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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: January 30, 2003

SUBJECT: Federal Acquisition Regulation (FAR); Depreciation Cost Principle

SOURCE: Federal Register, January 30, 2003, Vol. 68, No. 20, page 4875

AGENCIES: Department of Defense (DOD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA)

ACTION: Proposed Rule

SYNOPSIS: It is proposed that FAR 31.205-11, Depreciation, be revised to retain, delete, or clarify specific requirements of the cost principle.

EDITOR'S NOTE: The Cost Accounting Standards (CAS) are Title 48 of the Code of Federal Regulations, Chapter 99. They available at http://www.acqnet.gov/far/97/html/appendix.html.

DATES: Comments are due on or before March 31, 2003.

ADDRESSES: Submit written comments on the proposed rule to General Services Administration, FAR Secretariat (MVA), 1800 F Street, NW, Room 4035, Attn: Laurie Duarte, Washington, DC 20405. Submit e-mail comments to: farcase.2001-026@gsa.gov. Cite "FAR case 2001-026" when referring to this proposed rule.

FOR FURTHER INFORMATION CONTACT: Ralph De Stefano, 202-501-1758.

SUPPLEMENTAL INFORMATION: The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council performed a comprehensive review of the FAR 31.205-11 cost principle 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:

• Definition of depreciation. Because the language currently in FAR 31.205-11(a) is a definition of "depreciation," it is proposed to be moved to FAR 2.101, Definitions, since "depreciation" is used throughout the FAR.
  
  
• Residual values. FAR 31.205-11 is more restrictive than CAS because the cost principle requires a contractor to use residual values in establishing depreciation costs, while CAS 409, Depreciation of Tangible Capital Assets (CAS Section 9904.409 (48 CFR 9904.409)) allows contractors to ignore residual values under 10% for tangible personal property (paragraph (h) of 48 CFR 9904.409-50, Techniques for Application). The proposed rule would add the following language to new paragraph (a) of FAR 31.205-11 to make the policy on residual values consistent with CAS 409: "For tangible personal property, only estimated residual values that exceed 10% 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."
  
  
• 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 references to federal income tax accounting in paragraphs (d)(3) and (e) 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.
  
  
• Write-down due to business combinations/impaired assets. Current paragraphs (n) and (o) would be redesignated as paragraphs (g) and (h). These paragraphs 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.
  
  New paragraph (c) would state, "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." The Councils added "except as indicated in paragraphs (g) and (h) of this subsection" to eliminate any potential inequity caused between these paragraphs. 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 an 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.
  
  
• Emergency facilities. The current paragraph at FAR 31.205-11(i) would be deleted since the Councils are not aware of any existing contracts supporting the operation of emergency facilities covered by certificates of necessity.

Other changes would be made to FAR 31.205-11 to clarify, improve structure, and remove redundancies throughout the cost principle.

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

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