Federal Acquisition Regulation; Gains and Losses, 33673-33676 [05-11184]

Download as PDF Federal Register / Vol. 70, No. 109 / Wednesday, June 8, 2005 / Rules and Regulations Dated: May 27, 2005. Julia B. Wise, Director, Contract Policy Division. employees. Accrued PRB costs shall be— (A) Measured and assigned in accordance with generally accepted I Therefore, DoD, GSA, and NASA accounting principles. However, the amend 48 CFR parts 31 and 52 as set portion of PRB costs attributable to the forth below: transition obligation assigned to the I 1. The authority citation for 48 CFR current year that is in excess of the parts 31 and 52 is revised to read as amount assignable under the delayed follows: recognition methodology described in AUTHORITY: 40 U.S.C. 121(c); 10 U.S.C. paragraphs 112 and 113 of Financial chapter 137; and 42 U.S.C. 2473(c). Accounting Standards Board Statement 106 is unallowable. The transition PART 31—CONTRACT COST obligation is defined in Statement 106, PRINCIPLES AND PROCEDURES paragraph 110; (B) Paid to an insurer or trustee to I 2. Amend section 31.205–6 by revising paragraphs (k), (o)(2), (o)(3), and (o)(5) to establish and maintain a fund or reserve for the sole purpose of providing PRB to read as follows: retirees; and 31.205–6 Compensation for personal (C) Calculated in accordance with services. generally accepted actuarial principles * * * * * and practices as promulgated by the (k) Deferred compensation other than Actuarial Standards Board. pensions. The costs of deferred (3) To be allowable, PRB costs must compensation awards are allowable be funded by the time set for filing the subject to the following limitations: Federal income tax return or any (1) The costs shall be measured, extension thereof, or paid to an insurer, assigned, and allocated in accordance provider, or other recipient by the time with 48 CFR 9904.415, Accounting for set for filing the Federal income tax the Cost of Deferred Compensation. return or extension thereof. PRB costs (2) The costs of deferred assigned to the current year, but not compensation awards are unallowable if funded, paid or otherwise liquidated by the awards are made in periods the tax return due date as extended are subsequent to the period when the work not allowable in any subsequent year. being remunerated was performed. * * * * * * * * * * (5) The Government shall receive an (o) Postretirement benefits other than equitable share of any amount of pensions (PRB). previously funded PRB costs which revert or inure to the contractor. Such * * * * * (2) To be allowable, PRB costs shall be equitable share shall reflect the Government’s previous participation in incurred pursuant to law, employerPRB costs through those contracts for employee agreement, or an established which cost or pricing data were required policy of the contractor, and shall comply with paragraphs (o)(2)(i), (ii), or or which were subject to Subpart 31.2. (iii) of this subsection. * * * * * (i) Pay-as-you-go. PRB costs are not PART 52—SOLICITATION PROVISIONS accrued during the working lives of AND CONTRACT CLAUSES employees. Costs are assigned to the period in which— I 3. Revise section 52.215–18 to read as (A) Benefits are actually provided; or follows: (B) The costs are paid to an insurer, provider, or other recipient for current 52.215–18 Reversion or Adjustment of year benefits or premiums. Plans for Postretirement Benefits (PRB) (ii) Terminal funding. PRB costs are Other Than Pensions. not accrued during the working lives of As prescribed in 15.408(j), insert the the employees. following clause: (A) Terminal funding occurs when the REVERSION OR ADJUSTMENT OF PLANS entire PRB liability is paid in a lump FOR POSTRETIREMENT BENEFITS (PRB) sum upon the termination of employees OTHER THAN PENSIONS (JUL 2005) (a) The Contractor shall promptly notify (or upon conversion to such a terminalthe Contracting Officer in writing when the funded plan) to an insurer or trustee to establish and maintain a fund or reserve Contractor determines that it will terminate for the sole purpose of providing PRB to or reduce the benefits of a PRB plan. (b) If PRB fund assets revert or inure to the retirees. Contractor, or are constructively received by (B) Terminal funded costs shall be it under a plan termination or otherwise, the amortized over a period of 15 years. Contractor shall make a refund or give a (iii) Accrual basis. PRB costs are credit to the Government for its equitable accrued during the working lives of share as required by 31.205–6(o)(5) of the VerDate jul<14>2003 17:35 Jun 07, 2005 Jkt 205001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 33673 Federal Acquisition Regulation (FAR). When determining or agreeing on the method for recovery of the Government’s equitable share, the contracting parties should consider the following methods: cost reduction, amortizing the credit over a number of years (with appropriate interest), cash refund, or some other agreed upon method. Should the parties be unable to agree on the method for recovery of the Government’s equitable share, through good faith negotiations, the Contracting Officer shall designate the method of recovery. (c) The Contractor shall insert the substance of this clause in all subcontracts that meet the applicability requirements of FAR 15.408(j). (End of clause) [FR Doc. 05–11185 Filed 6–7–05; 8:45 am] BILLING CODE 6820–EP–S 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 Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA). ACTION: Final rule. AGENCIES: 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. E:\FR\FM\08JNR4.SGM 08JNR4 33674 DATES: Federal Register / Vol. 70, No. 109 / Wednesday, June 8, 2005 / Rules and Regulations Effective Date: July 8, 2005. 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. FOR FURTHER INFORMATION CONTACT: 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 VerDate jul<14>2003 17:35 Jun 07, 2005 Jkt 205001 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). 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 Disposition date an ‘‘either or’’ negotiation. As stated in 2. Comment: Two respondents the Federal Register at 69 FR 29380, support the disposition date being the May 21, 2004, the FAR ‘‘will continue date of the sale and leaseback to limit future lease costs to the costs of arrangement. However, the respondents ownership.’’ In addition, the longnoted that the use of the term standing policy, referred to as ‘‘arrangement’’ is ambiguous and subject ‘‘depreciation recapture’’ by the to various interpretations. The respondent, will continue in that ‘‘gains respondents have recommended using and losses on disposition of tangible language that represents the effective capital assets, including those acquired date (i.e., the date title passes from seller under capital leases (see 31.205–11(i)), to buyer) as the disposition date for the shall be considered as adjustments of sale and leaseback transaction. depreciation costs previously Councils’ response: Partially concur. recognized.’’ (see FAR 31.205–16(c)). The Councils agree that the date of the However, the Councils have sale and leaseback arrangement may be recognized that some additional subject to various interpretations. language is needed to ensure that the However, the Councils believe that the contractor’s and Government’s interests term ‘‘effective date’’ also would be are protected. The intent of this subject to various interpretations longstanding limitation in the cost because of the numerous underlying principles is that, for Government legal relationships that can affect a sale contract costing purposes, the contractor and leaseback arrangement. The should not benefit, nor should the Councils therefore have revised the contractor be harmed, for entering into language at FAR 31.205–16(b) to state a sale and leaseback agreement, and that that the gain or loss is determined on the recovery of costs should be limited the date that the contractor becomes a to the normal cost of ownership. As the lessee of the property. In addition, for respondent has noted, under the current clarity purposes, the Councils have proposed rule, the recognition of a gain removed the term ‘‘disposition date’’ may limit the contractor in its ability to from the proposed rule at FAR 31.205– recoup what would otherwise be 16(b)(1) and (2), since that term is not considered allowable costs up to the used elsewhere in this provision in original acquisition cost. Likewise, the discussing other asset dispositions. recognition of a loss may have the Depreciation recapture/lease cost opposite effect that being the limitation Government would actually reimburse the contractor for costs in excess of the 3. Comment: One respondent asserts that ‘‘the combined reading of proposed original acquisition cost. As a result, the limitation at FAR 31.205–11(i)(1) and 31.205–16(a), (b), (c) and (d) with FAR 31.205–36(b)(2) has been modified 31.205–11(m)(1) and 31.205–36(b)(2) to to reflect these concerns. mean that the contractor must provide both depreciation recapture and limit Limitation on losses from less than future lease charges to what would have arm’s-length transactions been the continuing ownership costs.’’ 4. Comment: One respondent states This respondent further states: that the proposed rule ‘‘is a boon for ‘‘This unclear and contentious area has government contractors and a bust for long been an inequitable proposition. For the government and taxpayers.’’ The example, a contractor sells a building for the original value. This results in a full respondent notes that proposed depreciation recapture and means that the paragraph 31.205–16(d) clearly limits Government received goods and services free the amount of credit accruing to the of any building costs. However, if the Government but that the proposed rule leaseback exceeds the previous ownership has no limit on the losses the contractor costs, then the contractor is forced to provide can charge to the Government. The future facilitization at less than cost. This is respondent recommends that paragraph clearly inequitable compared to other contractors who receive full recovery of their (b) include language that eliminates the recognition of losses on Government facility costs.’’ PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\08JNR4.SGM 08JNR4 Federal Register / Vol. 70, No. 109 / Wednesday, June 8, 2005 / Rules and Regulations 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’slength transaction between unrelated parties. In the case of sale and leaseback arrangements, the use of ‘‘net amount realized’’ instead of ‘‘fair market value’’ VerDate jul<14>2003 17:35 Jun 07, 2005 Jkt 205001 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. PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 33675 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. Therefore, DoD, GSA, and NASA amend 48 CFR part 31 as set forth below: I PART 31—CONTRACT COST PRINCIPLES AND PROCEDURES 1. The authority citation for 48 CFR part 31 is revised to read as follows: I Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42 U.S.C. 2473(c). 2. Amend section 31.205–11 by revising paragraph (i)(1) to read as follows: I 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 * * * * * I 3. Amend section 31.205–16 by— I a. Removing from paragraph (a) the words ‘‘paragraph (d)’’ and inserting ‘‘paragraph (f)’’ in its place; I b. Redesignating paragraphs (b), (c), (d), (e), (f), and (g), as (c), (e), (f), (g), (h), and (i), respectively; I c. Adding new paragraphs (b) and (d); and I d. Revising the newly designated paragraph (e)(2)(ii). I 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 E:\FR\FM\08JNR4.SGM 08JNR4 33676 Federal Register / Vol. 70, No. 109 / Wednesday, June 8, 2005 / Rules and Regulations (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. * * * * * 4. Amend section 31.205–36 by revising paragraph (b)(2) to read as follows: I 31.205–36 and National Aeronautics and Space Administration (NASA). ACTION: Small Entity Compliance Guide. 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] BILLING CODE 6820–EP–S DEPARTMENT OF DEFENSE GENERAL SERVICES ADMINISTRATION NATIONAL AERONAUTICS AND SPACE ADMINISTRATION 48 CFR Chapter 1 Federal Acquisition Regulation; Small Entity Compliance Guide AGENCIES: Department of Defense (DoD), General Services Administration (GSA), SUMMARY: This document is issued under the joint authority of the Secretary of Defense, the Administrator of General Services and the Administrator for the National Aeronautics and Space Administration. This Small Entity Compliance Guide has been prepared in accordance with Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996. It consists of a summary of rules appearing in Federal Acquisition Circular (FAC) 2005–04 which amend the FAR. An asterisk (*) next to a rule indicates that a regulatory flexibility analysis has been prepared. Interested parties may obtain further information regarding these rules by referring to FAC 2005–04 which precedes this document. These documents are also available via the Internet at http://www.acqnet.gov/ far. FOR FURTHER INFORMATION CONTACT: Laurieann Duarte, FAR Secretariat, (202) 501–4755. For clarification of content, contact the analyst whose name appears in the table below. LIST OF RULES IN FAC 2005–04 Item Subject I ............ II ........... *III ......... IV .......... Notification of Employee Rights Concerning Payment of Union Dues or Fees ................................. Telecommuting for Federal Contractors .............................................................................................. Incentives for Use of Performance-Based Contracting for Services .................................................. Submission of Cost or Pricing Data on Noncommercial Modifications of Commercial Items (Interim). Applicability of SDB and HUBZone Price Evaluation Factor .............................................................. Labor Standards for Contracts Involving Construction ....................................................................... Deferred Compensation and Postretirement Benefits Other Than Pensions ..................................... Gains and Losses ................................................................................................................................ *V ......... VI .......... VII ......... VIII ........ SUPPLEMENTARY INFORMATION: Summaries for each FAR rule follow. For the actual revisions and/or amendments to these FAR cases, refer to the specific item number and subject set forth in the documents following these item summaries. FAC 2005–04 amends the FAR as specified below: Item I—Notification of Employee Rights Concerning Payment of Union Dues or Fees (FAR Case 2004–010) This final rule adopts, without change, the interim rule published in the Federal Register at 69 FR 76352, December 20, 2004, and issued as Item IV of FAC 2001–26. It amends FAR parts VerDate jul<14>2003 17:35 Jun 07, 2005 Jkt 205001 FAR case 2, 22, and 52 to implement Executive Order (E.O.) 13201, Notification of Employee Rights Concerning Payment of Union Dues or Fees, and Department of Labor regulations at 29 CFR 470. The rule requires Government contractors and subcontractors to post notices informing their employees that under Federal law they cannot be required to join a union or maintain membership in a union to retain their jobs. The required notice also advises employees who are not union members that they can object to the use of their union dues for certain purposes. This rule applies to Federal contractors and subcontractors with contracts or subcontracts that exceed the simplified acquisition threshold, unless PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 Analyst 2004–010 2003–025 2004–004 2004–035 Marshall. Zaffos. Wise. Olson. 2003–015 2002–004 2001–031 2004–005 Marshall. Nelson. Olson. Olson. covered by an exemption granted by the Secretary of Labor. Item II—Telecommuting for Federal Contractors (FAR Case 2003–025) This rule finalizes without changes the interim rule published in the Federal Register at 69 FR 59701, October 5, 2004, and issued as Item III of FAC 2001–025. This final rule implements Section 1428 of the Services Acquisition Reform Act of 2003 (Title XIV of Public Law 108–136), which prohibits agencies from including a requirement in a solicitation that precludes an offeror from permitting its employees to telecommute or, when telecommuting is not precluded, from E:\FR\FM\08JNR4.SGM 08JNR4

Agencies

[Federal Register Volume 70, Number 109 (Wednesday, June 8, 2005)]
[Rules and Regulations]
[Pages 33673-33676]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-11184]


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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]
BILLING CODE 6820-EP-S