[Federal Register Volume 68, Number 129 (Monday, July 7, 2003)]
[Proposed Rules]
[Pages 40466-40468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-16982]



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Part IV





Department of Defense

General Services Administration

National Aeronautics and Space Administration





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48 CFR Parts 15 and 31



Federal Acquisition Regulation; Gains and Losses, Maintenance and 
Repair Costs, and Material Costs; Proposed Rule

  Federal Register / Vol. 68, No. 129 / Monday, July 7, 2003 / Proposed 
Rules  

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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 15 and 31

[FAR Case 2002-008]
RIN 9000-AJ69


Federal Acquisition Regulation; Gains and Losses, Maintenance and 
Repair Costs, and Material Costs

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

ACTION: Proposed rule.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) are proposing to amend the 
Federal Acquisition Regulation (FAR) by deleting the cost principle 
regarding maintenance and repair costs, revising the cost principles 
regarding gains and losses on disposition or impairment of depreciable 
property or other capital assets, and by revising the language 
concerning material costs.

DATES: Interested parties should submit comments in writing on or 
before September 5, 2003 to be considered in the formulation of a final 
rule.

ADDRESSES: Submit written comments to--General Services Administration, 
FAR Secretariat (MVA), 1800 F Street, NW., Room 4035, ATTN: Laurie 
Duarte, Washington, DC 20405.
    Submit electronic comments via the Internet to--farcase.2002-
[email protected].
    Please submit comments only and cite FAR case 2002-008 in all 
correspondence related to this case.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, Room 4035, GS 
Building, Washington, DC, 20405, at (202) 501-4755 for information 
pertaining to status or publication schedules. For clarification of 
content, contact Edward Loeb, Procurement Analyst, at (202) 501-0650. 
Please cite FAR case 2002-008.

SUPPLEMENTARY INFORMATION:

A. Background

    The DoD Director of Defense Procurement established a special 
interagency Ad Hoc Committee to perform a comprehensive review of 
policies and procedures in FAR Part 31, Contract Cost Principles and 
Procedures, relating to cost measurement, assignment, and allocation. 
The Director announced a series of public meetings in the Federal 
Register notice at 66 FR 13712, March 7, 2001, (with a ``correction to 
notice'' published in the Federal Register at 66 FR 16186, March 23, 
2001). Attendees at the public meetings (held on April 19, 2001, May 
10-11, 2001, and June 12, 2001) included representatives from industry, 
Government, and other interested parties who provided views on 
potential areas for revision in FAR Part 31. The Ad Hoc Committee 
reviewed the cost principles and procedures and the public comments; 
identified potential changes to the FAR; and submitted several reports, 
including draft proposed rules for consideration by the Councils.
    The Councils reviewed the reports 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, and proposed the following revisions:
    1. FAR 31.205-16. Add a new paragraph (b) that addresses the method 
and timing for determining the gain and loss associated with a sale and 
leaseback arrangement. The Councils believe that (a) a contractor 
should not benefit or be penalized for entering into a sale and 
leaseback arrangement; (b) the Government should reimburse the 
contractor the same amount for the subject asset as if the contractor 
had retained title; and (c) the Government would be precluded from 
recovering the financing costs that were imbedded in the sales price 
should the gain be recognized at the date of the sale and leaseback 
arrangement. For these reasons, the Councils are recommending that the 
gain or loss be determined at the end of the lease term or when the 
contractor no longer occupies the property (whichever date is later), 
rather than the date of the sale and leaseback arrangement. 
Implementation of adequate agency guidance and tracking controls (e.g., 
maintenance of permanent files on contractors by auditors) should 
assure that the Government properly computes its share of the gain or 
loss at the date of disposition.
    The Councils do not believe the impairment language currently in 
paragraph (f) of the cost principle should be revised because 48 CFR 
9904.404--Capitalization of Tangible Assets, and 48 CFR 9904.409--Cost 
Accounting Standard--Depreciation of Tangible Capital Assets, do not 
address the issue of asset impairments.
    2. FAR 31.205-24. Delete this cost principle which addresses the 
assignment of maintenance and repair costs to cost accounting periods. 
The Councils believe that 48 CFR 9904--Cost Accounting Standards 
adequately addresses these costs for contracts subject to full CAS 
coverage. For business units with no contracts subject to full CAS 
coverage, Generally Accepted Accounting Principles (GAAP) would apply 
to all of the contracts in the business unit subject to FAR Part 31. 
GAAP, which include criteria for determining whether a cost should be 
expensed or capitalized, adequately address this issue. For business 
units that have contracts subject to full CAS coverage and contracts 
that are not, the contractor would be required to apply a method that 
was consistent with GAAP for the contracts that are not subject to full 
CAS coverage (this method could be the same as the method used by the 
business unit for contracts subject to full CAS coverage).
    3. FAR 31.205-26. Delete the current paragraph (c) and the last 
sentence of the current paragraph (d). Paragraph (c) requires that 
adjustments for differences in physical and book inventories relate to 
the period of contract performance. The Councils recommend deleting 
this provision, and, thereby, relying upon GAAP.
    The Councils also recommend deleting the last sentence of the 
current paragraph (d). This sentence provides specific methods for 
estimating material costs. Since FAR 31 focuses on criteria regarding 
the allowability of costs rather than the methods used to estimate 
costs, this sentence has been deleted.
    4. Make related editorial changes.
    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 Councils do not expect this proposed rule 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 simplified 
acquisition procedures or are awarded on a competitive, fixed-price 
basis, and do not require application of the cost principles discussed 
in this rule. An Initial Regulatory Flexibility Analysis has, 
therefore, not been performed. We invite comments from small businesses 
and other interested parties. The Councils will consider comments from 
small entities

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concerning the affected FAR Parts 15 and 31 in accordance with 5 U.S.C. 
610. Interested parties must submit such comments separately and should 
cite 5 U.S.C. 601, et seq. (FAR case 2002-008), in correspondence.

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 Parts 15 and 31

    Government procurement.

    Dated: June 26, 2003.
Laura G. Smith,
Director, Acquisition Policy Division.
    Therefore, DoD, GSA, and NASA propose amending 48 CFR parts 15 and 
32 as set forth below:
    1. The authority citation for 48 CFR parts 15 and 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).

PART 15--CONTRACTING BY NEGOTIATION


15.208  [Amended]

    2. In section 15.408, amend Table 15-2, which follows paragraph 
(m)(4), by removing from paragraph A.(1) of Item II, Cost Elements, 
``31.205-26(e)'' and adding ``31.205-26(c)'' in its place.

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

    3. In section 31.205-7, revise the last sentence in paragraph 
(c)(2) to read as follows:


31.205-7  Contingencies.

* * * * *
    (c) * * *
    (2) * * * (See, for example, 31.205-6(g) and 31.205-19).
* * * * *


31.205-11  [Amended]

    4. Amend section 31.205-11 in paragraph (k) by removing ``31.205-
26(e)'' and adding ``31.205-26(c)'' in its place.
    5. Amend section 31.205-16 as follows:
    a. Revise paragraph (a);
    b. Redesignate paragraphs (b) through (g) as (c) through (h), 
respectively;
    c. Add a new paragraph (b);
    d. Revise the newly designated paragraphs (c), (d)(1), (e), and 
(f);
    e. Amend the newly designated paragraph (d)(2)(ii) by removing 
``subparagraph (c)(1)'' and adding ``paragraph (d)(1)'' in its place;
    f. Amend the newly designated paragraph (g) by removing ``shall 
be'' and adding ``is'' in its place; and
    g. Amend the first sentence of the newly designated paragraph (h) 
by removing ``shall be'' and adding ``is'' in its place. The added and 
revised text reads as follows:


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

    (a) The Government and the contractor shall include gains and 
losses from the sale, retirement, or other disposition (but see 31-
205.19) of depreciable property in the year in which they occur as 
credits or charges to the cost grouping(s) in which the depreciation or 
amortization applicable to those assets was included (but see paragraph 
(e) of this subsection). However, no gain or loss is recognized as a 
result of the transfer of assets in a business combination (see 31.205-
52).
    (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(m)(1) or 31.205-36(b)(2)--
    (1) The gain or loss is the difference between the fair market 
value on the disposition date and the adjusted asset value at the time 
of disposition (as defined in paragraph (b)(3) of this subsection);
    (2) The disposition date is the later of--
    (i) The latest ending date of the lease term, including any 
extensions and renewals; or
    (ii) The date the contractor vacates the property; and
    (3) The adjusted asset value at the time of disposition is the 
contractor's original asset cost less the sum of--
    (i) The allowable depreciation costs for the period prior to the 
date of the sale and leaseback; and
    (ii) The depreciation costs that would have been allowed had the 
contractor retained title to the property from the date of the sale and 
leaseback until the disposition date.
    (c) The Government and the contractor consider gains and losses on 
disposition of tangible capital assets including those acquired under 
capital leases (see 31.205-11(m)) as adjustments of depreciation costs 
previously recognized. The gain or loss for each asset disposed of is 
the difference between the net amount realized, including insurance 
proceeds from involuntary conversions, and its undepreciated balance. 
The Government and the contractor shall limit the gain recognized for 
contract costing purposes 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 paragraph (d)(2)(i) or (ii) of this subsection).
    (d) * * *
    (1) When there is a cash award and the converted asset is not 
replaced, the Government and the contractor shall recognize the gain or 
loss in the period of disposition. The gain recognized for contract 
costing purposes is limited to the difference between the acquisition 
cost of the asset and its undepreciated balance.
* * * * *
    (e) The Government and the contractor shall not recognize gains or 
losses on the disposition of depreciable property as a separate charge 
or credit when the contractor--
    (1) Processes the gains and losses through the depreciation reserve 
account and reflects them in the depreciation allowable under 31.205-
11; or
    (2) Exchanges the property as part of the purchase price of a 
similar item, and takes into consideration the gain or loss in the 
depreciation cost basis of the new item.
    (f) The Government and the contractor shall consider gains and 
losses arising from mass or extraordinary sales, retirements, or other 
disposition other than through business combinations on a case-by-case 
basis.
* * * * *


31.205-24  [Removed & Reserved]

    6. Remove and reserve section 31.205-24.
    7. Revise section 31.205-26 to read as follows:


31.205-26  Material costs.

    (a) Material costs include the costs of such items as raw 
materials, parts, subassemblies, components, and manufacturing 
supplies, whether purchased or manufactured by the contractor, and may 
include such collateral items as inbound transportation and intransit 
insurance. In computing material costs, the contractor shall consider 
reasonable overruns, spoilage, or defective work (unless otherwise 
provided in any contract provision relating to inspecting and 
correcting defective work).
    (b) The contractor shall--
    (1) Adjust the costs of material for income and other credits, 
including available trade discounts, refunds, rebates, allowances, and 
cash discounts,

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and credits for scrap, salvage, and material returned to vendors; and
    (2) Credit such income and other credits either directly to the 
cost of the material or allocate such income and other credits as a 
credit to indirect costs. When the contractor can demonstrate that 
failure to take cash discounts was reasonable, the contractor does not 
need to credit lost discounts.
    (c) When materials are purchased specifically for and are 
identifiable solely with performance under a contract, the actual 
purchase cost of those materials should be charged to the contract. If 
material is issued from stores, any generally recognized method of 
pricing such material is acceptable if that method is consistently 
applied and the results are equitable.
    (d) Allowance for all materials, supplies and services that are 
sold or transferred between any divisions, subdivisions, subsidiaries 
or affiliates of the contractor under a common control shall be on the 
basis of cost incurred in accordance with this subpart. However, 
allowance may be at price when--
    (1) It is the established practice of the transferring organization 
to price interorganizational transfers at other than cost for 
commercial work of the contractor or any division, subsidiary or 
affiliate of the contractor under a common control; and
    (2) The item being transferred qualifies for an exception under 
15.403-1(b) and the contracting officer has not determined the price to 
be unreasonable.
    (e) When a commercial item under paragraph (c) of this subsection 
is transferred at a price based on a catalog or market price, the 
contractor--
    (1) Should adjust the price to reflect the quantities being 
acquired; and
    (2) May adjust the price to reflect the actual cost of any 
modifications necessary because of contract requirements.


31.205-44  [Amended]

    8. Amend section 31.205-44 in paragraph (f) by removing ``31.205-
24''.

[FR Doc. 03-16982 Filed 7-3-03; 8:45 am]
BILLING CODE 6820-EP-U