[Federal Register: January 30, 2003 (Volume 68, Number 20)]
[Proposed Rules]
[Page 4875-4877]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30ja03-29]
[[Page 4875]]
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Part VI
Department of Defense
General Services Administration
National Aeronautics and Space Administration
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48 CFR Parts 2 and 31
Federal Acquisition Regulation; Depreciation Cost Principle; Proposed
Rule
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 2 and 31
[FAR Case 2001-026]
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: Proposed rule.
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SUMMARY: The Civilian Agency Acquisition Council and the Defense
Acquisition Regulations Council (Councils) are proposing to amend the
Federal Acquisition Regulation (FAR) to revise the depreciation cost
principle.
DATES: Interested parties should submit comments in writing on or
before March 31, 2003 to be considered in the formulation of a final
rule.
ADDRESSES: Submit written comments to--General Services Administration,
FAR Secretariat (MVA), 1800 F Street, NW., Room 4035, Attn: Laurie
Duarte, Washington, DC 20405.
Submit electronic comments via the Internet to--farcase.2001-
026@gsa.gov.
Please submit comments only and cite FAR case 2001-026 in all
correspondence related to this case.
FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, Room 4035, GS
Building, Washington, DC 20405, at (202) 501-4755 for information
pertaining to status or publication schedules. For clarification of
content, contact Mr. Ralph De Stefano at (202) 501-1758. Please cite
FAR case 2001-026.
SUPPLEMENTARY INFORMATION:
A. Background
The Councils performed a comprehensive review of the cost principle
at FAR 31.205-11, Depreciation, to evaluate the need for each specific
requirement. As a result of the review, the Councils are proposing to
revise the cost principle as follows:
1. Definition of depreciation. The language currently at FAR
31.205-11(a) is a definition for the term ``depreciation.'' Since the
term is used throughout the FAR, the definition was moved to FAR 2.101,
Definitions.
2. Residual values. The depreciation cost principle is more
restrictive than cost accounting standards (CAS) because it requires a
contractor to use residual values in establishing depreciation costs,
while the cost accounting standard for depreciation of tangible capital
assets at 48 CFR 9904.409-50(h) allows contractors to ignore residual
values under 10 percent for tangible personal property. The rule adds
language at FAR 31.205-11(a) to make the policy on residual values
consistent with CAS.
3. Depreciation claimed for tax purposes. Currently, FAR 31.205-
11(e) limits allowable depreciation to the lesser of the depreciation
used for Federal income tax purposes or for financial statements. This
policy encourages contractors to use the same depreciation for both tax
and financial reporting purposes. The Councils have eliminated all
references to Federal income tax accounting since it is unnecessary to
tie allowable depreciation to depreciation claimed for tax purposes,
and to penalize contractors because they use an acceptable depreciation
method for tax purposes that is different from that used for financial
purposes.
4. Write-down due to business combinations/impaired assets. The
Councils added ``except as indicated in paragraphs (g) and (h) of this
subsection'' to FAR 31.205-11(c) of the proposed rule to eliminate any
potential inequity caused among these paragraphs. In the proposed rule,
the language currently in paragraphs FAR 31.205-11(n) and (o) are moved
to new paragraphs (g) and (h) to specifically disallow the effect on
depreciation when contractors are involved in the write-down of assets
from carrying value to fair market value as a result of business
combinations or impairments. In effect, these paragraphs require
contractors to continue to use their depreciation schedules as if the
business combination (paragraph (g)) or impaired asset write-down
(paragraph (h)) never occurred. However, if there is an asset write-
down due to either of these events, the depreciation calculated based
on generally accepted accounting principles (GAAP) will be lower than
the depreciation generated by the use of the contractor's previous
depreciation schedule. Without a stated exception to the general rule
in the proposed paragraph (c) that allowable depreciation cannot exceed
the amount calculated based on GAAP, one might misinterpret the cost
principle and inappropriately disallow the depreciation in excess of
GAAP when a write-down of an asset due to a business combination or
impairment occurs.
5. Emergency facilities. The current paragraph at FAR 31.205-11(i)
has been deleted since the Councils are not aware of any existing
contracts supporting the operation of emergency facilities covered by
certificates of necessity.
6. The rule makes other changes to clarify, improve the structure,
and remove redundancies throughout the cost principle.
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.
B. Regulatory Flexibility Act
The Councils do not expect this proposed rule to 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 principles discussed
in this rule. An Initial Regulatory Flexibility Analysis has,
therefore, not been performed. We invite comments from small businesses
and other interested parties. The Councils will consider comments from
small entities concerning the affected FAR parts in accordance with 5
U.S.C. 610. Interested parties must submit such comments separately and
should cite 5 U.S.C. 601, et seq. (FAR case 2001-026), in
correspondence.
C. Paperwork Reduction Act
The Paperwork Reduction Act does not apply because the proposed
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: January 23, 2003.
Al Matera,
Director, Acquisition Policy Division.
Therefore, DoD, GSA, and NASA propose amending 48 CFR parts 2 and
31 as set forth below:
1. The authority citation for 48 CFR parts 2 and 31 continues to
read as follows:
Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42
U.S.C. 2473(c).
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PART 2--DEFINITIONS OF WORDS AND TERMS
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.
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PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES
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 shall be used in establishing depreciable
costs. Depreciation cost that would 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 shall 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 that meets the criteria for
allowance at price under 31.205-26(e) may be 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, the
contractor shall consider 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
contractor shall comply with the requirements of 31.205-52, which limit
the allowability of depreciation.
(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. 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. Capital leases under FAS-13 are
subject to the requirements of 31.205-11. Operating leases are subject
to the requirements of 31.205-36. The standards of financial accounting
and reporting prescribed by FAS-13 are incorporated into this principle
and govern its application, except as follows:
(1) Rental 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.
(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.
(j) The undepreciated balance of assets acquired before the
effective date of this cost principle need not be retroactively
adjusted if the assets were properly depreciated on Government
contracts at the time the depreciation was charged. However, the
remaining undepreciated balance as of the effective date of this cost
principle shall be depreciated using the same method as used for
financial statement purposes.
31.205-16 [Amended]
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.
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. Compliance with 31.205-11(i) requires that
assets acquired by means of capital leases, as defined in FAS-13, 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 lease term as amortization charges,
as appropriate.
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[FR Doc. 03-1962 Filed 1-29-03; 8:45 am]