31.205-11 Depreciation
Source: FAR 31.205-11 on acquisition.gov
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.
(a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable.
(b) Contractors having contracts subject to 48 CFR9904.409, Depreciation of Tangible Capital Assets, shall adhere to the requirement of that standard for all fully CAS-covered contracts and may elect to adopt the standard for all other contracts. All requirements of 48 CFR9904.409 are applicable if the election is made, and contractors must continue to follow it until notification of final acceptance of all deliverable items on all open negotiated Government contracts.
(c) For contracts to which 48 CFR9904.409 is not applied, except as indicated in paragraphs (g) and (h) of this subsection, allowable depreciation shall not exceed the amount used for financial accounting purposes, and shall be determined in a manner consistent with the depreciation policies and procedures followed in the same segment on non-Government business.
(d) Depreciation, rental, or use charges are unallowable on property acquired from the Government at no cost by the contractor or by any division, subsidiary, or affiliate of the contractor under common control.
(e) The depreciation on any item which meets the criteria for allowance at price under 31.205-26(e) may be based on that price, provided the same policies and procedures are used for costing all business of the using division, subsidiary, or organization under common control.
(f) No depreciation or rental is allowed on property fully depreciated by the contractor or by any division, subsidiary, or affiliate of the contractor under common control. However, a reasonable charge for using fully depreciated property may be agreed upon and allowed (but, see 31.109(h)(2)). In determining the charge, consideration shall be given to cost, total estimated useful life at the time of negotiations, effect of any increased maintenance charges or decreased efficiency due to age, and the amount of depreciation previously charged to Government contracts or subcontracts.
(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 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.
(h) A "capital lease," as defined in Financial Accounting Standards Board’s Accounting Standards Codification (FASB ASC) 840, Leases, is subject to the requirements of this cost principle. (See 31.205-36 for Operating Leases.) FASB ASC 840 requires that capital leases be treated as purchased assets, i.e., be capitalized, and the capitalized value of such assets be distributed over their useful lives as depreciation charges or over the leased life as amortization charges, as appropriate, except that-
(1) Lease costs under a sale and leaseback arrangement are allowable only up to the amount that would be allowed if the contractor retained title, computed based on the net book value of the asset on the date the contractor becomes a lessee of the property adjusted for any gain or loss recognized in accordance with 31.205-16(b); and
(2) If it is determined that the terms of the capital lease have been significantly affected by the fact that the lessee and lessor are related, depreciation charges are not allowable in excess of those that would have occurred if the lease contained terms consistent with those found in a lease between unrelated parties.