31.205-16
Gains and losses on disposition or impairment of depreciable property or other capital assets
FAR 31.205-16 sets strict rules for recognizing and allocating gains and losses from the disposition of depreciable property, ensuring only allowable amounts impact contract costs.
Overview
FAR 31.205-16 addresses how contractors must account for gains and losses resulting from the sale, retirement, or other disposition of depreciable property or capital assets. The regulation specifies when such gains or losses should be recognized, how they are calculated, and how they should be allocated to contract costs. It also covers special cases such as involuntary conversions (e.g., destruction by fire), sale and leaseback transactions, and mass or extraordinary dispositions. The section ensures that only appropriate gains or losses are included in contract costs and prevents contractors from recognizing losses due to asset impairments before actual disposition.
Key Rules
- Recognition of Gains and Losses
- Gains and losses must be included in the year they occur and allocated to the same cost groupings as the related depreciation or amortization, except in business combinations or certain other exceptions.
- Sale and Leaseback Transactions
- Special rules limit the recognition of losses in sale and leaseback situations, particularly when fair market value exceeds or is less than the undepreciated balance.
- Calculation of Gains/Losses
- The gain or loss is the difference between the net amount realized and the undepreciated balance, with specific limitations for contract costing purposes.
- Involuntary Conversions
- When property is destroyed and insurance is recovered, gains or losses are recognized based on whether the asset is replaced and how the replacement is handled.
- Exceptions
- Gains and losses are not recognized separately if processed through depreciation reserves or if property is exchanged for similar items.
- Mass or Extraordinary Dispositions
- These are reviewed on a case-by-case basis.
- Non-Depreciable Capital Assets
- Gains and losses from non-depreciable capital assets are excluded from contract costs.
- Impairments
- Losses from write-downs due to impairments are not allowed; gains/losses upon disposition are calculated as if no write-down occurred.
Responsibilities
- Contracting Officers: Ensure contractors apply these rules correctly and review gain/loss calculations for allowability.
- Contractors: Properly calculate, document, and allocate gains and losses in accordance with these rules; avoid recognizing unallowable losses or gains.
- Agencies: Oversee compliance and address special cases or disputes as needed.
Practical Implications
- This section prevents manipulation of contract costs through improper recognition of asset gains or losses.
- Contractors must maintain accurate records and follow detailed rules for different types of asset dispositions.
- Common pitfalls include misallocating gains/losses, failing to follow sale and leaseback rules, or attempting to recognize losses from impairments before disposition.