64254 Federal Register / Vol. 60, No. 240 / Thursday, December 14, 1995 / Rules and Regulations

DEPARTMENT OF DEFENSE

GENERAL SERVICES

ADMINISTRATION

NATIONAL AERONAUTICS AND

SPACE ADMINISTRATION

48 CFR Part 31

[FAC 90–35; FAR Case 95–003]

RIN 9000–AG73

Federal Acquisition Regulation;

Impairment of Long-Lived Assets

AGENCIES: Department of Defense (DOD),

General Services Administration (GSA),

and National Aeronautics and Space

Administration (NASA).

ACTION: Interim rule, with request for

comments.

SUMMARY: The Civilian Agency

Acquisition Council and the Defense

Acquisition Regulations Council have

agreed to an interim rule to clarify the

allowability of losses recognized when

carrying values of impaired assets are

written down for financial reporting

purposes. This regulatory action was not

subject to Office of Management and

Budget review under Executive Order

12866, dated September 30, 1993.

DATES: Effective Date: December 14,

1995.

Comment Due Date: To be considered

in the formulation of a final rule,

comments should be submitted to the

address given below on or before

February 12, 1996.

ADDRESSES: Comments should be

submitted to: General Services

Administration, FAR Secretariat, 18th &

F Streets NW., Room 4037, Washington,

DC 20405.

FOR FURTHER INFORMATION CONTACT:

Mr. Jeremy F. Olson at (202) 501–3775

in reference to this FAR case. For

general information, contact the FAR

Secretariat, Room 4037, GS Building,

Washington, DC 20405 (202) 501–4755.

Please cite FAC 90–35, FAR Case 95–

003.

SUPPLEMENTARY INFORMATION:

A. Background

This interim rule is intended to clarify

cost allowability rules concerning the

recognition of gains and losses related to

long-lived assets. The rule addresses a

cost category which is the subject of a

Financial Accounting Standards Board

Statement of Financial Accounting

Standards (SFAS), No. 121, dated March

1995, entitled ‘‘Accounting for the

Impairment of Long-Lived Assets and

for Long-Lived Assets To Be Disposed

Of.’’

The SFAS applies to long-lives assets

(such as land, buildings, and

equipment), identifiable intangibles,

and related goodwill, and establishes

guidance to recognize and measure

impairment losses. If impaired assets are

to be held for use, the SFAS requires a

write-down to fair value when events or

circumstances (e.g., environmental

damage, idle facilities arising from

declining business, etc.) indicate that

carrying values may not be fully

recoverable.

Impaired assets that are to be

disposed of, however, would be

reported (with certain exceptions) at the

lower of cost or fair value less cost to

sell. Once written down, the previous

carrying amount of an impaired asset

could not be restored if the impairment

was subsequently removed.

In contrast to the SFAS provisions,

Cost Accounting Standard (CAS)

9904.409, ‘‘Depreciation of Tangible

Capital Assets’’, provides quite different

criteria and guidance to recognize gains

and losses for Government contract

purposes. The language at 9904.409–40

(a)(4) and (b)(4), 9904.409–50(j), and

related Promulgation Comment 10,

‘‘Gain or Loss,’’ makes it clear that gains

and losses are recognized only upon

asset disposal; no other circumstances

trigger such recognition.

FAR 31.205–16 reflects the CAS

provisions that an asset be disposed of

in order to recognize a gain or loss. The

FAR rule applies to both CAS and nonCAS covered contracts. Consequently,

for Government contract purposes, an

impairment loss is recognized only

upon disposal of the impaired asset.

Like other losses, it is measured as the

difference between the net amount

realized and the impaired asset’s

undepreciated balance. Government

contractors, therefore, recover the

carrying values of impaired assets held

for use by retaining pre-write-down

depreciation or amortization schedules

as though no impairment had occurred.

The rule addresses the treatment of

losses for impaired assets by adding a

new paragraph (o) at 31.205–11, and

revising the title and adding a new

paragraph (g) at 31.205.16.

B. Regulatory Flexibility Act

The interim rule is not expected to

have 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 are awarded on a

competitive fixed-price basis and the

cost principles do not apply. An Initial

Regulatory Flexibility Analysis has,

therefore, not been performed.

Comments are invited from small

businesses and other interested parties.

Comments from small entities

concerning the affected FAR parts will

also be considered in accordance with 5

U.S.C. 610. Such comments must be

submitted separately and cite 5 U.S.C.

601, et seq. (FAC 90–35, Far case 95–

003) in correspondence.

C. Paperwork Reduction Act

The Paperwork Reduction Act does

not apply because the rule does not

impose any reporting or record keeping

requirements which require the

approval of the Office of Management

and Budget under 44 U.S.C. 3501, et

seq.

D. Determination To Issue an Interim

Rule

A determination has been made under

authority of the Secretary of Defense

(DOD), the Administrator of General

Services (GSA), and the Administrator

of the National Aeronautics and Space

Administration (NASA) that, pursuant

to 41 U.S.C. 418b, urgent and

compelling reasons exist to publish an

interim rule prior to affording the public

an opportunity to comment. This action

is necessary because the Statement of

Financial Accounting Standards No.

121, Accounting for the Impairment of

Long-Lived Assets and for Long-Lived

Assets to be Disposed Of, dated March

1995, requires all publicly owned firms

to recognize impairment losses in their

financial statements for fiscal years

beginning after December 15, 1995. It is

likely that Government contractors

whose 1996 fiscal year begins after

December 15, 1995, will recognize

impairment losses for financial

reporting and claim a portion of such

losses either on current contracts or on

those awarded after December 15, 1995.

In order to ensure that contractors’

impairment losses are not paid by the

Federal Government, it is necessary to

issue this clarification of existing cost

principles expeditiously. However,

pursuant to Public Law 98–577 and FAR

1.501, public comments received in

response to this interim rule will be

considered in formulating the final rule.

List of Subjects in 48 CFR Part 31

Government procurement.

Dated: December 8, 1995.

Edward C. Loeb,

Acting Director, Office of Federal Acquisition

Policy.

Federal Acquisition Circular

Number 90–35

Federal Acquisition Circular (FAC) 90–35

is issued under the authority of the Secretary

of Defense, the Administrator of General
Federal Register / Vol. 60, No. 240 / Thursday, December 14, 1995 / Rules and Regulations 64255

Services, and the Administrator for the

National Aeronautics and Space

Administration.

Unless otherwise specified, all Federal

Acquisition Regulation (FAR) and other

directive material contained in FAC 90–35 is

effective December 14, 1995.

Dated: December 1, 1995.

Eleanor R. Spector,

Director, Defense Procurement.

Dated: December 6, 1995.

Ida M. Ustad,

Associate Administrator, for Acquisition

Policy.

Dated: December 7, 1995.

Tom Luedtke,

Deputy Associate Administrator for

Procurement, NASA.

Therefore, 48 CFR Part 31 is amended

as set forth below:

PART 31—CONTRACT COST

PRINCIPLES AND PROCEDURES

1. The authority citation for 48 CFR

Part 31 continues to read as follows:

Authority: 40 U.S.C. 486(c); 10 U.S.C.

chapter 137; and 42 U.S.C. 2473(c).

2. Section 31.205–11 is amended at

the end of paragraph (e) by adding the

parenthetical ‘‘(but see paragraph (o) of

this subsection).’’; and by adding

paragraph (o) to read as follows:

31.205–11 Depreciation.

* * * * *

(o) 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, depreciation

of the impaired assets shall not exceed

the amounts established on depreciation

schedules in use prior to the write-down

(see 31.205–16(g)).

3. Section 31.205–16 is amended by

revising the section heading and adding

paragraph (g) to read as follows:

31.205–16 Gains and losses on

disposition or impairment of depreciable

property or other capital assets.

* * * * *

(g) With respect to long-lived tangible

and identifiable intangible assets held

for use, no loss shall be recognized 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.). Depreciation or

amortization on pre-write-down

carrying value of impaired assets not yet

disposed of shall continue to be

recoverable under established

depreciation or amortization schedules

to the extent it is not otherwise

unallowable under other provisions of

the FAR.

[FR Doc. 95–30442 Filed 12–13–95; 8:45 am]

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48 CFR Part 31

[Federal Acquisition Circular 90–35]

Federal Acquisition Regulation; Rates

of Inflation

AGENCIES: Department of Defense (DOD),

General Services Administration (GSA),

and National Aeronautics and Space

Administration (NASA).

ACTION: Annual notice of rates of

inflation.

The Civilian Agency Acquisition

Council and the Defense Acquisition

Regulations Council have agreed to

publish as an information item, the rates

of inflation which are used in

conjunction with other factors to

determine the allowability of IR&D/B&P

costs for major contractors under

31.205–18(c)(2)(i)(C)(2) during the first

three contractor fiscal years beginning

on or after October 1, 1992. The

following rates of inflation are effective

immediately, and shall remain in effect

until superseded by the next

publication, which is anticipated in

January 1996:

Fiscal year

Annual

percentage rate

1994 ................................................ 2.5

1995 ................................................ 2.9

1996 ................................................ 3.0

1997 ................................................ 3.0

The above rates are the Price

Escalation Indices for the Research,

Development, Test & Evaluation

(RDT&E) Account, Total Obligation

Authority (TOA), issued by the

Principal Deputy Under Secretary of

Defense (Comptroller) on January 10,

1995. These rates of inflation supersede

those published in FAC 90–23, Item

XL—Annual Notice of Rates of Inflation,

in the Federal Register on December 28,

1994.

Dated: December 8, 1995.

Edward C. Loeb,

Acting Director, Office of Federal Acquisition

Policy.

[FR Doc. 95–30443 Filed 12–13–95; 8:45 am]

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