31.205-11
Depreciation
Depreciation is allowable only when calculated consistently with CAS or financial accounting standards, and must not result in excessive or duplicative charges to the government.
Overview
FAR 31.205-11 establishes the rules for the allowability of depreciation costs on contractor-owned plant, equipment, and other capital facilities under government contracts. It details how depreciation should be calculated, the applicable accounting standards, and specific limitations, including treatment of residual values, fully depreciated assets, property acquired from the government, and assets involved in sale and leaseback or capital lease arrangements. The regulation ensures that depreciation costs charged to the government are reasonable, consistent, and not duplicative, aligning with both Cost Accounting Standards (CAS) and financial accounting practices where applicable.
Key Rules
- Allowable Depreciation
- Depreciation is generally allowable, but must not reduce asset book value below residual value, and only residual values exceeding 10% of capitalized cost need be considered for tangible personal property.
- CAS Applicability
- Contractors subject to CAS 409 must follow its requirements for fully CAS-covered contracts and may elect to apply it to others, maintaining consistency until contract completion.
- Financial Accounting Consistency
- For non-CAS contracts, allowable depreciation cannot exceed amounts used for financial accounting and must be consistent with non-government business practices.
- Unallowable Depreciation
- No depreciation is allowed on property acquired from the government at no cost or on fully depreciated property, unless a reasonable use charge is negotiated.
- Special Asset Transactions
- Specific rules apply for sale and leaseback, capital leases, and asset impairments, limiting allowable depreciation to what would have been allowed without such transactions.
Responsibilities
- Contracting Officers: Ensure contractor compliance with depreciation rules, review asset transactions, and verify consistency with CAS or financial accounting standards.
- Contractors: Apply appropriate depreciation methods, maintain consistent policies, document asset transactions, and avoid charging unallowable depreciation.
- Agencies: Oversee contractor adherence, audit depreciation charges, and enforce reporting and notification requirements.
Practical Implications
- This section prevents overstatement of depreciation costs, double-charging, and inconsistent accounting practices. Contractors must carefully track asset values, lease arrangements, and related-party transactions to ensure compliance. Common pitfalls include misapplying residual value rules, failing to adjust for sale/leaseback transactions, or charging depreciation on government-furnished or fully depreciated property.