[Federal Register: June 28, 2006 (Volume 71, Number 124)]
[Rules and Regulations]
[Page 36939-36941]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jn06-21]
[[Page 36939]]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Part 31
[FAC 2005-10; FAR Case 2004-014; Item VI; Docket 2006-0020, Sequence 7]
RIN 9000-AK19
Federal Acquisition Regulation; FAR Case 2004-014, Buy-Back of
Assets
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 principle regarding depreciation costs. The final rule
adds language which addresses the allowability of depreciation costs of
reacquired assets involved in a sale and leaseback arrangement.
DATES: Effective Date: July 28, 2006.
FOR FURTHER INFORMATION CONTACT: For clarification of content, contact
Mr. Jeremy Olson, at (202) 501-4755. Please cite FAC 2005-10, FAR case
2004-014. For information pertaining to status or publication
schedules, contact the FAR Secretariat at (202) 501-3221.
SUPPLEMENTARY INFORMATION:
A. Background
In response to public comments related to proposed language at FAR
31.205-16 regarding the recognition of gains and losses associated with
a sale and leaseback arrangement (submitted under FAR case 2002-008 by
the FAR Part 31 Ad Hoc Committee), the Committee revised FAR 31.205-16
to state that the disposition date is the date of the sale and
leaseback arrangement. FAR case 2002-008 addressed three cost
principles. A new case, FAR case 2004-005, was later split-off and only
addressed sale and leaseback arrangements.
During the deliberations of FAR case 2002-008, DCAA brought to the
Committee's attention a concern regarding the cost treatment when a
contractor subsequently re-acquires title to an asset under a sale and
leaseback arrangement. The Committee recognized this concern, not just
for sale and leaseback arrangements, but also for assets that are
purchased, depreciated, sold, and subsequently repurchased. As such,
the issue involves a myriad of situations where a contractor
depreciates an asset or charges cost of ownership in lieu of lease
costs, disposes of that asset, and then reacquires the asset.
For example, in a sale and leaseback arrangement, a contractor may
purchase an asset in 2001. The contractor then enters into a sale and
leaseback arrangement in 2004, with a ten year lease. At the end of
2014, the contractor reacquires the asset. The question is if and how
much the contractor can charge for depreciation costs or usage charge
related to that asset.
In addition, consider a purchase of an asset in 2003 (without a
sale leaseback arrangement). The contractor depreciates the asset for
15 years, and then in 2018 sells the asset. In 2020, the contractor
reacquires the asset. Again the question is if and how much the
contractor can charge for depreciation costs or usage charges related
to the asset.
The Committee recognized this issue required research and
deliberation. The Committee therefore recommended that the DAR Council
establish a new case to address this buyback issue. The DAR Council
concurred with the recommendation, established the subject case (FAR
case 2004-014), and assigned the case to the FAR Acquisition Finance
Team.
On August 31, 2004, the FAR Acquisition Finance Team issued its
report on the subject case. The report noted that there are situations
when a contractor can and will reacquire an asset after relinquishing
title, in either a sale and leaseback arrangement or simply a typical
sale and subsequent repurchase. After extensive discussion within the
Team and respective members' Agencies, the Team concluded that the only
area that currently requires coverage is a sale and leaseback
arrangement.
The report noted that a contractor should not benefit or be
penalized for entering into a sale and leaseback arrangement, i.e., the
Government should reimburse the contractor the same amount for the
subject asset as if the contractor had retained title throughout the
service life of the asset. Therefore, the Team recommended revised
language for the determination of allowable depreciation expense that
includes consideration of--
The depreciation expense taken prior to the sale and
leaseback arrangement;
Any gain or loss recognized in accordance with FAR 31.205-
16(b); and
Any depreciation expense included in the calculation of
the normal cost of ownership for the limitations at FAR 31.205-36(b)(2)
and 31.205-11(h)(1).
A proposed rule was published in the Federal Register at 70 FR
34080, June 13, 2005. In response to the proposed rule, comments were
received from two commenters. These commenters oppose the proposed
rule, asserting that the rule penalizes contractors, ignores GAAP and
CAS, ignores the requirement to pay a contractor a reasonable cost, and
imposes an administrative burden. In addition, one commenter asserts
that the rule would cause a situation where a given asset's value and
allowable depreciation will differ depending on the relationships of
the parties from whom the asset is acquired. The Councils disagree with
each of the commenters assertions. As such, the final rule is identical
to the proposed rule published on June 13, 2005.
Public Comments
1. Contractor is penalized under proposed rule.
Comment: The commenters assert that the proposed rule is not
consistent with the Government position that a contractor should not
benefit or be penalized for entering into a sale and leaseback
arrangement. The commenters further assert that the recent changes to
FAR 31.205-11, 31.205-16, and 31.205-36 have constructed parameters
that penalize a contractor for having owned its facilities at any time
during contract performance. The commenters state that these rules
ensure the Government never pays more than the initial capitalized cost
of an asset regardless of changes in ownership, changes in invested
capital or changes in market rate.
Councils' Response: When a contractor purchases an asset and holds
that asset for the entire period of contact performance, the Government
pays no more than the initial capitalized cost of an asset. This has
been the longstanding policy of the Government. The Councils believe
this same policy should apply when a contractor re-acquires an asset
for which there was a sale and leaseback arrangement, i.e., the
Government should pay no more than the initial capitalized cost of the
asset. The Councils believe the proposed rule accomplishes this
objective.
2. GAAP and CAS 404.
Comment: The commenters assert that limiting allowable depreciation
costs to that which would have resulted if the contractor had retained
title throughout the service life of the asset ignores
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fundamental Cost Accounting Standard (CAS) 404 requirements and
Generally Accepted Accounting Principles (GAAP) for an asset to be
capitalized at its purchase price, even if that purchase is the
reacquisition of a previously owned asset.
Councils' Response: CAS provides criteria for measuring, assigning,
and allocating costs for CAS-covered contracts. However, FAR part 31
provides the criteria for allowability of those costs. Under the
proposed and final rules, the costs are measured, assigned, and
allocated in accordance with CAS for contracts that are subject to CAS
404. The proposed and final rules provide for a limitation on the
allowability of those measured, assigned, and allocated costs. Thus,
the proposed rule does not conflict with CAS.
In regards to GAAP, there are a number of cost principles, as well
as some cost accounting standards, that deviate from GAAP. This
deviation occurs for a variety of reasons. In many cases, the deviation
is necessary because GAAP is focused on reporting to investors, while
FAR focuses on cost reimbursement for Government contracts.
In the subject case, the Councils believe that neither CAS nor GAAP
provide adequate coverage when a contractor re-acquires an asset that
was part of a sale and leaseback arrangement. The Councils believe this
final rule is necessary to provide for consistent reimbursement
treatment for capital assets, i.e., the Government pays no more than
the initial capitalized cost of the asset.
3. Contractor should be reimbursed a reasonable cost.
Comment: The commenters assert that the proposed rule ignores the
basic principle that a contractor should be reimbursed for reasonable
cost incurred in the course of business.
Councils' Response: The Councils do not believe the contractor is
reimbursed an unreasonable cost under the proposed rule. The Councils
believe the longstanding policy of reimbursement based on the initial
capitalized cost is reasonable. The Councils further believe it is
unreasonable to reimburse a contractor for additional costs merely
because it sold an asset and then chose to re-acquire it shortly
afterwards.
4. Administrative burden.
Comment: The commenters state that the administrative time required
to document and track the ownership trail of the asset will become
needlessly complex and excessively burdensome.
Councils' Response: In drafting the proposed rule, the Councils
considered the administrative burden of tracking these assets for long
periods of time. The application of this provision is limited to
instances where the asset generated either depreciation expense or cost
of money during the most recent accounting period prior to the date of
reacquisition. The Councils do not believe it is an administrative
burden to obtain the necessary records in such cases, since the sale
and leaseback arrangement would have expired no earlier than the
accounting period prior to when the asset is re-acquired. The Councils
note that the application period for re-acquired assets is also
consistent with CAS 404-50(d)(1), which provides the capitalization
criteria for the acquisition of assets resulting from a business
combination.
5. Asset value and allowable depreciation differ based on
relationships of the parties.
Comment: One commenter asserts that the rule would cause a
situation where a given asset's value and allowable depreciation will
differ depending on the relationships of the parties from whom the
asset is acquired. The commenter states that when a contractor that
owns the building and then re-acquires the asset is compared to a
contractor that is conducting business under an operating lease, the
contractor that leases the building is reimbursed significantly more
costs than the contractor that owned the building. The commenter
asserts that the contractor that owned the building is forced to absorb
millions of dollars of costs deemed unallowable for Government costing
purposes.
Team Response: The subject rule does not establish a new policy of
providing differing reimbursement based on whether the contractor
leases or owns the asset (this is already an established policy). Under
FAR part 31, a contractor that enters into an operating lease is
reimbursed based on actual rental payments made. On the other hand, a
contractor that purchases an asset is reimbursed based on the actual
costs of ownership, which includes depreciation. As a result, the
amount a contractor is reimbursed differs depending on whether the
contractor leases or owns the asset. Under the subject rule, the
reimbursement for purchased assets continues to be based on cost of
ownership, i.e., the basis for reimbursement is the initial capitalized
cost of the asset.
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 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 principles and procedures discussed in this rule. For Fiscal
Year 2003, only 2.4% of all contract actions were cost contracts
awarded to small business.
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 Part 31
Government procurement.
Dated: June 20, 2006.
Linda Nelson,
Deputy 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 continues 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 (g); removing
paragraph (h); and redesignating paragraph (i) as (h). The revised text
reads as follows:
31.205-11 Depreciation.
* * * * *
(g) Whether or not the contract is otherwise subject to CAS the
following apply:
(1) The requirements of 31.205-52 shall be observed.
(2) 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
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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.
(3)(i) In the event the contractor reacquires property involved in
a sale and leaseback arrangement, allowable depreciation of reacquired
property shall be based on the net book value of the asset as of the
date the contractor originally became a lessee of the property in the
sale and leaseback arrangement--
(A) Adjusted for any allowable gain or loss determined in
accordance with 31.205-16(b); and
(B) Less any amount of depreciation expense included in the
calculation of the amount that would have been allowed had the
contractor retained title under 31.205-11(h)(1) and 31.205-36(b)(2).
(ii) As used in this paragraph (g)(3), reacquired property is
property that generated either any depreciation expense or any cost of
money considered in the calculation of the limitations under 31.205-
11(h)(1) and 31.205-36(b)(2) during the most recent accounting period
prior to the date of reacquisition.
* * * * *
31.205-16 [Amended]
0
3. Amend section 31.205-16 by--
0
a. Removing from the introductory text of paragraph (b) ``31.205-
11(i)(1)'' and adding ``31.205-11(h)(1)'' in its place; and
0
b. Removing from paragraph (c) ``31.205-11(i)'' and adding ``31.205-
11(h)'' in its place.
[FR Doc. 06-5706 Filed 6-27-06; 8:45 am]
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