[Federal Register Volume 69, Number 99 (Friday, May 21, 2004)]
[Proposed Rules]
[Pages 29379-29382]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11458]



[[Page 29379]]

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Part III





Department of Defense

General Services Administration

National Aeronautics and Space Administration





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48 CFR Part 31



Federal Acquisition Regulation; Gains and Losses; Proposed Rule

Federal Register / Vol. 69, No. 99 / Friday, May 21, 2004 / Proposed 
Rules

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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 31

[FAR Case 2004-005]
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: 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 revising the cost principle 
regarding gains and losses on disposition or impairment of depreciable 
property or other capital assets.

DATES: Interested parties should submit comments in writing on or 
before July 20, 2004, 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-- www.regulations.gov or farcase.2004-005@gsa.gov.
    Please submit comments only and cite FAR case 2004-005 in all 
correspondence related to this case.

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. Edward Loeb, Policy Advisor, at 
(202) 501-0650. Please cite FAR case 2004-005.

SUPPLEMENTARY INFORMATION:

A. Background

    The DoD Director of Defense Procurement and Acquisition Policy 
(DPAP) 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. DPAP announced a series of public meetings 
in the Federal Register at 66 FR 13712, March 7, 2001 (with a 
``correction to notice'' published in the Federal Register at 66 FR 
16186, March 23, 2001). Public meetings were held on April 19, 2001, 
May 10 and 11, 2001, and June 12, 2001. Attendees at the public 
meetings 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 input obtained during the public meetings; 
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. On July 7, 2003, a proposed rule was 
published for public comment in the Federal Register at 68 FR 40466 
under FAR case 2002-008.
    The Councils, with input from the Ad Hoc Committee, reviewed the 
public comments and concluded that the proposed rule relating to FAR 
31.205-24 and FAR 31.205-26 should be converted to a final rule, with 
minor changes to the proposed rule; the final rule is being published 
under a separate Federal Register notice (FAR case 2002-008). As a 
result of the public comments received, the Councils also decided to 
make substantive changes to the FAR 31.205-16 cost principle and to 
publish the proposed revisions as a proposed rule in this Federal 
Register notice under the new FAR case 2004-005.
    The Councils are recommending several changes to the proposed rule 
for FAR 31.205-16. In particular, the Councils are recommending that 
the date of disposition for a sale and leaseback arrangement be 
revised. The Councils had initially recommended use of the later 
disposition date. However, in consideration of the public comments, 
which articulated a myriad of potential issues and problems that could 
result from the use of the later disposition date, the Councils have 
revised the proposed rule to state that the disposition date is the 
date of the sale and leaseback arrangement, rather than at the end of 
the lease term. The Councils believe this is a more practical approach 
that will reduce record-keeping and the potential for future disputes.
    Interested parties are requested to provide input on the revised 
disposition date, based on the assumption that the FAR will specify a 
disposition date and will continue to limit future lease costs to the 
costs of ownership.
    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.
    In response to the proposed FAR rule published under FAR case 2002-
008 in the Federal Register at 68 FR 40466, July 7, 2003, three 
respondents submitted comments on FAR 31.205-16. The Councils 
considered all comments and concluded that, since the changes result in 
a rule that differs significantly from the proposed rule, it should be 
published as a proposed rule under a new FAR case 2004-005. Differences 
between the proposed rule under FAR case 2002-008 and this proposed 
rule are discussed in Comments 2 and 4 below.

Public Comments:

    FAR 31.205-16(b)

    1. Comment: Two respondents believe that paragraph (b) of the 
proposed rule is unnecessary, not reflective of the reality of the 
business decisions, potentially inequitable and not in the interest of 
either the Government or the contractor. One of these respondents also 
believes that the proposed rule will place a recordkeeping and 
reconciliation burden on the contractor that is onerous, complicated, 
and likely to delay contract closings.
    Councils' response: Nonconcur. The Councils continue to believe 
that the cost principle should explicitly address sale and leaseback 
arrangements. The Councils believe that specifying the disposition date 
will eliminate potential disagreements regarding whether the 
disposition date should be the date of the sale and leaseback 
arrangement or the date the contractor is no longer leasing the asset. 
This position is also consistent with the input obtained during the 
public meetings in Spring 2001.

    FAR 31.205-16(b)(2)

    2. Comment: Two respondents state that the extension of the 
disposition date beyond the common language use of the term disposition 
is inequitable because: (1) the Government would recoup gains from a 
contractor who does not obtain a gain, and (2) the Government would be 
entitled to a gain of less than the amount of the gain actually 
realized by the contractor. These respondents further believe that this 
revision would encourage a contractor to make business decisions that 
are not mutually beneficial to either party. They believe this revision 
may encourage contractors to expend

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additional allowable costs to relocate to a non-formerly owned facility 
in order to recoup their full expenditure for leasing. These 
respondents also assert that it is not always clear when a contractor 
has finally vacated a facility. They ask how long a contractor must 
vacate a property to avoid application of the sale/leaseback 
provisions. One of the respondents also believes that contractor access 
to the records of the buyer could also be a problem because the 
provision requires knowledge of the ultimate sales price, data the 
contractor may not have access to.
    One respondent further asserts that the disposition of an asset 
involves a business decision while the leasing of the asset generally 
involves a separate business decision. If the asset disposed of 
requires replacement, that action can be accomplished in a number of 
ways. The calculation of the gain or loss on the disposition should not 
be impacted by whether the contractor intends to continue to use the 
asset under a different financial model.
    Councils' response: Partially concur. The Councils had recommended 
use of the later disposition date. However, in consideration of the 
myriad of potential issues and problems that could result from the use 
of the later disposition date, the Councils concur with the 
recommendation that paragraph (b)(2) of FAR 31.205-16 be revised to 
state that the disposition date is the date of the sale and leaseback 
arrangement, rather than at the end of the lease term. This is a more 
practical approach that will reduce recordkeeping and the potential for 
future disputes.
    3. Comment: Two respondents believe the contractor should recognize 
the gain or loss on a sale and leaseback transaction immediately upon 
execution of the change in control. These respondents believe that in 
exchange for sharing the gain, the contractor should be permitted to 
recover as an allowable cost the reasonable lease payments on the 
replacement facility, regardless of whether the replacement facility 
was previously owned or not. One of the respondents also states that 
this approach would permit timely settlement of the costs in question 
and result in equity to both the contractor and the Government.
    Councils' response. Nonconcur. The Councils disagree with the 
respondents recommendation to permit the contractor to recover the 
lease payments that result from the sale and leaseback arrangement. The 
allowable lease costs relating to a sale and leaseback arrangement have 
long been limited in the cost principles to what the contractor would 
have received had they retained title. The basic tenet that underlies 
this provision is that a contractor should not benefit for entering 
into a sale and leaseback arrangement. The Councils believe this basic 
tenet continues to be appropriate. It is important to note that a sale 
and leaseback arrangement is a voluntary financing mechanism entered 
into by the contractor. The Councils do not believe the contractor 
should be entitled to recover additional monies simply because of a 
paper transaction that provides no significant benefit to the 
Government.

    FAR 31.205-16(c) and (d)

    4. Comment: A third respondent proposed that the language at 
paragraph (b) be withdrawn. If the proposed language is not withdrawn, 
the respondent recommends that it be republished as a proposed rule and 
address the following three fundamental issues:
    a. Why is it equitable for any gain or loss to be recognized in 
connection with the sale-leaseback transaction?
    b. What reason is there that the gain or loss cannot be recognized 
at the time of the transaction, perhaps with an appropriate adjustment 
if the sales price and the subsequent rental cost are both below 
market?
    c. In any event, what justification is there for not limiting the 
amount of gain to be recognized by the amount of depreciation taken?
    Councils' response: Partially concur. The Councils agree that the 
proposed language should be republished as a second proposed rule.
    In response to comment 4a, the Councils believe that a gain or loss 
should be recognized when an asset is disposed of, regardless of 
whether that disposition relates to a sale and leaseback arrangement or 
some other method used by the contractor to dispose of the asset. The 
recognition of a gain or loss is a necessary adjustment because 
depreciation is an estimate of the usefulness of an asset. When the 
asset is disposed of, an adjustment is required to reflect the 
difference between the actual and estimated usefulness of the asset.
    The Councils agree with the respondent's assertion that the 
proposed language could have been interpreted to entitle the Government 
to recover more than the amount of depreciation that has been taken. 
This was not the intent of the proposed language. Paragraph (b) 
includes the statement ``Notwithstanding the language in paragraph (c) 
of this subsection....'' Paragraph (c) is currently where the 
limitation exists. The Councils have therefore revised the language in 
paragraph (c), and added a new paragraph (d) to eliminate this concern. 
The language on the limitation is now contained in paragraph (d), which 
applies to all asset dispositions, including sale and leaseback 
arrangements.

C. 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 and 
procedures discussed in this rule. For FY2003, only 2.4% of all 
contract actions were cost contracts awarded to small business. 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 concerning the affected FAR part 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 2004-005), in correspondence.

D. 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: May 13, 2004.
Laura Auletta,
Director, Acquisition Policy Division.
    Therefore, DoD, GSA, and NASA propose amending 48 CFR part 31 as 
set forth below:

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

    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).

    2. Amend section 31.205-16 by--
    a. Revising paragraph (a);
    b. Redesignating paragraphs (b),(c),(d),(e),(f), and (g), as 
(c),(e),(f),(g),(h), and (i); and
    c. Adding new paragraphs (b) and (d).
    The revised text reads as follows:

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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(i)(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 undepreciated balance at the time 
of disposition; and
    (2) The disposition date is the date of the sale and leaseback 
arrangement.
    (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(i)) 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.
    (d) 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(e)(2)(i) or (ii) of this 
subsection).
    (e) Special considerations apply to an involuntary conversion which 
occurs when a contractor's property is destroyed by events over which 
the owner has no control, such as fire, windstorm, flood, accident, 
theft, etc., and an insurance award is recovered. The following govern 
involuntary conversions:
    (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.
    (2) When the converted asset is replaced, the contractor shall 
either--
    (i) Adjust the depreciable basis of the new asset by the amount of 
the total realized gain or loss; or
    (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.
    (f) 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.
    (g) 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.
    (h) Gains and losses of any nature arising from the sale or 
exchange of capital assets other than depreciable property shall be 
excluded in computing contract costs.
    (i) With respect to long-lived tangible and identifiable intangible 
assets held for use, no loss is 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. 04-11458 Filed 5-20-04; 8:45 am]
BILLING CODE 6820-EP-S