[Federal Register Volume 71, Number 124 (Wednesday, June 28, 2006)]
[Rules and Regulations]
[Pages 36939-36941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-5706]



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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 31

[FAC 2005-10; FAR Case 2004-014; Item VI; Docket 2006-0020, Sequence 7]
RIN 9000-AK19


Federal Acquisition Regulation; FAR Case 2004-014, Buy-Back of 
Assets

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

ACTION:  Final rule.

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SUMMARY:  The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) have agreed on a final rule 
amending the Federal Acquisition Regulation (FAR) by revising the 
contract cost principle regarding depreciation costs. The final rule 
adds language which addresses the allowability of depreciation costs of 
reacquired assets involved in a sale and leaseback arrangement.

DATES:  Effective Date: July 28, 2006.

FOR FURTHER INFORMATION CONTACT:  For clarification of content, contact 
Mr. Jeremy Olson, at (202) 501-4755. Please cite FAC 2005-10, FAR case 
2004-014. For information pertaining to status or publication 
schedules, contact the FAR Secretariat at (202) 501-3221.

SUPPLEMENTARY INFORMATION:

A. Background

    In response to public comments related to proposed language at FAR 
31.205-16 regarding the recognition of gains and losses associated with 
a sale and leaseback arrangement (submitted under FAR case 2002-008 by 
the FAR Part 31 Ad Hoc Committee), the Committee revised FAR 31.205-16 
to state that the disposition date is the date of the sale and 
leaseback arrangement. FAR case 2002-008 addressed three cost 
principles. A new case, FAR case 2004-005, was later split-off and only 
addressed sale and leaseback arrangements.
    During the deliberations of FAR case 2002-008, DCAA brought to the 
Committee's attention a concern regarding the cost treatment when a 
contractor subsequently re-acquires title to an asset under a sale and 
leaseback arrangement. The Committee recognized this concern, not just 
for sale and leaseback arrangements, but also for assets that are 
purchased, depreciated, sold, and subsequently 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.
    For example, in a sale and leaseback arrangement, a contractor may 
purchase an asset in 2001. The contractor then enters into a sale and 
leaseback arrangement in 2004, with a ten year lease. At the end of 
2014, the contractor reacquires the asset. The question is if and how 
much the contractor can charge for depreciation costs or usage charge 
related to that asset.
    In addition, consider a purchase of an asset in 2003 (without a 
sale leaseback arrangement). The contractor depreciates the asset for 
15 years, and then in 2018 sells the asset. In 2020, the contractor 
reacquires the asset. Again the question is if and how much the 
contractor can charge for depreciation costs or usage charges related 
to the asset.
    The Committee recognized this issue required research and 
deliberation. The Committee therefore recommended that the DAR Council 
establish a new case to address this buyback issue. The DAR Council 
concurred with the recommendation, established the subject case (FAR 
case 2004-014), and assigned the case to the FAR Acquisition Finance 
Team.
    On August 31, 2004, the FAR Acquisition Finance Team issued its 
report on the subject case. The report noted 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. After extensive discussion within the 
Team and respective members' Agencies, the Team concluded that the only 
area that currently requires coverage is a sale and leaseback 
arrangement.
    The report noted that a contractor should not benefit or be 
penalized for entering into a sale and leaseback arrangement, i.e., 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 Team recommended revised 
language for the determination of allowable depreciation expense that 
includes consideration of--
     The depreciation expense taken prior to the sale and 
leaseback arrangement;
     Any gain or loss recognized in accordance with FAR 31.205-
16(b); and
     Any depreciation expense included in the calculation of 
the normal cost of ownership for the limitations at FAR 31.205-36(b)(2) 
and 31.205-11(h)(1).
    A proposed rule was published in the Federal Register at 70 FR 
34080, June 13, 2005. In response to the proposed rule, comments were 
received from two commenters. These commenters oppose the proposed 
rule, asserting that the rule penalizes contractors, ignores GAAP and 
CAS, ignores the requirement to pay a contractor a reasonable cost, and 
imposes an administrative burden. In addition, one commenter asserts 
that the rule would cause a situation where a given asset's value and 
allowable depreciation will differ depending on the relationships of 
the parties from whom the asset is acquired. The Councils disagree with 
each of the commenters assertions. As such, the final rule is identical 
to the proposed rule published on June 13, 2005.

Public Comments

    1. Contractor is penalized under proposed rule.
    Comment: The commenters assert that the proposed rule is not 
consistent with the Government position that a contractor should not 
benefit or be penalized for entering into a sale and leaseback 
arrangement. The commenters further assert that the recent changes to 
FAR 31.205-11, 31.205-16, and 31.205-36 have constructed parameters 
that penalize a contractor for having owned its facilities at any time 
during contract performance. The commenters state that these rules 
ensure the Government never pays more than the initial capitalized cost 
of an asset regardless of changes in ownership, changes in invested 
capital or changes in market rate.
    Councils' Response: When a contractor purchases an asset and holds 
that asset for the entire period of contact performance, the Government 
pays no more than the initial capitalized cost of an asset. This has 
been the longstanding policy of the Government. The Councils believe 
this same policy should apply when a contractor re-acquires an asset 
for which there was a sale and leaseback arrangement, i.e., the 
Government should pay no more than the initial capitalized cost of the 
asset. The Councils believe the proposed rule accomplishes this 
objective.
    2. GAAP and CAS 404.
    Comment: The commenters assert that limiting allowable depreciation 
costs to that which would have resulted if the contractor had retained 
title throughout the service life of the asset ignores

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fundamental Cost Accounting Standard (CAS) 404 requirements and 
Generally Accepted Accounting Principles (GAAP) for an asset to be 
capitalized at its purchase price, even if that purchase is the 
reacquisition of a previously owned asset.
    Councils' Response: CAS provides criteria for measuring, assigning, 
and allocating costs for CAS-covered contracts. However, FAR part 31 
provides the criteria for allowability of those costs. Under the 
proposed and final rules, the costs are measured, assigned, and 
allocated in accordance with CAS for contracts that are subject to CAS 
404. The proposed and final rules provide for a limitation on the 
allowability of those measured, assigned, and allocated costs. Thus, 
the proposed rule does not conflict with CAS.
    In regards to GAAP, there are a number of cost principles, as well 
as some cost accounting standards, that deviate from GAAP. This 
deviation occurs for a variety of reasons. In many cases, the deviation 
is necessary because GAAP is focused on reporting to investors, while 
FAR focuses on cost reimbursement for Government contracts.
    In the subject case, the Councils believe that neither CAS nor GAAP 
provide adequate coverage when a contractor re-acquires an asset that 
was part of a sale and leaseback arrangement. The Councils believe this 
final rule is necessary to provide for consistent reimbursement 
treatment for capital assets, i.e., the Government pays no more than 
the initial capitalized cost of the asset.
    3. Contractor should be reimbursed a reasonable cost.
    Comment: The commenters assert that the proposed rule ignores the 
basic principle that a contractor should be reimbursed for reasonable 
cost incurred in the course of business.
    Councils' Response: The Councils do not believe the contractor is 
reimbursed an unreasonable cost under the proposed rule. The Councils 
believe the longstanding policy of reimbursement based on the initial 
capitalized cost is reasonable. The Councils further believe it is 
unreasonable to reimburse a contractor for additional costs merely 
because it sold an asset and then chose to re-acquire it shortly 
afterwards.
    4. Administrative burden.
    Comment: The commenters state that the administrative time required 
to document and track the ownership trail of the asset will become 
needlessly complex and excessively burdensome.
    Councils' Response: In drafting the proposed rule, the Councils 
considered the administrative burden of tracking these assets for long 
periods of time. The application of this provision is limited to 
instances where the asset generated either depreciation expense or cost 
of money during the most recent accounting period prior to the date of 
reacquisition. The Councils do not believe it is an administrative 
burden to obtain the necessary records in such cases, since the sale 
and leaseback arrangement would have expired no earlier than the 
accounting period prior to when the asset is re-acquired. The Councils 
note that the application period for re-acquired assets is also 
consistent with CAS 404-50(d)(1), which provides the capitalization 
criteria for the acquisition of assets resulting from a business 
combination.
    5. Asset value and allowable depreciation differ based on 
relationships of the parties.
    Comment: One commenter asserts that the rule would cause a 
situation where a given asset's value and allowable depreciation will 
differ depending on the relationships of the parties from whom the 
asset is acquired. The commenter states that when a contractor that 
owns the building and then re-acquires the asset is compared to a 
contractor that is conducting business under an operating lease, the 
contractor that leases the building is reimbursed significantly more 
costs than the contractor that owned the building. The commenter 
asserts that the contractor that owned the building is forced to absorb 
millions of dollars of costs deemed unallowable for Government costing 
purposes.
    Team Response: The subject rule does not establish a new policy of 
providing differing reimbursement based on whether the contractor 
leases or owns the asset (this is already an established policy). Under 
FAR part 31, a contractor that enters into an operating lease is 
reimbursed based on actual rental payments made. On the other hand, a 
contractor that purchases an asset is reimbursed based on the actual 
costs of ownership, which includes depreciation. As a result, the 
amount a contractor is reimbursed differs depending on whether the 
contractor leases or owns the asset. Under the subject rule, the 
reimbursement for purchased assets continues to be based on cost of 
ownership, i.e., the basis for reimbursement is the initial capitalized 
cost of the asset.
    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 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 cost principles and procedures discussed in this rule. For Fiscal 
Year 2003, only 2.4% of all contract actions were cost contracts 
awarded to small business.

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 20, 2006.
Linda Nelson,
Deputy Director, Contract Policy Division.

0
Therefore, DoD, GSA, and NASA amend 48 CFR part 31 as set forth below:

PART 31-CONTRACT COST PRINCIPLES AND PROCEDURES

0
1. The authority citation for 48 CFR part 31 continues to read as 
follows:

    Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42 
U.S.C. 2473(c).


0
2. Amend section 31.205-11 by revising paragraph (g); removing 
paragraph (h); and 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

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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.
* * * * *


31.205-16  [Amended]

0
3. Amend section 31.205-16 by--
0
a. Removing from the introductory text of paragraph (b) ``31.205-
11(i)(1)'' and adding ``31.205-11(h)(1)'' in its place; and
0
b. Removing from paragraph (c) ``31.205-11(i)'' and adding ``31.205-
11(h)'' in its place.

[FR Doc. 06-5706 Filed 6-27-06; 8:45 am]
BILLING CODE 6820-EP-S