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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: July 7, 2003

SUBJECT: Federal Acquisition Regulation (FAR); Gains and Losses, Maintenance and Repair Costs, and Material Costs

SOURCE: Federal Register, July 7, 2003, Vol. 68, No. 129, page 40465

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

ACTION: Proposed Rule

SYNOPSIS: It is proposed that FAR Subpart 31.2, Contracts with Commercial Organizations, be amended to revise the cost principles regarding gains and losses on disposition or impairment of depreciable property or other capital assets, delete the cost principle regarding maintenance and repair costs, and revise the language concerning material costs.

EDITOR'S NOTE: For more on the public meetings that were held to discuss potential opportunities to streamline the provisions of FAR Part 31, Contract Cost Principles and Procedures, see the March 7, 2001, FEDERAL CONTRACTS DISPATCH "Department of Defense; Public Meetings on Streamlining Cost Measurement, Assignment, and Allocation."

For more on other proposed rules produced by the special interagency ad hoc committee, see the February 4, 2003, FEDERAL CONTRACTS DISPATCH "Federal Acquisition Regulation (FAR); General Provisions of the Cost Principles"; the May 22, 2003, FEDERAL CONTRACTS DISPATCH "Federal Acquisition Regulation (FAR); Application of Cost Principles and Procedures, and Accounting for Unallowable Costs"; and the June 3, 2003, FEDERAL CONTRACTS DISPATCH "Federal Acquisition Regulation (FAR); Deferred Compensation and Postretirement Benefits Other Than Pensions."

DATES: Comments should be submitted on or before September 5, 2003.

ADDRESSES: Submit written comments on proposed rule to General Services Administration, FAR Secretariat (MVA), 1800 F Street, NW, Room 4035, Attn: Laurie Duarte, Washington, DC 20405. Submit e-mail comments to: farcase.2002-008@gsa.gov. Cite "FAR case 2002-008" when referring to this proposed rule.

FOR FURTHER INFORMATION CONTACT: Edward Loeb, 202-501-0650.

SUPPLEMENTAL INFORMATION: In 2001, Director of Defense Procurement Deidre Lee established a special interagency ad hoc committee to perform a comprehensive review of policies and procedures in FAR Part 31 related to cost measurement, assignment, and allocation to assess the need for each specific requirement in light of the evolution of generally accepted accounting principles (GAAP) and experience gained from implementation.

Public meetings were held on April 19, 2001, May 10-11, 2001, and June 12, 2001, to discuss potential opportunities to streamline the provisions of FAR Part 31. The meetings included representatives from industry, government, and other interested parties who provided their views. The ad hoc committee reviewed the cost principles and procedures and the public comments; identified potential changes to the FAR; and submitted draft proposed rules to the Civilian Agency Acquisition Council (CAAC) and the Defense Acquisition Regulations Council (DARC) for consideration.

The Councils are proposing the following revisions to FAR Subpart 31.2:

• FAR 31.205-16, Gains and Losses on Disposition or Impairment of Depreciable Property or Other Capital Assets: The proposed rule would 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 introductory material to this proposed rule states, "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 (for example, 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.
  
  
• FAR 31.205-24, Maintenance and Repair Costs: This cost principle, which addresses the assignment of maintenance and repair costs to cost accounting periods, would be deleted. The Councils believe that the Cost Accounting Standards (CAS) adequately addresses these costs for contracts subject to full CAS coverage. (EDITOR'S NOTE: The Cost Accounting Standards (CAS) are 19 standards which apply to large contractors performing large contracts. The CAS are in Chapter 99 of Title 48 of the Code of Federal Regulations (CFR), and are available on the Internet at http://www.arnet.gov/far/97/html/appendix.html.)
  
  The introductory material to the proposed rule states, "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)."
  
  
• FAR 31.205-26, Material Costs: Paragraph (c) and the last sentence of paragraph (d) would be deleted.
  
  Paragraph (c) states, "Reasonable adjustments arising from differences between periodic physical inventories and book inventories may be included in arriving at costs; provided, such adjustments relate to the period of contract performance." The Councils recommend deleting this provision and relying on GAAP.
  
  The last sentence of paragraph (d) states, "When estimates of future material costs are required, current market price or anticipated acquisition cost may be used, but the basis of pricing must be disclosed." This sentence provides specific methods for estimating material costs. Since FAR Part 31 focuses on criteria regarding the allowability of costs rather than the methods used to estimate costs, this sentence should be deleted.

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

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