Federal Acquisition Regulation; Gains and Losses, 33673-33676 [05-11184]
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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
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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.
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(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
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(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.
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(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
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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.
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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
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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.’’
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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’’
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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.
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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.
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(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
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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.
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(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
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(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.
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*
(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)* * *
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(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.
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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.
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(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).
*
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*
[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 https://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
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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
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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
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]]>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
