Federal Acquisition Regulation; FAR Case 2004-014, Buy-Back of Assets, 36939-36941 [06-5706]
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Federal Register / Vol. 71, No. 124 / Wednesday, June 28, 2006 / Rules and Regulations
DEPARTMENT OF DEFENSE
GENERAL SERVICES
ADMINISTRATION
NATIONAL AERONAUTICS AND
SPACE ADMINISTRATION
48 CFR Part 31
[FAC 2005–10; FAR Case 2004–014; Item
VI; Docket 2006–0020, Sequence 7]
RIN 9000–AK19
Federal Acquisition Regulation; FAR
Case 2004–014, Buy-Back of Assets
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 principle regarding
depreciation costs. The final rule adds
language which addresses the
allowability of depreciation costs of
reacquired assets involved in a sale and
leaseback arrangement.
DATES: Effective Date: July 28, 2006.
FOR FURTHER INFORMATION CONTACT: For
clarification of content, contact Mr.
Jeremy Olson, at (202) 501–4755. Please
cite FAC 2005–10, FAR case 2004–014.
For information pertaining to status or
publication schedules, contact the FAR
Secretariat at (202) 501–3221.
SUPPLEMENTARY INFORMATION:
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A. Background
In response to public comments
related to proposed language at FAR
31.205–16 regarding the recognition of
gains and losses associated with a sale
and leaseback arrangement (submitted
under FAR case 2002–008 by the FAR
Part 31 Ad Hoc Committee), the
Committee revised FAR 31.205–16 to
state that the disposition date is the date
of the sale and leaseback arrangement.
FAR case 2002–008 addressed three cost
principles. A new case, FAR case 2004–
005, was later split-off and only
addressed sale and leaseback
arrangements.
During the deliberations of FAR case
2002–008, DCAA brought to the
Committee’s attention a concern
regarding the cost treatment when a
contractor subsequently re-acquires title
to an asset under a sale and leaseback
arrangement. The Committee recognized
this concern, not just for sale and
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leaseback arrangements, but also for
assets that are purchased, depreciated,
sold, and subsequently repurchased. As
such, the issue involves a myriad of
situations where a contractor
depreciates an asset or charges cost of
ownership in lieu of lease costs,
disposes of that asset, and then
reacquires the asset.
For example, in a sale and leaseback
arrangement, a contractor may purchase
an asset in 2001. The contractor then
enters into a sale and leaseback
arrangement in 2004, with a ten year
lease. At the end of 2014, the contractor
reacquires the asset. The question is if
and how much the contractor can
charge for depreciation costs or usage
charge related to that asset.
In addition, consider a purchase of an
asset in 2003 (without a sale leaseback
arrangement). The contractor
depreciates the asset for 15 years, and
then in 2018 sells the asset. In 2020, the
contractor reacquires the asset. Again
the question is if and how much the
contractor can charge for depreciation
costs or usage charges related to the
asset.
The Committee recognized this issue
required research and deliberation. The
Committee therefore recommended that
the DAR Council establish a new case to
address this buyback issue. The DAR
Council concurred with the
recommendation, established the
subject case (FAR case 2004–014), and
assigned the case to the FAR
Acquisition Finance Team.
On August 31, 2004, the FAR
Acquisition Finance Team issued its
report on the subject case. The report
noted that there are situations when a
contractor can and will reacquire an
asset after relinquishing title, in either a
sale and leaseback arrangement or
simply a typical sale and subsequent
repurchase. After extensive discussion
within the Team and respective
members’ Agencies, the Team
concluded that the only area that
currently requires coverage is a sale and
leaseback arrangement.
The report noted that a contractor
should not benefit or be penalized for
entering into a sale and leaseback
arrangement, i.e., the Government
should reimburse the contractor the
same amount for the subject asset as if
the contractor had retained title
throughout the service life of the asset.
Therefore, the Team recommended
revised language for the determination
of allowable depreciation expense that
includes consideration of—
• The depreciation expense taken
prior to the sale and leaseback
arrangement;
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36939
• Any gain or loss recognized in
accordance with FAR 31.205–16(b); and
• Any depreciation expense included
in the calculation of the normal cost of
ownership for the limitations at FAR
31.205–36(b)(2) and 31.205–11(h)(1).
A proposed rule was published in the
Federal Register at 70 FR 34080, June
13, 2005. In response to the proposed
rule, comments were received from two
commenters. These commenters oppose
the proposed rule, asserting that the rule
penalizes contractors, ignores GAAP
and CAS, ignores the requirement to pay
a contractor a reasonable cost, and
imposes an administrative burden. In
addition, one commenter asserts that the
rule would cause a situation where a
given asset’s value and allowable
depreciation will differ depending on
the relationships of the parties from
whom the asset is acquired. The
Councils disagree with each of the
commenters assertions. As such, the
final rule is identical to the proposed
rule published on June 13, 2005.
Public Comments
1. Contractor is penalized under
proposed rule.
Comment: The commenters assert that
the proposed rule is not consistent with
the Government position that a
contractor should not benefit or be
penalized for entering into a sale and
leaseback arrangement. The commenters
further assert that the recent changes to
FAR 31.205–11, 31.205–16, and 31.205–
36 have constructed parameters that
penalize a contractor for having owned
its facilities at any time during contract
performance. The commenters state that
these rules ensure the Government
never pays more than the initial
capitalized cost of an asset regardless of
changes in ownership, changes in
invested capital or changes in market
rate.
Councils’ Response: When a
contractor purchases an asset and holds
that asset for the entire period of contact
performance, the Government pays no
more than the initial capitalized cost of
an asset. This has been the longstanding
policy of the Government. The Councils
believe this same policy should apply
when a contractor re-acquires an asset
for which there was a sale and leaseback
arrangement, i.e., the Government
should pay no more than the initial
capitalized cost of the asset. The
Councils believe the proposed rule
accomplishes this objective.
2. GAAP and CAS 404.
Comment: The commenters assert that
limiting allowable depreciation costs to
that which would have resulted if the
contractor had retained title throughout
the service life of the asset ignores
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36940
Federal Register / Vol. 71, No. 124 / Wednesday, June 28, 2006 / Rules and Regulations
fundamental Cost Accounting Standard
(CAS) 404 requirements and Generally
Accepted Accounting Principles
(GAAP) for an asset to be capitalized at
its purchase price, even if that purchase
is the reacquisition of a previously
owned asset.
Councils’ Response: CAS provides
criteria for measuring, assigning, and
allocating costs for CAS-covered
contracts. However, FAR part 31
provides the criteria for allowability of
those costs. Under the proposed and
final rules, the costs are measured,
assigned, and allocated in accordance
with CAS for contracts that are subject
to CAS 404. The proposed and final
rules provide for a limitation on the
allowability of those measured,
assigned, and allocated costs. Thus, the
proposed rule does not conflict with
CAS.
In regards to GAAP, there are a
number of cost principles, as well as
some cost accounting standards, that
deviate from GAAP. This deviation
occurs for a variety of reasons. In many
cases, the deviation is necessary because
GAAP is focused on reporting to
investors, while FAR focuses on cost
reimbursement for Government
contracts.
In the subject case, the Councils
believe that neither CAS nor GAAP
provide adequate coverage when a
contractor re-acquires an asset that was
part of a sale and leaseback
arrangement. The Councils believe this
final rule is necessary to provide for
consistent reimbursement treatment for
capital assets, i.e., the Government pays
no more than the initial capitalized cost
of the asset.
3. Contractor should be reimbursed a
reasonable cost.
Comment: The commenters assert that
the proposed rule ignores the basic
principle that a contractor should be
reimbursed for reasonable cost incurred
in the course of business.
Councils’ Response: The Councils do
not believe the contractor is reimbursed
an unreasonable cost under the
proposed rule. The Councils believe the
longstanding policy of reimbursement
based on the initial capitalized cost is
reasonable. The Councils further believe
it is unreasonable to reimburse a
contractor for additional costs merely
because it sold an asset and then chose
to re-acquire it shortly afterwards.
4. Administrative burden.
Comment: The commenters state that
the administrative time required to
document and track the ownership trail
of the asset will become needlessly
complex and excessively burdensome.
Councils’ Response: In drafting the
proposed rule, the Councils considered
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the administrative burden of tracking
these assets for long periods of time.
The application of this provision is
limited to instances where the asset
generated either depreciation expense or
cost of money during the most recent
accounting period prior to the date of
reacquisition. The Councils do not
believe it is an administrative burden to
obtain the necessary records in such
cases, since the sale and leaseback
arrangement would have expired no
earlier than the accounting period prior
to when the asset is re-acquired. The
Councils note that the application
period for re-acquired assets is also
consistent with CAS 404–50(d)(1),
which provides the capitalization
criteria for the acquisition of assets
resulting from a business combination.
5. Asset value and allowable
depreciation differ based on
relationships of the parties.
Comment: One commenter asserts
that the rule would cause a situation
where a given asset’s value and
allowable depreciation will differ
depending on the relationships of the
parties from whom the asset is acquired.
The commenter states that when a
contractor that owns the building and
then re-acquires the asset is compared to
a contractor that is conducting business
under an operating lease, the contractor
that leases the building is reimbursed
significantly more costs than the
contractor that owned the building. The
commenter asserts that the contractor
that owned the building is forced to
absorb millions of dollars of costs
deemed unallowable for Government
costing purposes.
Team Response: The subject rule does
not establish a new policy of providing
differing reimbursement based on
whether the contractor leases or owns
the asset (this is already an established
policy). Under FAR part 31, a contractor
that enters into an operating lease is
reimbursed based on actual rental
payments made. On the other hand, a
contractor that purchases an asset is
reimbursed based on the actual costs of
ownership, which includes
depreciation. As a result, the amount a
contractor is reimbursed differs
depending on whether the contractor
leases or owns the asset. Under the
subject rule, the reimbursement for
purchased assets continues to be based
on cost of ownership, i.e., the basis for
reimbursement is the initial capitalized
cost of the asset.
This is not a significant regulatory
action and, therefore, was not subject to
review under Section 6(b) of Executive
Order 12866, Regulatory Planning and
Review, dated September 30, 1993. This
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rule is not a major rule under 5 U.S.C.
804.
B. Regulatory Flexibility Act
The Department of Defense, the
General Services Administration, and
the National Aeronautics and Space
Administration certify that this final
rule will not have a significant
economic impact on a substantial
number of small entities within the
meaning of the Regulatory Flexibility
Act, 5 U.S.C. 601, et seq., because most
contracts awarded to small entities use
simplified acquisition procedures or are
awarded on a competitive, fixed-price
basis, and do not require application of
the cost principles and procedures
discussed in this rule. For Fiscal Year
2003, only 2.4% of all contract actions
were cost contracts awarded to small
business.
C. Paperwork Reduction Act
The Paperwork Reduction Act does
not apply because the proposed changes
to the FAR do not impose information
collection requirements that require the
approval of the Office of Management
and Budget under 44 U.S.C. 3501, et
seq.
List of Subjects in 48 CFR Part 31
Government procurement.
Dated: June 20, 2006.
Linda Nelson,
Deputy Director, Contract Policy Division.
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 continues 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 (g); removing
paragraph (h); and redesignating
paragraph (i) as (h). The revised text
reads as follows:
I
31.205–11
Depreciation.
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*
*
*
*
(g) Whether or not the contract is
otherwise subject to CAS the following
apply:
(1) The requirements of 31.205–52
shall be observed.
(2) In the event of a write-down from
carrying value to fair value as a result
of impairments caused by events or
changes in circumstances, allowable
depreciation of the impaired assets is
limited to the amounts that would have
been allowed had the assets not been
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Federal Register / Vol. 71, No. 124 / Wednesday, June 28, 2006 / Rules and Regulations
written down (see 31.205–16(g)).
However, this does not preclude a
change in depreciation resulting from
other causes such as permissible
changes in estimates of service life,
consumption of services, or residual
value.
(3)(i) In the event the contractor
reacquires property involved in a sale
and leaseback arrangement, allowable
depreciation of reacquired property
shall be based on the net book value of
the asset as of the date the contractor
originally became a lessee of the
property in the sale and leaseback
arrangement—
(A) Adjusted for any allowable gain or
loss determined in accordance with
31.205–16(b); and
(B) Less any amount of depreciation
expense included in the calculation of
the amount that would have been
allowed had the contractor retained title
under 31.205–11(h)(1) and 31.205–
36(b)(2).
(ii) As used in this paragraph (g)(3),
reacquired property is property that
generated either any depreciation
expense or any cost of money
considered in the calculation of the
limitations under 31.205–11(h)(1) and
31.205–36(b)(2) during the most recent
accounting period prior to the date of
reacquisition.
*
*
*
*
*
31.205–16
[Amended]
3. Amend section 31.205–16 by—
a. Removing from the introductory
text of paragraph (b) ‘‘31.205–11(i)(1)’’
and adding ‘‘31.205–11(h)(1)’’ in its
place; and
I b. Removing from paragraph (c)
‘‘31.205–11(i)’’ and adding ‘‘31.205–
11(h)’’ in its place.
I
I
[FR Doc. 06–5706 Filed 6–27–06; 8:45 am]
SUMMARY: This document amends the
Federal Acquisition Regulation (FAR) to
make editorial changes.
DATES: Effective Date: June 28, 2006.
FOR FURTHER INFORMATION CONTACT The
FAR Secretariat, Room 4035, GS
Building, Washington, DC, 20405, (202)
501–4755, for information pertaining to
status or publication schedules. Please
cite FAC 2005–10, Technical
Amendments.
SUPPLEMENTARY INFORMATION:
(c) * * *
(1) National Industries for the Blind,
1310 Braddock Place, Alexandria, VA
22314–1691, (703) 310–0500; and
(2) NISH, 8401 Old Courthouse Road,
Vienna, VA 22182, (571) 226–4660.
(End of clause)
I 5. Amend section 52.212–3 by
revising the date of the clause; and
removing from the heading of paragraph
(h) ‘‘Executive Order 12549’’ and adding
‘‘Executive Order 12689’’ in its place.
The revised text reads as follows:
List of Subjects in 48 CFR Parts 8, 33,
and 52
Government procurement.
52.212–3 Offeror Representations and
Certifications—Commercial Items.
Dated: June 20, 2006.
Ralph De Stefano,
Director, Contract Policy Division.
OFFEROR REPRESENTATIONS AND
CERTIFICATIONS—COMMERCIAL ITEMS
(JUN 2006)
I
Therefore, DoD, GSA, and NASA
amend 48 CFR parts 8, 33, and 52 as set
forth below:
I 1. The authority citation for 48 CFR
parts 8, 33, and 52 continues to read as
follows:
*
Authority: 40 U.S.C. 121(c); 10 U.S.C.
chapter 137; and 42 U.S.C. 2473(c).
52.225–11 Buy American Act—
Construction Materials under Trade
Agreements.
PART 8—REQUIRED SOURCES OF
SUPPLIES AND SERVICES
*
2. Revise section 8.714(a)(1) and (2) to
read as follows:
I
8.714 Communications with the central
nonprofit agencies and the Committee.
(a) * * *
(1) National Industries for the Blind,
1310 Braddock Place, Alexandria, VA
22314–1691, (703) 310–0500; and
(2) NISH, 8401 Old Courthouse Road,
Vienna, VA 22182, (571) 226–4660.
*
*
*
*
*
PART 33—PROTESTS, DISPUTES,
AND APPEALS
BILLING CODE 6820–EP–S
33.102
GENERAL SERVICES
ADMINISTRATION
3. Amend section 33.102 by removing
from the end of paragraph (b)(1) the
word ‘‘and’’; and by removing the
period from the end of paragraph (b)(2)
and adding ‘‘; and’’ in its place.
NATIONAL AERONAUTICS AND
SPACE ADMINISTRATION
PART 52—SOLICITATION PROVISIONS
AND CONTRACT CLAUSES
48 CFR Parts 8, 33, and 52
I
[FAC 2005–10; Item VII; Docket 2006–0021]
rwilkins on PROD1PC63 with RULES_3
Federal Acquisition Regulation;
Technical Amendments
Department of Defense (DoD),
General Services Administration (GSA),
and National Aeronautics and Space
Administration (NASA).
ACTION: Final rule.
AGENCIES:
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17:14 Jun 27, 2006
Jkt 208001
4. Amend section 52.208–9 by
revising the date of the clause and
paragraphs (c)(1) and (2) to read as
follows:
52.208–9 Contractor Use of Mandatory
Sources of Supply or Services.
*
*
*
*
*
CONTRACTOR USE OF MANDATORY
SOURCES OF SUPPLY OR SERVICES (JUN
2006)
*
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*
6. Amend section 52.225–11 by
revising the date of the clause; and
removing from paragraph (b)(2) the
comma after ‘‘or’’ in the first line. The
revised text reads as follows:
I
*
*
*
*
BUY AMERICAN ACT—CONSTRUCTION
MATERIALS UNDER TRADE AGREEMENTS
(JUN 2006)
*
*
*
*
*
[FR Doc. 06–5705 Filed 6–27–06; 8:45 am]
BILLING CODE 6820–EP–S
DEPARTMENT OF DEFENSE
GENERAL SERVICES
ADMINISTRATION
NATIONAL AERONAUTICS AND
SPACE ADMINISTRATION
48 CFR Chapter 1
[Amended]
I
DEPARTMENT OF DEFENSE
36941
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Docket FAR—2006—0023
Federal Acquisition Regulation;
Federal Acquisition Circular 2005–10;
Small Entity Compliance Guide
Department of Defense (DoD),
General Services Administration (GSA),
and National Aeronautics and Space
Administration (NASA).
ACTION: Small Entity Compliance Guide.
AGENCIES:
SUMMARY: This document is issued
under the joint authority of the
Secretary of Defense, the Administrator
of General Services and the
Administrator of the National
Aeronautics and Space Administration.
This Small Entity Compliance Guide has
been prepared in accordance with
Section 212 of the Small Business
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]]>Agencies
[Federal Register Volume 71, Number 124 (Wednesday, June 28, 2006)]
[Rules and Regulations]
[Pages 36939-36941]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-5706]
[[Page 36939]]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Part 31
[FAC 2005-10; FAR Case 2004-014; Item VI; Docket 2006-0020, Sequence 7]
RIN 9000-AK19
Federal Acquisition Regulation; FAR Case 2004-014, Buy-Back of
Assets
AGENCIES: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Civilian Agency Acquisition Council and the Defense
Acquisition Regulations Council (Councils) have agreed on a final rule
amending the Federal Acquisition Regulation (FAR) by revising the
contract cost principle regarding depreciation costs. The final rule
adds language which addresses the allowability of depreciation costs of
reacquired assets involved in a sale and leaseback arrangement.
DATES: Effective Date: July 28, 2006.
FOR FURTHER INFORMATION CONTACT: For clarification of content, contact
Mr. Jeremy Olson, at (202) 501-4755. Please cite FAC 2005-10, FAR case
2004-014. For information pertaining to status or publication
schedules, contact the FAR Secretariat at (202) 501-3221.
SUPPLEMENTARY INFORMATION:
A. Background
In response to public comments related to proposed language at FAR
31.205-16 regarding the recognition of gains and losses associated with
a sale and leaseback arrangement (submitted under FAR case 2002-008 by
the FAR Part 31 Ad Hoc Committee), the Committee revised FAR 31.205-16
to state that the disposition date is the date of the sale and
leaseback arrangement. FAR case 2002-008 addressed three cost
principles. A new case, FAR case 2004-005, was later split-off and only
addressed sale and leaseback arrangements.
During the deliberations of FAR case 2002-008, DCAA brought to the
Committee's attention a concern regarding the cost treatment when a
contractor subsequently re-acquires title to an asset under a sale and
leaseback arrangement. The Committee recognized this concern, not just
for sale and leaseback arrangements, but also for assets that are
purchased, depreciated, sold, and subsequently repurchased. As such,
the issue involves a myriad of situations where a contractor
depreciates an asset or charges cost of ownership in lieu of lease
costs, disposes of that asset, and then reacquires the asset.
For example, in a sale and leaseback arrangement, a contractor may
purchase an asset in 2001. The contractor then enters into a sale and
leaseback arrangement in 2004, with a ten year lease. At the end of
2014, the contractor reacquires the asset. The question is if and how
much the contractor can charge for depreciation costs or usage charge
related to that asset.
In addition, consider a purchase of an asset in 2003 (without a
sale leaseback arrangement). The contractor depreciates the asset for
15 years, and then in 2018 sells the asset. In 2020, the contractor
reacquires the asset. Again the question is if and how much the
contractor can charge for depreciation costs or usage charges related
to the asset.
The Committee recognized this issue required research and
deliberation. The Committee therefore recommended that the DAR Council
establish a new case to address this buyback issue. The DAR Council
concurred with the recommendation, established the subject case (FAR
case 2004-014), and assigned the case to the FAR Acquisition Finance
Team.
On August 31, 2004, the FAR Acquisition Finance Team issued its
report on the subject case. The report noted that there are situations
when a contractor can and will reacquire an asset after relinquishing
title, in either a sale and leaseback arrangement or simply a typical
sale and subsequent repurchase. After extensive discussion within the
Team and respective members' Agencies, the Team concluded that the only
area that currently requires coverage is a sale and leaseback
arrangement.
The report noted that a contractor should not benefit or be
penalized for entering into a sale and leaseback arrangement, i.e., the
Government should reimburse the contractor the same amount for the
subject asset as if the contractor had retained title throughout the
service life of the asset. Therefore, the Team recommended revised
language for the determination of allowable depreciation expense that
includes consideration of--
The depreciation expense taken prior to the sale and
leaseback arrangement;
Any gain or loss recognized in accordance with FAR 31.205-
16(b); and
Any depreciation expense included in the calculation of
the normal cost of ownership for the limitations at FAR 31.205-36(b)(2)
and 31.205-11(h)(1).
A proposed rule was published in the Federal Register at 70 FR
34080, June 13, 2005. In response to the proposed rule, comments were
received from two commenters. These commenters oppose the proposed
rule, asserting that the rule penalizes contractors, ignores GAAP and
CAS, ignores the requirement to pay a contractor a reasonable cost, and
imposes an administrative burden. In addition, one commenter asserts
that the rule would cause a situation where a given asset's value and
allowable depreciation will differ depending on the relationships of
the parties from whom the asset is acquired. The Councils disagree with
each of the commenters assertions. As such, the final rule is identical
to the proposed rule published on June 13, 2005.
Public Comments
1. Contractor is penalized under proposed rule.
Comment: The commenters assert that the proposed rule is not
consistent with the Government position that a contractor should not
benefit or be penalized for entering into a sale and leaseback
arrangement. The commenters further assert that the recent changes to
FAR 31.205-11, 31.205-16, and 31.205-36 have constructed parameters
that penalize a contractor for having owned its facilities at any time
during contract performance. The commenters state that these rules
ensure the Government never pays more than the initial capitalized cost
of an asset regardless of changes in ownership, changes in invested
capital or changes in market rate.
Councils' Response: When a contractor purchases an asset and holds
that asset for the entire period of contact performance, the Government
pays no more than the initial capitalized cost of an asset. This has
been the longstanding policy of the Government. The Councils believe
this same policy should apply when a contractor re-acquires an asset
for which there was a sale and leaseback arrangement, i.e., the
Government should pay no more than the initial capitalized cost of the
asset. The Councils believe the proposed rule accomplishes this
objective.
2. GAAP and CAS 404.
Comment: The commenters assert that limiting allowable depreciation
costs to that which would have resulted if the contractor had retained
title throughout the service life of the asset ignores
[[Page 36940]]
fundamental Cost Accounting Standard (CAS) 404 requirements and
Generally Accepted Accounting Principles (GAAP) for an asset to be
capitalized at its purchase price, even if that purchase is the
reacquisition of a previously owned asset.
Councils' Response: CAS provides criteria for measuring, assigning,
and allocating costs for CAS-covered contracts. However, FAR part 31
provides the criteria for allowability of those costs. Under the
proposed and final rules, the costs are measured, assigned, and
allocated in accordance with CAS for contracts that are subject to CAS
404. The proposed and final rules provide for a limitation on the
allowability of those measured, assigned, and allocated costs. Thus,
the proposed rule does not conflict with CAS.
In regards to GAAP, there are a number of cost principles, as well
as some cost accounting standards, that deviate from GAAP. This
deviation occurs for a variety of reasons. In many cases, the deviation
is necessary because GAAP is focused on reporting to investors, while
FAR focuses on cost reimbursement for Government contracts.
In the subject case, the Councils believe that neither CAS nor GAAP
provide adequate coverage when a contractor re-acquires an asset that
was part of a sale and leaseback arrangement. The Councils believe this
final rule is necessary to provide for consistent reimbursement
treatment for capital assets, i.e., the Government pays no more than
the initial capitalized cost of the asset.
3. Contractor should be reimbursed a reasonable cost.
Comment: The commenters assert that the proposed rule ignores the
basic principle that a contractor should be reimbursed for reasonable
cost incurred in the course of business.
Councils' Response: The Councils do not believe the contractor is
reimbursed an unreasonable cost under the proposed rule. The Councils
believe the longstanding policy of reimbursement based on the initial
capitalized cost is reasonable. The Councils further believe it is
unreasonable to reimburse a contractor for additional costs merely
because it sold an asset and then chose to re-acquire it shortly
afterwards.
4. Administrative burden.
Comment: The commenters state that the administrative time required
to document and track the ownership trail of the asset will become
needlessly complex and excessively burdensome.
Councils' Response: In drafting the proposed rule, the Councils
considered the administrative burden of tracking these assets for long
periods of time. The application of this provision is limited to
instances where the asset generated either depreciation expense or cost
of money during the most recent accounting period prior to the date of
reacquisition. The Councils do not believe it is an administrative
burden to obtain the necessary records in such cases, since the sale
and leaseback arrangement would have expired no earlier than the
accounting period prior to when the asset is re-acquired. The Councils
note that the application period for re-acquired assets is also
consistent with CAS 404-50(d)(1), which provides the capitalization
criteria for the acquisition of assets resulting from a business
combination.
5. Asset value and allowable depreciation differ based on
relationships of the parties.
Comment: One commenter asserts that the rule would cause a
situation where a given asset's value and allowable depreciation will
differ depending on the relationships of the parties from whom the
asset is acquired. The commenter states that when a contractor that
owns the building and then re-acquires the asset is compared to a
contractor that is conducting business under an operating lease, the
contractor that leases the building is reimbursed significantly more
costs than the contractor that owned the building. The commenter
asserts that the contractor that owned the building is forced to absorb
millions of dollars of costs deemed unallowable for Government costing
purposes.
Team Response: The subject rule does not establish a new policy of
providing differing reimbursement based on whether the contractor
leases or owns the asset (this is already an established policy). Under
FAR part 31, a contractor that enters into an operating lease is
reimbursed based on actual rental payments made. On the other hand, a
contractor that purchases an asset is reimbursed based on the actual
costs of ownership, which includes depreciation. As a result, the
amount a contractor is reimbursed differs depending on whether the
contractor leases or owns the asset. Under the subject rule, the
reimbursement for purchased assets continues to be based on cost of
ownership, i.e., the basis for reimbursement is the initial capitalized
cost of the asset.
This is not a significant regulatory action and, therefore, was not
subject to review under Section 6(b) of Executive Order 12866,
Regulatory Planning and Review, dated September 30, 1993. This rule is
not a major rule under 5 U.S.C. 804.
B. Regulatory Flexibility Act
The Department of Defense, the General Services Administration, and
the National Aeronautics and Space Administration certify that this
final rule will not have a significant economic impact on a substantial
number of small entities within the meaning of the Regulatory
Flexibility Act, 5 U.S.C. 601, et seq., because most contracts awarded
to small entities use simplified acquisition procedures or are awarded
on a competitive, fixed-price basis, and do not require application of
the cost principles and procedures discussed in this rule. For Fiscal
Year 2003, only 2.4% of all contract actions were cost contracts
awarded to small business.
C. Paperwork Reduction Act
The Paperwork Reduction Act does not apply because the proposed
changes to the FAR do not impose information collection requirements
that require the approval of the Office of Management and Budget under
44 U.S.C. 3501, et seq.
List of Subjects in 48 CFR Part 31
Government procurement.
Dated: June 20, 2006.
Linda Nelson,
Deputy Director, Contract Policy Division.
0
Therefore, DoD, GSA, and NASA amend 48 CFR part 31 as set forth below:
PART 31-CONTRACT COST PRINCIPLES AND PROCEDURES
0
1. The authority citation for 48 CFR part 31 continues to read as
follows:
Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42
U.S.C. 2473(c).
0
2. Amend section 31.205-11 by revising paragraph (g); removing
paragraph (h); and redesignating paragraph (i) as (h). The revised text
reads as follows:
31.205-11 Depreciation.
* * * * *
(g) Whether or not the contract is otherwise subject to CAS the
following apply:
(1) The requirements of 31.205-52 shall be observed.
(2) In the event of a write-down from carrying value to fair value
as a result of impairments caused by events or changes in
circumstances, allowable depreciation of the impaired assets is limited
to the amounts that would have been allowed had the assets not been
[[Page 36941]]
written down (see 31.205-16(g)). However, this does not preclude a
change in depreciation resulting from other causes such as permissible
changes in estimates of service life, consumption of services, or
residual value.
(3)(i) In the event the contractor reacquires property involved in
a sale and leaseback arrangement, allowable depreciation of reacquired
property shall be based on the net book value of the asset as of the
date the contractor originally became a lessee of the property in the
sale and leaseback arrangement--
(A) Adjusted for any allowable gain or loss determined in
accordance with 31.205-16(b); and
(B) Less any amount of depreciation expense included in the
calculation of the amount that would have been allowed had the
contractor retained title under 31.205-11(h)(1) and 31.205-36(b)(2).
(ii) As used in this paragraph (g)(3), reacquired property is
property that generated either any depreciation expense or any cost of
money considered in the calculation of the limitations under 31.205-
11(h)(1) and 31.205-36(b)(2) during the most recent accounting period
prior to the date of reacquisition.
* * * * *
31.205-16 [Amended]
0
3. Amend section 31.205-16 by--
0
a. Removing from the introductory text of paragraph (b) ``31.205-
11(i)(1)'' and adding ``31.205-11(h)(1)'' in its place; and
0
b. Removing from paragraph (c) ``31.205-11(i)'' and adding ``31.205-
11(h)'' in its place.
[FR Doc. 06-5706 Filed 6-27-06; 8:45 am]
BILLING CODE 6820-EP-S
