[Federal Register: May 21, 2004 (Volume 69, Number 99)]
[Proposed Rules]
[Page 29379-29382]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21my04-40]
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Part III
Department of Defense
General Services Administration
National Aeronautics and Space Administration
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48 CFR Part 31
Federal Acquisition Regulation; Gains and Losses; Proposed Rule
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Part 31
[FAR Case 2004-005]
RIN 9000-AJ93
Federal Acquisition Regulation; Gains and Losses
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 revising the cost principle
regarding gains and losses on disposition or impairment of depreciable
property or other capital assets.
DATES: Interested parties should submit comments in writing on or
before July 20, 2004, 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-- http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov or farcase.2004-005@gsa.gov.
Please submit comments only and cite FAR case 2004-005 in all
correspondence related to this case.
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 FAR case 2004-005.
SUPPLEMENTARY INFORMATION:
A. Background
The DoD Director of Defense Procurement and Acquisition Policy
(DPAP) 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. DPAP announced a series of public meetings
in the Federal Register at 66 FR 13712, March 7, 2001 (with a
``correction to notice'' published in the Federal Register at 66 FR
16186, March 23, 2001). Public meetings were held on April 19, 2001,
May 10 and 11, 2001, and June 12, 2001. Attendees at the public
meetings 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 input obtained during the public meetings;
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. On July 7, 2003, a proposed rule was
published for public comment in the Federal Register at 68 FR 40466
under FAR case 2002-008.
The Councils, with input from the Ad Hoc Committee, reviewed the
public comments and concluded that the proposed rule relating to FAR
31.205-24 and FAR 31.205-26 should be converted to a final rule, with
minor changes to the proposed rule; the final rule is being published
under a separate Federal Register notice (FAR case 2002-008). As a
result of the public comments received, the Councils also decided to
make substantive changes to the FAR 31.205-16 cost principle and to
publish the proposed revisions as a proposed rule in this Federal
Register notice under the new FAR case 2004-005.
The Councils are recommending several changes to the proposed rule
for FAR 31.205-16. In particular, the Councils are recommending that
the date of disposition for a sale and leaseback arrangement be
revised. The Councils had initially recommended use of the later
disposition date. However, in consideration of the public comments,
which articulated a myriad of potential issues and problems that could
result from the use of the later disposition date, the Councils have
revised the proposed rule to state that the disposition date is the
date of the sale and leaseback arrangement, rather than at the end of
the lease term. The Councils believe this is a more practical approach
that will reduce record-keeping and the potential for future disputes.
Interested parties are requested to provide input on the revised
disposition date, based on the assumption that the FAR will specify a
disposition date and will continue to limit future lease costs to the
costs of ownership.
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.
In response to the proposed FAR rule published under FAR case 2002-
008 in the Federal Register at 68 FR 40466, July 7, 2003, three
respondents submitted comments on FAR 31.205-16. The Councils
considered all comments and concluded that, since the changes result in
a rule that differs significantly from the proposed rule, it should be
published as a proposed rule under a new FAR case 2004-005. Differences
between the proposed rule under FAR case 2002-008 and this proposed
rule are discussed in Comments 2 and 4 below.
Public Comments:
FAR 31.205-16(b)
1. Comment: Two respondents believe that paragraph (b) of the
proposed rule is unnecessary, not reflective of the reality of the
business decisions, potentially inequitable and not in the interest of
either the Government or the contractor. One of these respondents also
believes that the proposed rule will place a recordkeeping and
reconciliation burden on the contractor that is onerous, complicated,
and likely to delay contract closings.
Councils' response: Nonconcur. The Councils continue to believe
that the cost principle should explicitly address sale and leaseback
arrangements. The Councils believe that specifying the disposition date
will eliminate potential disagreements regarding whether the
disposition date should be the date of the sale and leaseback
arrangement or the date the contractor is no longer leasing the asset.
This position is also consistent with the input obtained during the
public meetings in Spring 2001.
FAR 31.205-16(b)(2)
2. Comment: Two respondents state that the extension of the
disposition date beyond the common language use of the term disposition
is inequitable because: (1) the Government would recoup gains from a
contractor who does not obtain a gain, and (2) the Government would be
entitled to a gain of less than the amount of the gain actually
realized by the contractor. These respondents further believe that this
revision would encourage a contractor to make business decisions that
are not mutually beneficial to either party. They believe this revision
may encourage contractors to expend
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additional allowable costs to relocate to a non-formerly owned facility
in order to recoup their full expenditure for leasing. These
respondents also assert that it is not always clear when a contractor
has finally vacated a facility. They ask how long a contractor must
vacate a property to avoid application of the sale/leaseback
provisions. One of the respondents also believes that contractor access
to the records of the buyer could also be a problem because the
provision requires knowledge of the ultimate sales price, data the
contractor may not have access to.
One respondent further asserts that the disposition of an asset
involves a business decision while the leasing of the asset generally
involves a separate business decision. If the asset disposed of
requires replacement, that action can be accomplished in a number of
ways. The calculation of the gain or loss on the disposition should not
be impacted by whether the contractor intends to continue to use the
asset under a different financial model.
Councils' response: Partially concur. The Councils had recommended
use of the later disposition date. However, in consideration of the
myriad of potential issues and problems that could result from the use
of the later disposition date, the Councils concur with the
recommendation that paragraph (b)(2) of FAR 31.205-16 be revised to
state that the disposition date is the date of the sale and leaseback
arrangement, rather than at the end of the lease term. This is a more
practical approach that will reduce recordkeeping and the potential for
future disputes.
3. Comment: Two respondents believe the contractor should recognize
the gain or loss on a sale and leaseback transaction immediately upon
execution of the change in control. These respondents believe that in
exchange for sharing the gain, the contractor should be permitted to
recover as an allowable cost the reasonable lease payments on the
replacement facility, regardless of whether the replacement facility
was previously owned or not. One of the respondents also states that
this approach would permit timely settlement of the costs in question
and result in equity to both the contractor and the Government.
Councils' response. Nonconcur. The Councils disagree with the
respondents recommendation to permit the contractor to recover the
lease payments that result from the sale and leaseback arrangement. The
allowable lease costs relating to a sale and leaseback arrangement have
long been limited in the cost principles to what the contractor would
have received had they retained title. The basic tenet that underlies
this provision is that a contractor should not benefit for entering
into a sale and leaseback arrangement. The Councils believe this basic
tenet continues to be appropriate. It is important to note that a sale
and leaseback arrangement is a voluntary financing mechanism entered
into by the contractor. The Councils do not believe the contractor
should be entitled to recover additional monies simply because of a
paper transaction that provides no significant benefit to the
Government.
FAR 31.205-16(c) and (d)
4. Comment: A third respondent proposed that the language at
paragraph (b) be withdrawn. If the proposed language is not withdrawn,
the respondent recommends that it be republished as a proposed rule and
address the following three fundamental issues:
a. Why is it equitable for any gain or loss to be recognized in
connection with the sale-leaseback transaction?
b. What reason is there that the gain or loss cannot be recognized
at the time of the transaction, perhaps with an appropriate adjustment
if the sales price and the subsequent rental cost are both below
market?
c. In any event, what justification is there for not limiting the
amount of gain to be recognized by the amount of depreciation taken?
Councils' response: Partially concur. The Councils agree that the
proposed language should be republished as a second proposed rule.
In response to comment 4a, the Councils believe that a gain or loss
should be recognized when an asset is disposed of, regardless of
whether that disposition relates to a sale and leaseback arrangement or
some other method used by the contractor to dispose of the asset. The
recognition of a gain or loss is a necessary adjustment because
depreciation is an estimate of the usefulness of an asset. When the
asset is disposed of, an adjustment is required to reflect the
difference between the actual and estimated usefulness of the asset.
The Councils agree with the respondent's assertion that the
proposed language could have been interpreted to entitle the Government
to recover more than the amount of depreciation that has been taken.
This was not the intent of the proposed language. Paragraph (b)
includes the statement ``Notwithstanding the language in paragraph (c)
of this subsection....'' Paragraph (c) is currently where the
limitation exists. The Councils have therefore revised the language in
paragraph (c), and added a new paragraph (d) to eliminate this concern.
The language on the limitation is now contained in paragraph (d), which
applies to all asset dispositions, including sale and leaseback
arrangements.
C. 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 and
procedures discussed in this rule. For FY2003, only 2.4% of all
contract actions were cost contracts awarded to small business. 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 part 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 2004-005), in correspondence.
D. 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 Part 31
Government procurement.
Dated: May 13, 2004.
Laura Auletta,
Director, Acquisition Policy Division.
Therefore, DoD, GSA, and NASA propose amending 48 CFR part 31 as
set forth below:
PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES
1. The authority citation for 48 CFR part 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).
2. Amend section 31.205-16 by--
a. Revising paragraph (a);
b. Redesignating paragraphs (b),(c),(d),(e),(f), and (g), as
(c),(e),(f),(g),(h), and (i); and
c. Adding new paragraphs (b) and (d).
The revised text reads as follows:
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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(i)(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 undepreciated balance at the time
of disposition; and
(2) The disposition date is the date of the sale and leaseback
arrangement.
(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(i)) 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.
(d) 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(e)(2)(i) or (ii) of this
subsection).
(e) Special considerations apply to an involuntary conversion which
occurs when a contractor's property is destroyed by events over which
the owner has no control, such as fire, windstorm, flood, accident,
theft, etc., and an insurance award is recovered. The following govern
involuntary conversions:
(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.
(2) When the converted asset is replaced, the contractor shall
either--
(i) Adjust the depreciable basis of the new asset by the amount of
the total realized gain or loss; or
(ii) Recognize the gain or loss in the period of disposition, in
which case the Government shall participate to the same extent as
outlined in paragraph (e)(1) of this subsection.
(f) 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.
(g) 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.
(h) Gains and losses of any nature arising from the sale or
exchange of capital assets other than depreciable property shall be
excluded in computing contract costs.
(i) With respect to long-lived tangible and identifiable intangible
assets held for use, no loss is allowed for a write-down from carrying
value to fair value as a result of impairments caused by events or
changes in circumstances (e.g., environmental damage, idle facilities
arising from a declining business base, etc.). If depreciable property
or other capital assets have been written down from carrying value to
fair value due to impairments, gains or losses upon disposition shall
be the amounts that would have been allowed had the assets not been
written down.
[FR Doc. 04-11458 Filed 5-20-04; 8:45 am]