[Federal Register: June 8, 2005 (Volume 70, Number 109)]
[Rules and Regulations]
[Page 33673-33676]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08jn05-36]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Part 31
[FAC 2005-04; FAR Case 2004-005; Item VIII]
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: 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) by revising the
contract cost principles for Gains and losses on disposition or
impairment of depreciable property or other capital assets,
Depreciation costs, and Rental costs. The final rule adds language to
specifically address the gain or loss recognition of sale and leaseback
transactions to be consistent with the date at which a contractor
begins to incur an obligation for lease or rental costs. A date for
recognition of gain or loss associated with sale and leaseback
transactions was previously undefined within the cost principles. In
addition, revised language is also added to recognize that an
adjustment to the lease/rental cost limitations are required to ensure
that the total costs associated with the use of the subject assets do
not exceed the constructive costs of ownership.
[[Page 33674]]
DATES: Effective Date: July 8, 2005.
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. Jeremy Olson at (202) 501-3221.
Please cite FAC 2005-04, FAR case 2004-005.
SUPPLEMENTARY INFORMATION:
A. Background
DoD, GSA, and NASA published a proposed FAR rule for public comment
in the Federal Register at 68 FR 40466, July 7, 2003, under FAR case
2002-008. The proposed rule 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. As result of the public comments received, the Councils
converted the proposed rule relating to FAR 31.205-24 and FAR 31.205-26
to a final rule, with minor changes. The Councils also decided to make
substantive changes to the proposed rule for FAR 31.205-16 and
published a second proposed FAR rule in the Federal Register at 69 FR
29380, May 21, 2004, with a request for comments by July 20, 2004.
Three respondents submitted public comments in response to the
second proposed FAR rule. A discussion of these public comments is
provided below. The Councils considered all comments and concluded that
the proposed rule should be converted to a final rule, with changes to
the proposed rule and changes to FAR 31.205-11 and FAR 31.205-36 to
address concerns raised in the public comments. Differences between the
second proposed rule and final rule are discussed in Section B,
Comments 1, 2, 3, and 5, below.
B. Public Comments
The Government and the contractor
1. Comment: Two respondents are opposed to the language ``the
Government and Contractor shall'' take certain actions. One of the
respondents specifically states, ``The new phrase implies that both
parties perform such duties as accounting entries when in reality FAR
provides requirements that must be met by the contractor and approved
by the contracting officer.'' The respondents recommend removing the
language ``the Government and Contractor shall'' and retaining the
current language structure.
Councils' response: Concur. The Councils concur that the FAR cost
principles are regulations that the contractor must meet with regard to
the allowability of contract costs. Since the current language has not
resulted in any problems and the proposed revision could cause
potential confusion, the Councils have retained the current language
and removed reference to ``the Government and the contractor shall'' at
proposed FAR 31.205-16(a), (c), (d), (e)(1), (f), and (g).
Disposition date
2. Comment: Two respondents support the disposition date being the
date of the sale and leaseback arrangement. However, the respondents
noted that the use of the term ``arrangement'' is ambiguous and subject
to various interpretations. The respondents have recommended using
language that represents the effective date (i.e., the date title
passes from seller to buyer) as the disposition date for the sale and
leaseback transaction.
Councils' response: Partially concur. The Councils agree that the
date of the sale and leaseback arrangement may be subject to various
interpretations. However, the Councils believe that the term
``effective date'' also would be subject to various interpretations
because of the numerous underlying legal relationships that can affect
a sale and leaseback arrangement. The Councils therefore have revised
the language at FAR 31.205-16(b) to state that the gain or loss is
determined on the date that the contractor becomes a lessee of the
property. In addition, for clarity purposes, the Councils have removed
the term ``disposition date'' from the proposed rule at FAR 31.205-
16(b)(1) and (2), since that term is not used elsewhere in this
provision in discussing other asset dispositions.
Depreciation recapture/lease cost limitation
3. Comment: One respondent asserts that ``the combined reading of
proposed 31.205-16(a), (b), (c) and (d) with 31.205-11(m)(1) and
31.205-36(b)(2) to mean that the contractor must provide both
depreciation recapture and limit future lease charges to what would
have been the continuing ownership costs.'' This respondent further
states:
``This unclear and contentious area has long been an inequitable
proposition. For example, a contractor sells a building for the
original value. This results in a full depreciation recapture and
means that the Government received goods and services free of any
building costs. However, if the leaseback exceeds the previous
ownership costs, then the contractor is forced to provide future
facilitization at less than cost. This is clearly inequitable
compared to other contractors who receive full recovery of their
facility costs.''
The respondent suggests that the sale and leaseback transaction
should be limited to an ``either or'' negotiation. Either apply the
depreciation recapture at the time of sale, or limit the lease cost for
the period of time necessary to liquidate an amount equal to the
depreciation recapture.
Councils' response: Partially concur. The Councils disagree with
the respondent's recommendation regarding an ``either or'' negotiation.
As stated in the Federal Register at 69 FR 29380, May 21, 2004, the FAR
``will continue to limit future lease costs to the costs of
ownership.'' In addition, the long-standing policy, referred to as
``depreciation recapture'' by the respondent, will continue in that
``gains and losses on disposition of tangible capital assets, including
those acquired under capital leases (see 31.205-11(i)), shall be
considered as adjustments of depreciation costs previously
recognized.'' (see FAR 31.205-16(c)).
However, the Councils have recognized that some additional language
is needed to ensure that the contractor's and Government's interests
are protected. The intent of this longstanding limitation in the cost
principles is that, for Government contract costing purposes, the
contractor should not benefit, nor should the contractor be harmed, for
entering into a sale and leaseback agreement, and that the recovery of
costs should be limited to the normal cost of ownership. As the
respondent has noted, under the current proposed rule, the recognition
of a gain may limit the contractor in its ability to recoup what would
otherwise be considered allowable costs up to the original acquisition
cost. Likewise, the recognition of a loss may have the opposite effect
that being the Government would actually reimburse the contractor for
costs in excess of the original acquisition cost. As a result, the
limitation at FAR 31.205-11(i)(1) and FAR 31.205-36(b)(2) has been
modified to reflect these concerns.
Limitation on losses from less than arm's-length transactions
4. Comment: One respondent states that the proposed rule ``is a
boon for government contractors and a bust for the government and
taxpayers.'' The respondent notes that proposed paragraph 31.205-16(d)
clearly limits the amount of credit accruing to the Government but that
the proposed rule has no limit on the losses the contractor can charge
to the Government. The respondent recommends that paragraph (b) include
language that eliminates the recognition of losses on Government
[[Page 33675]]
contracts that are not entered into in an arm's-length transaction.
Councils' response: Nonconcur. The provisions in the proposed
paragraph 31.205-16(d) limiting recognition of any gain on the
disposition of capital assets to the accumulated depreciation as of the
disposition date has been the cost principle provision for many years.
This provision is currently found in FAR 31.205-16(b). For contract
costing purposes, gains and losses are ``considered as adjustments of
depreciation costs previously recognized.'' The Government participates
in the cost associated with the use of the capital asset by the
contractor; this does not include any appreciation in asset value in
excess of its original cost. Therefore, the cost principle limits the
Government's recognition of the gain to the accumulated depreciation
costs. In addition, the proposed paragraph at 31.205-16(b)(2) limits
the allowable loss to the amount computed using ``fair market value,''
which protects the Government from participating in any potential
``paper losses.'' As a result, the Councils do not believe the
recommendation to add a provision relative to less than arm's-length
transactions is necessary.
Fair Market Value
5. Comment: Two respondents are opposed to using the language
``fair market value'' and recommend using the existing term ``net
amount realized,'' which is used in the proposed paragraph at 31.205-
16(c). The assertion is that the ``fair market value'' is an undefined
term and subject to multiple interpretations, which one of the
respondents noted as being a problematic concept that has led to
litigation. In addition, one respondent asserted that the use of ``fair
market value'' to measure the gain is inconsistent with the language
provided at CAS 409.50(j)(1). This respondent stated that CAS 409
measures the gain or loss as the difference between the net amount
realized and its undepreciated balance. The respondent believes that
since CAS is the determining authority for the measurement and
assignment of cost, the language should be revised to make it
consistent with CAS.
Councils' response: Partially concur. The concept of ``fair market
value'' is adopted widely in the financial and accounting literature
and is representative of the price for which the property could be sold
in an arm's-length transaction between unrelated parties. In the case
of sale and leaseback arrangements, the use of ``net amount realized''
instead of ``fair market value'' places the Government at risk for
potentially reimbursing the costs of raising capital. Sale and
leaseback arrangements are unique and can be structured by the parties
involved in many ways. Therefore, the use of ``fair market value''
helps to protect the Government from participating in any potential
``paper losses'' or artificially reduced gains. However, the Councils
recognize that the CAS governs the measurement of the gain or loss for
CAS covered contracts. Thus, the final rule reflects the measurement
provisions at CAS 409 for such contracts. Since the Councils believe
the measurement should be the same for all contracts, the final rule
also measures the gain or loss for non-CAS covered contracts in
accordance with CAS 409.
Although CAS 409 provides for the measurement of the gain or loss,
the Councils continue to be concerned that the Government may be at
risk of reimbursing the costs of raising capital (a cost the Government
does not normally reimburse, as indicated by the provision at FAR
31.205-27). In addition, the parties can structure the transaction such
that the Government participates in ``paper losses.'' Therefore, the
final rule in 31.205-16(b)(2) limits the allowable portion of any loss
to the difference between the fair market value and the undepreciated
balance of the asset on the date the contractor becomes a lessee. While
the Councils are also concerned about artificially reduced gains, the
FAR cannot recognize a gain in excess of the amount measured by CAS.
Thus, the allowable portion of the gain under the final rule is equal
to the amount measured by CAS 409.
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.
C. 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.
D. 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 Part 31
Government procurement.
Dated: May 27, 2005.
Julia B. Wise,
Director, Contract Policy Division.
0
Therefore, DoD, GSA, and NASA amend 48 CFR part 31 as set forth below:
PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES
0
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).
0
2. Amend section 31.205-11 by revising paragraph (i)(1) to read as
follows:
31.205-11 Depreciation.
* * * * *
(i)* * *
(1) Lease costs under a sale and leaseback arrangement are
allowable only up to the amount that would be allowed if the contractor
retained title, computed based on the net book value of the asset on
the date the contractor becomes a lessee of the property adjusted for
any gain or loss recognized in accordance with 31.205-16(b); and
* * * * *
0
3. Amend section 31.205-16 by--
0
a. Removing from paragraph (a) the words ``paragraph (d)'' and
inserting ``paragraph (f)'' in its place;
0
b. Redesignating paragraphs (b), (c), (d), (e), (f), and (g), as (c),
(e), (f), (g), (h), and (i), respectively;
0
c. Adding new paragraphs (b) and (d); and
0
d. Revising the newly designated paragraph (e)(2)(ii).
0
The revised and added text reads as follows:
31.205-16 Gains and losses on disposition or impairment of depreciable
property or other capital assets.
* * * * *
(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 net amount
realized and the undepreciated balance of the asset on the date the
contractor becomes a lessee; and
[[Page 33676]]
(2) When the application of (b)(1) of this subsection results in a
loss--
(i) The allowable portion of the loss is zero if the fair market
value exceeds the undepreciated balance of the asset on the date the
contractor becomes a lessee; and
(ii) The allowable portion of the loss is limited to the difference
between the fair market value and the undepreciated balance of the
asset on the date the contractor becomes a lessee if the fair market
value is less than the undepreciated balance of the asset on the date
the contractor becomes a lessee.
* * * * *
(d) The gain recognized for contract costing purposes shall be
limited 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
paragraphs (e)(2)(i) or (ii) of this subsection).
(e)* * *
(2)* * *
* * * * *
(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.
* * * * *
0
4. Amend section 31.205-36 by revising paragraph (b)(2) to read as
follows:
31.205-36 Rental costs.
* * * * *
(b)* * *
(2) Rental costs under a sale and leaseback arrangement only up to
the amount the contractor would be allowed if the contractor retained
title, computed based on the net book value of the asset on the date
the contractor becomes a lessee of the property adjusted for any gain
or loss recognized in accordance with 31.205-16(b).
* * * * *
[FR Doc. 05-11184 Filed 6-7-05; 8:45 am]