[Federal Register Volume 62, Number 127 (Wednesday, July 2, 1997)]
[Proposed Rules]
[Pages 35900-35901]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-17151]



[[Page 35899]]

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Part III

Department of Defense

General Services Administration

National Aeronautics and Space Administration
_______________________________________________________________________



48 CFR Part 31, et al.



Federal Acquisition Regulation; Transfer of Assets Following a Business 
Combination; Contract Quality Requirements; Proposed Rules

  Federal Register / Vol. 62, No. 127 / Wednesday, July 2, 1997 / 
Proposed Rules  

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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 31

[FAR Case 96-006]
RIN 9000-AH56


Federal Acquisition Regulation; Transfer of Assets Following a 
Business Combination

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

ACTION: Proposed rule with request for comments.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council are proposing to amend the Federal 
Acquisition Regulation (FAR) to implement a final rule of the Cost 
Accounting Standards (CAS) Board regarding the treatment of gains and 
losses attributable to tangible capital assets subsequent to business 
mergers or combinations. 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.

DATES: Comments on the proposed rule should be submitted in writing to 
the FAR Secretariat at the address shown below on or before September 
2, 1997 to be considered in the formulation of the final rule.

ADDRESSES: Comments: Interested parties should submit written comments 
to: General Services Administration, FAR Secretariat (MVR), 1800 F 
Street, NW, Room 4035, Washington, DC 20405.
    Internet: E-mail comments should be addressed to: farcase.96-
[email protected].
    Please cite FAR case 96-006 in all correspondence related to this 
case.

FOR FURTHER INFORMATION CONTACT: 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 FAR case 96-006.

SUPPLEMENTARY INFORMATION:

A. Background

    On February 13, 1996, the CAS Board published a final rule in the 
Federal Register (61 FR 5520) amending CAS 9904.404, Capitalization of 
Tangible Assets, and CAS 9904.409, Depreciation of Tangible Capital 
Assets. These amendments provide for ``no step-up, no step-down'' of 
asset bases (values would remain the same) after a business combination 
using the purchase method of accounting if tangible capital assets 
generated depreciation or cost of money charged to Government contracts 
in the seller's prior accounting year. However, if these costs were not 
charged to Government contracts in the seller's prior accounting 
period, the rule allows the assets to be adjusted to their fair values.
    The proposed FAR rule is consistent with the CAS Board's approach 
and the Government's long-standing policy that the Government be placed 
in no worse of a position by virtue of a change in business ownership 
than it would have been had the change not taken place. This policy 
recognizes that costs related to asset write-ups do not add value or 
produce additional benefits for the Government. When a contractor's 
assets are written up following a business combination, an inherent 
inequity is present if the Government is charged depreciation and cost 
of money more than once for the same assets, with no added value or 
benefit to Government contracts. Since the proposed rule's approach 
does not recognize that the sale of the asset took place, i.e., ``no 
step-up, no step-down,'' the proposed rule also does not recognize any 
gains or losses when assets generated depreciation or cost of money 
charged to Government contracts in the seller's prior accounting 
period.
    The Councils considered, but did not adopt, a significant 
alternative which would have retained the current FAR cost principles' 
approach of following Generally Accepted Accounting Principles (GAAP), 
not CAS, for non-CAS covered contracts. The current cost principles, in 
concert with GAAP, do not recognize asset write-ups, but do require 
assets to be written-down if the book value of acquired assets is 
reduced to be consistent with the purchase price of an acquired 
company. The Councils believe that the ``no step-up, no step-down'' 
approach of the proposed rule is more equitable to contractors with 
non-CAS covered contracts than retention of the current approach. In 
addition, the proposed rule will avoid complications that could arise 
from differences in accounting between CAS covered and non-CAS covered 
contracts for companies that come in and out of being CAS covered.

B. Regulatory Flexibility Act

    The proposed change to FAR part 31 is not expected to 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 the 
simplified acquisition procedures or are awarded on a competitive 
fixed-price basis, and the cost principles do not apply. In addition, 
this rule is limited to contractors who have undergone a business 
merger or combination. An Initial Regulatory Flexibility Analysis has, 
therefore, not been performed. Comments from small entities concerning 
the affected FAR part will be considered in accordance with 5 U.S.C. 
610 of the Act. Such comments must be submitted separately and should 
cite 5 U.S.C. 601, et seq. (FAR case 96-006), in correspondence.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the proposed 
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: June 24, 1997.
Edward C. Loeb,
Director, Federal Acquisition Policy Division.

    Therefore, it is proposed that 48 CFR Part 31 be amended as set 
forth below:

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 31.205-10 is amended by revising paragraph (a)(5) to 
read as follows:


31.205-10  Cost of money.

    (a) * * *
    (5) The requirements of 31.205-52 shall be observed in determining 
the allowable cost of money attributable to including asset valuations 
resulting from business combinations in the facilities capital employed 
base.
* * * * *
    3. Section 31.205-52 is revised to read as follows:

[[Page 35901]]

31.205-52  Asset valuations resulting from business combinations.

    (a) For tangible capital assets, when the purchase method of 
accounting for a business combination is used, whether or not the 
contract or subcontract is subject to CAS, the allowable depreciation 
and cost of money shall be the amount measured and assigned in 
accordance with 48 CFR 9904.404-50(d), if allocable, reasonable, and 
not otherwise unallowable.
    (b) For intangible capital assets, when the purchase method of 
accounting for a business combination is used, allowable amortization, 
cost of money, and depreciation shall be limited to the total of the 
amounts that would have been allowed had the combination not taken 
place.

[FR Doc. 97-17151 Filed 7-1-97; 8:45 am]
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