[Federal Register Volume 60, Number 240 (Thursday, December 14, 1995)]
[Rules and Regulations]
[Pages 64254-64255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30442]




[[Page 64253]]

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Part II

Department of Defense

General Services Administration

National Aeronautics and Space Administration
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48 CFR Part 31



Federal Acquisition Regulation; Impairment of Long-Lived Assets and 
Rates of Inflation; Interim Rule and Rule

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

[[Page 64254]]


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.

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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 non-CAS 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 

[[Page 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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