR 31.205-11(a)
Comment 1: Both respondents suggested that the cost principle
should allow flexibility in the use of residual values less than 10
percent and, therefore, the word ``shall'' in the second sentence of
proposed FAR 31.205-11(a) should be changed.
Councils' response: Concur. The Councils changed the word ``shall''
in sentence two of FAR 31.205-11(a) to ``need,'' which conforms with
the wording of Cost Accounting Standard (CAS) 409-50(h).
Comment 2: Respondent believes that for clarification and
consistency purposes in this area, language in CAS 409-50(h) should be
added to the cost principle. Respondent recommended adding the
statement regarding the recognition of residual values when certain
depreciation methods are used, and the term ``significantly'' when
referring to the allowability of depreciation costs that reduce assets
below their residual value.
Councils' response: Concur. The Councils believe the FAR should not
be more restrictive than the CAS in this area. Therefore, the Councils
added the following sentence as the third sentence of proposed FAR
31.205-11(a): ``Where either the declining balance method of
depreciation or the class life asset depreciation range system is used,
the residual value need not be deducted from capitalized cost to
determine depreciable costs.'' In addition, the Councils added the term
``significantly'' to the last sentence of proposed FAR 31.205-11(a).
Comment 3: Respondent suggested deleting the last sentence of FAR
31.205-11(a) since it appears to be contradictory to the previous
sentence and this requirement is already covered in the definition of
``depreciation.''
Councils' response: Do not concur. The Councils believe that the
sentence does not contradict the previous sentence, and the definition
of ``depreciation'' does not adequately cover this requirement.
FAR 31.205-11(d)
Comment 4: Both respondents suggested deleting the entire proposed
paragraph 31.205-11(d). One respondent stated, ``Depreciation, by
definition, requires a `cost.' If there is no cost, there is no
depreciation. Comments on rental or use charges are already covered in
Part 45 and should be covered under 31.205-36, Rental Costs, if
considered necessary, and not under the Depreciation Cost Principle.''
Councils' response: Do not concur. The Councils believe that in
those instances where contractors might put an asset on their books
without incurring a cost, i.e., a donated asset, it must be clear that
any costs associated with that asset are unallowable.
FAR 31.205-11(f)
Comment 5: Both respondents suggested deleting the third sentence
of the proposed FAR 31.205-11(f). They believe the requirements in the
sentence are overly prescriptive and instructional. One respondent
stated, ``FAR 31.109 already provides guidance on how to arrive at
advance agreements.''
Councils' response: Do not concur. The Councils believe that while
FAR 31.109 provides information on advance agreements, it does not
address items that should be considered in determining a reasonable
amount for a use charge. The Councils believe the guidance is helpful
in determining a reasonable charge. However, the last sentence of
proposed FAR 31.205-11(f) inappropriately limited the scope of this
provision with the words, ``the contractor shall consider * * *.''
Therefore, the Councils have replaced this language with broader
guidance, ``consideration shall be given to * * *.''
FAR 31.205-11(g)
Comment 6: Both respondents recommended revising proposed FAR
31.205-11(g) to more closely reflect the requirements of FAR 31.205-52,
Asset valuations resulting from business combinations. They maintain
that FAR 31.205-52 does not necessarily ``limit'' allowability as
stated in the proposed words.
Councils' response: Partially concur. It is not necessary to
characterize FAR 31.205-52 here as limiting allowability. Therefore,
the Councils deleted the words ``which limit the allowability of
depreciation'' from FAR 31.205-11(g). However, the proposed rule
inappropriately limited the scope of this provision with the words,
``the contractor shall comply with the requirements of 31.205-52.''
Therefore, the Councils replaced this language with broader guidance,
``the requirements of 31.205-52 shall be observed.''
FAR 31.205-11(i)
Comment 7: Both respondents recommended deleting the third sentence
of FAR 31.205-11(i) as redundant. They also recommended deleting the
fourth sentence, as well as paragraph (i)(1), because operating leases
and sale and lease back arrangements are already covered under FAR
31.205-36, Rental costs, and need not be repeated in the depreciation
cost principle. Finally, they recommended deleting the fifth sentence
as repetitive of the first two sentences.
Councils' response: Partially concur. The Councils agree with the
[[Page 69247]]
recommendation to delete the redundant third sentence: ``Capital leases
under FAS 13 are subject to the requirements of 31.205-11.'' The
Councils also agree that operating leases are covered in FAR 31.205-36,
and, therefore, deleted the fourth sentence: ``Operating leases are
subject to the requirements of 31.205-36.'' However, the Councils
believe a cross-reference in this cost principle is helpful because of
the interchange of the two cost principles and, therefore, inserted a
cross-reference after sentence one: ``(See 31.205-36 for Operating
Leases.)'' The Councils disagree with deleting the language relative to
sale and leaseback in paragraph (i)(1) since this language is closely
related to depreciation costs, but changed the first word from
``Rental'' to ``Lease.'' Finally, the Councils deleted most of the
fifth sentence as duplicative, but changed ``except as follows:'' to
``except that:''
FAR 31.205-11(j)
Comment 8: One respondent suggested revising proposed paragraph (j)
in FAR 31.205-11, and asserted that the second sentence of the proposed
rule would require contractors to change their depreciation method if
different. The other respondent recommended deleting the entire
paragraph and stated, ``It is obsolete in that it only applies to
assets acquired before the effective date of this cost principle (i.e.,
pre-ASPR time frame).''
Councils' response: Partially concur. The Councils deleted
paragraph (j) since the grandfather provision benefits industry and it
is no longer needed.
FAR 31.205-36, Rental Costs
FAR 31.205-36(a)
Comment 9: Both respondents recommended deleting the second
sentence of FAR 31.205-36(a) since depreciation issues are already
covered under 31.205-11, Depreciation, and need not be repeated in FAR
31.205-36.
Councils' response: Concur. The Councils agree that the detailed
language does not need to be repeated in FAR 31.205-36, but believe a
cross-reference is useful to the users of the cost principles because
of the interchange of the two cost principles. Therefore, the second
sentence of FAR 31.205-36(a) is deleted and a cross-reference, ``(See
31.205-11 for Capital Leases.),'' is inserted.
FAR 31.205-36(b)(1)(iv)
Comment 9: Respondent recommended retaining the language at FAR
31.205-36(b)(1)(iv). They stated that no explanation was given for
deleting the language.
Councils' response: Do not concur. The respondent appears to have
misread the changes made. FAR 31.205-36(b)(4) was deleted, not FAR
31.205-36(b)(1)(iv).
C. Regulatory Planning and Review
This is not a significant regulatory action and, therefore, was not
subject to review under Section 6(b) of Executive Order 12866,
Regulatory Planning and Review, dated September 30, 1993. This rule is
not a major rule under 5 U.S.C. 804.
D. Regulatory Flexibility Act
The Department of Defense, the General Services Administration, and
the National Aeronautics and Space Administration certify that this
final rule will not have a significant economic impact on a substantial
number of small entities within the meaning of the Regulatory
Flexibility Act, 5 U.S.C. 601, et seq., because most contracts awarded
to small entities use simplified acquisition procedures or are awarded
on a competitive, fixed-price basis, and do not require application of
the cost principle discussed in this rule.
E. Paperwork Reduction Act
The Paperwork Reduction Act does not apply because the changes to
the FAR do not impose information collection requirements that require
the approval of the Office of Management and Budget under 44 U.S.C.
3501, et seq.
List of Subjects in 48 CFR Parts 2 and 31
Government procurement.
Dated: December 4, 2003.
Laura Auletta,
Director, Acquisition Policy Division.
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Therefore, DoD, GSA, and NASA amend 48 CFR parts 2 and 31 as set forth
below:
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1. The authority citation for 48 CFR parts 2 and 31 is revised to read
as follows:
Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42
U.S.C. 2473(c).
PART 2--DEFINITIONS OF WORDS AND TERMS
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2. Amend section 2.101 in paragraph (b) by adding, in alphabetical
order, the definition ``Depreciation'' to read as follows:
2.101 Definitions.
* * * * *
Depreciation means a charge to current operations that distributes
the cost of a tangible capital asset, less estimated residual value,
over the estimated useful life of the asset in a systematic and logical
manner. It does not involve a process of valuation. Useful life refers
to the prospective period of economic usefulness in a particular
contractor's operations as distinguished from physical life; it is
evidenced by the actual or estimated retirement and replacement
practice of the contractor.
* * * * *
PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES
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3. Revise section 31.205-11 to read as follows:
31.205-11 Depreciation.
(a) Depreciation on a contractor's plant, equipment, and other
capital facilities is an allowable contract cost, subject to the
limitations contained in this cost principle. For tangible personal
property, only estimated residual values that exceed 10 percent of the
capitalized cost of the asset need be used in establishing depreciable
costs. Where either the declining balance method of depreciation or the
class life asset depreciation range system is used, the residual value
need not be deducted from capitalized cost to determine depreciable
costs. Depreciation cost that would significantly reduce the book value
of a tangible capital asset below its residual value is unallowable.
(b) Contractors having contracts subject to 48 CFR 9904.409,
Depreciation of Tangible Capital Assets, shall adhere to the
requirement of that standard for all fully CAS-covered contracts and
may elect to adopt the standard for all other contracts. All
requirements of 48 CFR 9904.409 are applicable if the election is made,
and contractors must continue to follow it until notification of final
acceptance of all deliverable items on all open negotiated Government
contracts.
(c) For contracts to which 48 CFR 9904.409 is not applied, except
as indicated in paragraphs (g) and (h) of this subsection, allowable
depreciation shall not exceed the amount used for financial accounting
purposes, and shall be determined in a manner consistent with the
depreciation policies and procedures followed in the same segment on
non-Government business.
(d) Depreciation, rental, or use charges are unallowable on
property acquired from the Government at no cost by the contractor or
by any division, subsidiary, or affiliate of the contractor under
common control.
(e) The depreciation on any item which meets the criteria for
allowance at price under 31.205-26(e) may be
[[Page 69248]]
based on that price, provided the same policies and procedures are used
for costing all business of the using division, subsidiary, or
organization under common control.
(f) No depreciation or rental is allowed on property fully
depreciated by the contractor or by any division, subsidiary, or
affiliate of the contractor under common control. However, a reasonable
charge for using fully depreciated property may be agreed upon and
allowed (but, see 31.109(h)(2)). In determining the charge,
consideration shall be given to cost, total estimated useful life at
the time of negotiations, effect of any increased maintenance charges
or decreased efficiency due to age, and the amount of depreciation
previously charged to Government contracts or subcontracts.
(g) Whether or not the contract is otherwise subject to CAS, the
requirements of 31.205-52 shall be observed.
(h) In the event of a write-down from carrying value to fair value
as a result of impairments caused by events or changes in
circumstances, allowable depreciation of the impaired assets is limited
to the amounts that would have been allowed had the assets not been
written down (see 31.205-16(g)). However, this does not preclude a
change in depreciation resulting from other causes such as permissible
changes in estimates of service life, consumption of services, or
residual value.
(i) A ``capital lease,'' as defined in Statement of Financial
Accounting Standard No. 13 (FAS-13), Accounting for Leases, is subject
to the requirements of this cost principle. (See 31.205-36 for
Operating Leases.) FAS-13 requires that capital leases be treated as
purchased assets, i.e., be capitalized, and the capitalized value of
such assets be distributed over their useful lives as depreciation
charges or over the leased life as amortization charges, as
appropriate, except that--
(1) Lease costs under a sale and leaseback arrangement are
allowable up to the amount that would have been allowed had the
contractor retained title to the asset; and
(2) If it is determined that the terms of the capital lease have
been significantly affected by the fact that the lessee and lessor are
related, depreciation charges are not allowable in excess of those that
would have occurred if the lease contained terms consistent with those
found in a lease between unrelated parties.
31.205-16 [Amended]
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4. Amend section 31.205-16 in the first sentence of paragraph (b) by
removing ``31.205-11(m)'' and adding ``31.205-11(i)'' in its place.
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5. Amend section 31.205-36 by revising paragraph (a); and removing
paragraph (b)(4) to read as follows:
31.205-36 Rental costs.
(a) This subsection is applicable to the cost of renting or leasing
real or personal property acquired under ``operating leases'' as
defined in Statement of Financial Accounting Standards No. 13 (FAS-13),
Accounting for Leases. (See 31.205-11 for Capital Leases.)
* * * * *
[FR Doc. 03-30473 Filed 12-10-03; 8:45 am]