[Federal Register Volume 70, Number 112 (Monday, June 13, 2005)]
[Proposed Rules]
[Pages 34080-34081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-11643]





48 CFR Part 31

[FAR Case 2004-014]
RIN: 9000-AK19

Federal Acquisition Regulation; Buy-Back of Assets

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

ACTION: Proposed rule.


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 contract cost 
principle regarding depreciation. The proposed rule adds language which 
addresses the allowability of depreciation costs of reacquired assets 
involved in a sales and leaseback arrangement.

DATES: Interested parties should submit comments in writing on or 
before August 12, 2005, to be considered in the formulation of a final 

ADDRESSES: Submit comments identified by FAR case 2004-014 by any of 
the following methods:
    Federal eRulemaking Portal: http://www.regulations.gov. Follow the 
instructions for submitting comments.
    Agency Web Site: http://www.acqnet.gov/far/ProposedRules/proposed.htm. Click on the FAR case number to submit comments.
    E-mail: [email protected]. Include FAR case 2004-014 in the 
subject line of the message.
    Fax: 202-501-4067.
    Mail: General Services Administration, Regulatory Secretariat 
(VIR), 1800 F Street, NW, Room 4035, ATTN: Laurieann Duarte, 
Washington, DC 20405.
    Instructions: Please submit comments only and cite FAR case 2004-
014 in all correspondence related to this case. All comments received 
will be posted without change to http://www.acqnet.gov/far/ProposedRules/proposed.htm, including any personal information 

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. Jeremy Olson, at (202) 501-3221. 
Please cite FAR case 2004-014.


A. Background

    In response to public comments related to FAR 31.205-16 (submitted 
under FAR Case 2002-008), the Councils 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. During the 
deliberations on this case, the Defense Contract Audit Agency brought 
to the Councils' attention a concern regarding the cost treatment when 
a contractor ``buys back'' an asset after a sale and leaseback 
transaction is recognized under the revised proposed rule. The Councils 
recognized this concern, not just for sale and leaseback arrangements, 
but also for assets that are purchased, depreciated, sold, and 
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. The 
Councils recognized this issue required research and deliberation and 
established a new case (FAR Case 2004-014) to address this buy-back 
    The Councils recognize 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. It appears that the only area that currently requires 
coverage is in the case of a sale and leaseback arrangement. The 
coverage related to a sale and leaseback arrangement is needed as a 
result of the changes made under FAR Case 2004-005, Gains and Losses 
(see Federal Register 70 FR 33673, dated June 8, 2005).
    Currently, no situations in which the Government was at risk in the 
areas of typical sale and reacquisition, or capital leases were 
identified. FAR 31.205-11(f) and 31.205-36(b)(3) currently provide 
coverage for typical sale and reacquisition transactions at less than 
arm's-length. In addition, FAR 31.205-11(i) requires contractors to 
treat leases meeting the definition of a capital lease in FAS-13 as an 
asset owned by the contractor. The subsequent acquisition

[[Page 34081]]

of title to the asset is not a disposition and therefore no gain or 
loss need to be considered. In addition, the GAAP treatment of the 
acquisition of an asset under a capital lease, which in effect steps-up 
the value of the asset, would result in an unallowable cost, based on 
the intent of the FAR as shown in FAR 31.205-52, Asset valuations 
resulting from business combinations.
    The Councils recommend revising FAR 31.205-11, Depreciation, to 
include specific language regarding the treatment of assets reacquired 
after entering into a sale and leaseback arrangement. The Councils 
believe this will eliminate potential disagreements regarding the 
allowable depreciation expense of assets involved in a sale and 
leaseback arrangement.
    The Councils believe that, for Government contract costing 
purposes, a contractor should not benefit or be penalized for entering 
into a sale and leaseback arrangement. 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 Councils recommend that the determination of allowable 
depreciation expense of the reacquired asset consider--
     Any gain or loss recognized in accordance with FAR 31.205-
     Any depreciation expense included in the calculation of 
the normal cost of ownership for the limitations at FAR 31.205-11(h)(1) 
and 31.205-36(b)(2); and
     The depreciation expense taken prior to the sale and 
leaseback arrangement.
    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 and 
procedures discussed in this rule. For fiscal year 2003, only 2.4 
percent 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 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 2004-014), in 

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 8, 2005.
Julia B. Wise,
Director, Contract Policy Division.
    Therefore, DoD, GSA, and NASA propose amending 48 CFR part 31 as 
set forth below:


    1. The authority citation for 48 CFR part 31 is revised to read as 

    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--
    a. Revising paragraph (g);
    b. Removing paragraph (h); and
    c. 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 
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.
* * * * *
[FR Doc. 05-11643 Filed 6-10-05; 8:45 am]