[Federal Register Volume 61, Number 246 (Friday, December 20, 1996)]
[Rules and Regulations]
[Pages 67423-67424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32010]


-----------------------------------------------------------------------


DEPARTMENT OF DEFENSE
48 CFR Part 31

[FAC 90-43; FAR Case 95-003; Item X]
RIN 9000-AG73


Federal Acquisition Regulation; Impairment of Long-Lived Assets

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

ACTION: Interim rule adopted as a final rule with changes.

-----------------------------------------------------------------------

SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council have agreed to a final rule to amend 
the Federal Acquisition Regulation (FAR) to clarify the cost 
allowability rules concerning the recognition of losses when carrying 
values of impaired assets are written down for financial reporting 
purposes. This regulatory action was not subject to Office of 
Management and Budget review under Executive Order 12866, dated 
September 30, 1993, and is not a major rule under 5 U.S.C. 804.

EFFECTIVE DATE: February 18, 1997.

FOR FURTHER INFORMATION CONTACT: Mr. Jeremy Olson at (202) 501-3221 in 
reference to this FAR case. For general information, contact the FAR 
Secretariat, Room 4035, GS Building, Washington, DC 20405 (202) 501-
4755. Please cite FAC 90-43, FAR case 95-003.

SUPPLEMENTARY INFORMATION:

A. Background

    This final rule clarifies that impairment losses recognized for 
financial accounting purposes under the Financial Accounting Standards 
Board Statement of Financial Accounting Standards (SFAS), No. 121, 
Accounting for the Impairment of Long-Lived Assets and for Long-Lived 
Assets to be Disposed of, dated March 1995, are not allowable for 
Government contract costing.
    The SFAS applies to long-lived assets (such as land, buildings, and 
equipment), certain identifiable intangibles, and related goodwill. If 
impaired assets are to be held for use, the SFAS requires a write-down 
to fair value when events or circumstances (e.g., environmental damage, 
idle facilities arising from declining business, etc.) indicate that 
carrying values may not be fully recoverable. Once written down, the 
previous carrying amount of an impaired asset could not be restored if 
the impairment were subsequently removed.
    In contrast to the SFAS provisions, Cost Accounting Standard (CAS) 
9904.409, Depreciation of Tangible Capital Assets, provides quite 
different criteria and guidance to recognize gains and losses for 
Government contract purposes. The language at CAS 9904.409-40 (a)(4) 
and (b)(4), CAS 9904.409-50(j), and related Promulgation Comment 10, 
Gain or Loss, makes it clear that gains and loses are recognized only 
upon asset disposal; no other circumstances trigger such recognition. 
The language at CAS 9904.409-50(i) makes it clear that changes in 
depreciation may result from other permissible causes, e.g., changes in 
estimated service life, consumption of services, and residual value.
    This final rule amends FAR 31.205-11, Depreciation, and 31.205-16, 
Gains and Losses on Disposition or

[[Page 67424]]

Impairment of Depreciable Property or Other Capital Assets, to clarify 
that these subsections reflect the CAS provisions that an asset be 
disposed of in order to recognize a gain or loss. Consequently, for 
Government contract purposes, (1) an impairment loss is recognized only 
upon disposal of the impaired asset and is measured, like other losses, 
as the difference between the net amount realized and the impaired 
asset's undepreciated balance; (2) Government contractors recover the 
carrying values of impaired assets held for use by retaining pre-write-
down depreciation or amortization schedules as though no impairment had 
occurred; and (3) changes in depreciation are allowable from other 
permissible causes.
    An interim rule was published in the Federal Register on December 
14, 1995 (60 FR 64254). Four sources submitted public comments. All 
comments were considered in developing this final rule.

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 FAR cost principles.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the changes to 
the FAR do not impose recordkeeping or information collection 
requirements, or collections of information from offerors, contractors, 
or members of the public which 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: September 11, 1996.
Edward C. Loeb,
Director, Federal Acquisition Policy Division.
    Accordingly, the interim rule amending 48 CFR Part 31 and published 
at 60 FR 64254, December 14, 1995, is adopted as a final rule with the 
following changes:

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

    1. The authority citation for 48 CFR Part 31 continues to read as 
follows:

    Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42 
U.S.C. 2473(c).

    2. Section 31.205-11(o) is revised to read as follows:


31.205-11  Depreciation.

* * * * *
    (o) 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 shall be 
limited to the amounts that would have been allowed had the assets not 
been 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. Section 31.205-16(g) is revised to read as follows:


31.205-16  Gains and losses on disposition or impairment of depreciable 
property or other capital assets.

* * * * *
    (g) With respect to long-lived tangible and identifiable intangible 
assets held for use, no loss shall be allowed for a write-down from 
carrying value to fair value as a result of impairments caused by 
events or changes in circumstances (e.g., environmental damage, idle 
facilities arising from a declining business base, etc.). If 
depreciable property or other capital assets have been written down 
from carrying value to fair value due to impairments, gains or losses 
upon disposition shall be the amounts that would have been allowed had 
the assets not been written down.

[FR Doc. 96-32010 Filed 12-19-96; 8:45 am]
BILLING CODE 6820-EP-P