[Federal Register: July 7, 2003 (Volume 68, Number 129)]
[Proposed Rules]
[Page 40465-40468]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07jy03-43]
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Part IV
Department of Defense
General Services Administration
National Aeronautics and Space Administration
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48 CFR Parts 15 and 31
Federal Acquisition Regulation; Gains and Losses, Maintenance and
Repair Costs, and Material Costs; Proposed Rule
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 15 and 31
[FAR Case 2002-008]
RIN 9000-AJ69
Federal Acquisition Regulation; Gains and Losses, Maintenance and
Repair Costs, and Material Costs
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) by deleting the cost principle
regarding maintenance and repair costs, revising the cost principles
regarding gains and losses on disposition or impairment of depreciable
property or other capital assets, and by revising the language
concerning material costs.
DATES: Interested parties should submit comments in writing on or
before September 5, 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.2002-
008@gsa.gov. Please submit comments only and cite FAR case 2002-008 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 Edward Loeb, Procurement Analyst, at (202) 501-0650.
Please cite FAR case 2002-008.
SUPPLEMENTARY INFORMATION:
A. Background
The DoD Director of Defense Procurement established a special
interagency Ad Hoc Committee to perform a comprehensive review of
policies and procedures in FAR Part 31, Contract Cost Principles and
Procedures, relating to cost measurement, assignment, and allocation.
The Director announced a series of public meetings in the Federal
Register notice at 66 FR 13712, March 7, 2001, (with a ``correction to
notice'' published in the Federal Register at 66 FR 16186, March 23,
2001). Attendees at the public meetings (held on April 19, 2001, May
10-11, 2001, and June 12, 2001) included representatives from industry,
Government, and other interested parties who provided views on
potential areas for revision in FAR Part 31. The Ad Hoc Committee
reviewed the cost principles and procedures and the public comments;
identified potential changes to the FAR; and submitted several reports,
including draft proposed rules for consideration by the Councils.
The Councils reviewed the reports related to FAR 31.205-16, Gains
and losses on disposition or impairment of depreciable property or
other capital assets, FAR 31.205-24, Maintenance and repair costs, and
FAR 31.205-26, Material costs, and proposed the following revisions:
1. FAR 31.205-16. Add a new paragraph (b) that addresses the method
and timing for determining the gain and loss associated with a sale and
leaseback arrangement. The Councils believe that (a) a contractor
should not benefit or be penalized for entering into a sale and
leaseback arrangement; (b) the Government should reimburse the
contractor the same amount for the subject asset as if the contractor
had retained title; and (c) the Government would be precluded from
recovering the financing costs that were imbedded in the sales price
should the gain be recognized at the date of the sale and leaseback
arrangement. For these reasons, the Councils are recommending that the
gain or loss be determined at the end of the lease term or when the
contractor no longer occupies the property (whichever date is later),
rather than the date of the sale and leaseback arrangement.
Implementation of adequate agency guidance and tracking controls (e.g.,
maintenance of permanent files on contractors by auditors) should
assure that the Government properly computes its share of the gain or
loss at the date of disposition.
The Councils do not believe the impairment language currently in
paragraph (f) of the cost principle should be revised because 48 CFR
9904.404--Capitalization of Tangible Assets, and 48 CFR 9904.409--Cost
Accounting Standard--Depreciation of Tangible Capital Assets, do not
address the issue of asset impairments.
2. FAR 31.205-24. Delete this cost principle which addresses the
assignment of maintenance and repair costs to cost accounting periods.
The Councils believe that 48 CFR 9904--Cost Accounting Standards
adequately addresses these costs for contracts subject to full CAS
coverage. For business units with no contracts subject to full CAS
coverage, Generally Accepted Accounting Principles (GAAP) would apply
to all of the contracts in the business unit subject to FAR Part 31.
GAAP, which include criteria for determining whether a cost should be
expensed or capitalized, adequately address this issue. For business
units that have contracts subject to full CAS coverage and contracts
that are not, the contractor would be required to apply a method that
was consistent with GAAP for the contracts that are not subject to full
CAS coverage (this method could be the same as the method used by the
business unit for contracts subject to full CAS coverage).
3. FAR 31.205-26. Delete the current paragraph (c) and the last
sentence of the current paragraph (d). Paragraph (c) requires that
adjustments for differences in physical and book inventories relate to
the period of contract performance. The Councils recommend deleting
this provision, and, thereby, relying upon GAAP.
The Councils also recommend deleting the last sentence of the
current paragraph (d). This sentence provides specific methods for
estimating material costs. Since FAR 31 focuses on criteria regarding
the allowability of costs rather than the methods used to estimate
costs, this sentence has been deleted.
4. Make related editorial changes.
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
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concerning the affected FAR Parts 15 and 31 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 2002-008), 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 15 and 31
Government procurement.
Dated: June 26, 2003.
Laura G. Smith,
Director, Acquisition Policy Division.
Therefore, DoD, GSA, and NASA propose amending 48 CFR parts 15 and
32 as set forth below:
1. The authority citation for 48 CFR parts 15 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 15--CONTRACTING BY NEGOTIATION
15.208 [Amended]
2. In section 15.408, amend Table 15-2, which follows paragraph
(m)(4), by removing from paragraph A.(1) of Item II, Cost Elements,
``31.205-26(e)'' and adding ``31.205-26(c)'' in its place.
PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES
3. In section 31.205-7, revise the last sentence in paragraph
(c)(2) to read as follows:
31.205-7 Contingencies.
* * * * *
(c) * * *
(2) * * * (See, for example, 31.205-6(g) and 31.205-19).
* * * * *
31.205-11 [Amended]
4. Amend section 31.205-11 in paragraph (k) by removing ``31.205-
26(e)'' and adding ``31.205-26(c)'' in its place.
5. Amend section 31.205-16 as follows:
a. Revise paragraph (a);
b. Redesignate paragraphs (b) through (g) as (c) through (h),
respectively;
c. Add a new paragraph (b);
d. Revise the newly designated paragraphs (c), (d)(1), (e), and
(f);
e. Amend the newly designated paragraph (d)(2)(ii) by removing
``subparagraph (c)(1)'' and adding ``paragraph (d)(1)'' in its place;
f. Amend the newly designated paragraph (g) by removing ``shall
be'' and adding ``is'' in its place; and
g. Amend the first sentence of the newly designated paragraph (h)
by removing ``shall be'' and adding ``is'' in its place. The added and
revised text reads as follows:
31.205-16 Gains and losses on disposition or impairment of depreciable
property or other capital assets.
(a) The Government and the contractor shall include gains and
losses from the sale, retirement, or other disposition (but see 31-
205.19) of depreciable property in the year in which they occur as
credits or charges to the cost grouping(s) in which the depreciation or
amortization applicable to those assets was included (but see paragraph
(e) of this subsection). However, no gain or loss is recognized as a
result of the transfer of assets in a business combination (see 31.205-
52).
(b) Notwithstanding the provisions in paragraph (c) of this
subsection, when costs of depreciable property are subject to the sale
and leaseback limitations in 31.205-11(m)(1) or 31.205-36(b)(2)--
(1) The gain or loss is the difference between the fair market
value on the disposition date and the adjusted asset value at the time
of disposition (as defined in paragraph (b)(3) of this subsection);
(2) The disposition date is the later of--
(i) The latest ending date of the lease term, including any
extensions and renewals; or
(ii) The date the contractor vacates the property; and
(3) The adjusted asset value at the time of disposition is the
contractor's original asset cost less the sum of--
(i) The allowable depreciation costs for the period prior to the
date of the sale and leaseback; and
(ii) The depreciation costs that would have been allowed had the
contractor retained title to the property from the date of the sale and
leaseback until the disposition date.
(c) The Government and the contractor consider gains and losses on
disposition of tangible capital assets including those acquired under
capital leases (see 31.205-11(m)) as adjustments of depreciation costs
previously recognized. The gain or loss for each asset disposed of is
the difference between the net amount realized, including insurance
proceeds from involuntary conversions, and its undepreciated balance.
The Government and the contractor shall limit the gain recognized for
contract costing purposes to the difference between the acquisition
cost (or for assets acquired under a capital lease, the value at which
the leased asset is capitalized) of the asset and its undepreciated
balance (except see paragraph (d)(2)(i) or (ii) of this subsection).
(d) * * *
(1) When there is a cash award and the converted asset is not
replaced, the Government and the contractor shall recognize the gain or
loss in the period of disposition. The gain recognized for contract
costing purposes is limited to the difference between the acquisition
cost of the asset and its undepreciated balance.
* * * * *
(e) The Government and the contractor shall not recognize gains or
losses on the disposition of depreciable property as a separate charge
or credit when the contractor--
(1) Processes the gains and losses through the depreciation reserve
account and reflects them in the depreciation allowable under 31.205-
11; or
(2) Exchanges the property as part of the purchase price of a
similar item, and takes into consideration the gain or loss in the
depreciation cost basis of the new item.
(f) The Government and the contractor shall consider gains and
losses arising from mass or extraordinary sales, retirements, or other
disposition other than through business combinations on a case-by-case
basis.
* * * * *
31.205-24 [Removed & Reserved]
6. Remove and reserve section 31.205-24.
7. Revise section 31.205-26 to read as follows:
31.205-26 Material costs.
(a) Material costs include the costs of such items as raw
materials, parts, subassemblies, components, and manufacturing
supplies, whether purchased or manufactured by the contractor, and may
include such collateral items as inbound transportation and intransit
insurance. In computing material costs, the contractor shall consider
reasonable overruns, spoilage, or defective work (unless otherwise
provided in any contract provision relating to inspecting and
correcting defective work).
(b) The contractor shall--
(1) Adjust the costs of material for income and other credits,
including available trade discounts, refunds, rebates, allowances, and
cash discounts,
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and credits for scrap, salvage, and material returned to vendors; and
(2) Credit such income and other credits either directly to the
cost of the material or allocate such income and other credits as a
credit to indirect costs. When the contractor can demonstrate that
failure to take cash discounts was reasonable, the contractor does not
need to credit lost discounts.
(c) When materials are purchased specifically for and are
identifiable solely with performance under a contract, the actual
purchase cost of those materials should be charged to the contract. If
material is issued from stores, any generally recognized method of
pricing such material is acceptable if that method is consistently
applied and the results are equitable.
(d) Allowance for all materials, supplies and services that are
sold or transferred between any divisions, subdivisions, subsidiaries
or affiliates of the contractor under a common control shall be on the
basis of cost incurred in accordance with this subpart. However,
allowance may be at price when--
(1) It is the established practice of the transferring organization
to price interorganizational transfers at other than cost for
commercial work of the contractor or any division, subsidiary or
affiliate of the contractor under a common control; and
(2) The item being transferred qualifies for an exception under
15.403-1(b) and the contracting officer has not determined the price to
be unreasonable.
(e) When a commercial item under paragraph (c) of this subsection
is transferred at a price based on a catalog or market price, the
contractor--
(1) Should adjust the price to reflect the quantities being
acquired; and
(2) May adjust the price to reflect the actual cost of any
modifications necessary because of contract requirements.
31.205-44 [Amended]
8. Amend section 31.205-44 in paragraph (f) by removing ``31.205-
24''.
[FR Doc. 03-16982 Filed 7-3-03; 8:45 am]