CAS 409 - Depreciation of Tangible Capital Assets

9904.409-20 Purpose

This Standard was created to "enhance objectivity and consistency" in allocating depreciation costs to Government contracts. The standard provides criteria for assigning costs of tangible capital assets to cost accounting periods.

9904.409-30 Definitions

(a) The following are definitions of terms which are prominent in this Standard. Other terms defined elsewhere in this Chapter 99 shall have the meanings ascribed to them in those definitions unless paragraph (b) of this subsection, requires otherwise.

(1) Residual Value means the proceeds (less removal and disposal costs, if any) realized upon disposition of a tangible capital asset. It usually is measured by the net proceeds from the sale or other disposition of the asset, or its fair value if the asset is traded in on another asset. The estimated residual value is a current forecast of the residual value.

(2) Service Life means the period of usefulness of a tangible asset (or group of assets) to its current owner. The period may be expressed in units of time or output. The estimated service life of a tangible capital asset (or group of assets) is a current forecast of its service life and is the period over which depreciation cost is to be assigned.

(3) Tangible Capital Asset means an asset that has physical substance, more than minimal value, and is expected to be held by an enterprise for continued use or possession beyond the current accounting period for the services it yields.

(b) The following modifications of terms defined elsewhere in this Chapter 99 are applicable to this Standard: None.

9904.409-40 Requirements

Residual Values

Estimated residual values must be determined for all tangible capital assets or groups of assets. The residual values must be deducted from the capitalized value in computing the depreciable cost base, except where;

• (1) the estimated residual value of tangible personal property does not exceed 10 percent of the capitalized cost or
• (2) either the declining balance method or class-life-asset-range system is used.

The standard prohibits the depreciation of assets or asset groups below their residual value, if the residual value is greater than ten percent of the capitalized cost of the asset, or if the asset is real property. For personal property that has a residual value less than or equal to ten percent of the capitalized cost of the asset, the asset or asset group may be depreciated below residual value if the residual value is immaterial. Materiality should be determined based on the general criteria contained in 48 CFR 9903.305, Materiality.

Estimated Service Life

The estimated service life of the tangible capital asset, over which the depreciated cost is assigned, must reasonably approximate the actual period of usefulness to its current owner, considering such factors as obsolescence and required quality and quantity of output. The estimated service life can exclude standby or incidental use periods, provided adequate records substantiate the withdrawal of such assets from active use. Expected periods of useful life must be based on recorded past experience, as modified for expected changes in operating practices, obsolescence, or quantity of products produced. However, the contractor must justify estimated service lives which deviate from the previously experienced lives.

When a new asset is acquired for which the contractor has no available data or prior experience, the estimated service life must be based on projection of the expected useful life. The projection cannot be less than the midrange period for asset guideline classes established under IRS Revenue Procedure 72-10 and will be used only until the required records are available.

In special circumstances, contracting parties may negotiate a shorter estimated service life if it can be reasonably projected.

Method of Depreciation

The contractor may select any appropriate method of depreciation which reflects the pattern of consumption of services over the life of the asset. For example, an accelerated method is appropriate where the expected consumption of services is greatest in the early years of the asset life. Financial accounting methods are expected to approximate the pattern of consumption of services. Therefore, if the contractor continues to use previous methods found to be acceptable to the government on similar assets for financial accounting, no additional support of existing method will ordinarily be required.

A depreciation method selected for newly acquired assets which differs from the depreciation method currently used for like assets in similar circumstances must be supported by the contractor’s projection of expected consumption of services.

Depreciation costs are generally allocated as indirect costs to the cost objectives for which the assets provide service. They may be charged directly to cost objectives at average rates only if the charges are based on usage and the costs of all like assets used for similar purposes are also charged directly. Depreciation costs for assets included in service centers, where significant, must be charged to the service center.

Substantiation and Record Keeping

The standard requires the contractor to maintain adequate records which identify the age of the asset or asset group at retirement or withdrawal from active use. The record should contain such information as asset acquisition/disposition dates, date asset was withdrawn from active service, and any other factors that directly influence asset lives. The record need not be maintained solely for fixed asset accounting; it may be a record used for such other purposes as property insurance, income/property taxes, property control, or maintenance.

If supporting records are not available on the date the contractor must first comply with the standard, the estimated service lives should be those used for financial accounting. However, the required supporting records must be developed by the end of the second fiscal year after that date and used as a basis for estimated service lives on assets subsequently acquired.

Changes

Changes to estimated service lives, residual values, or consumption of services may be required as a result of significantly changed circumstances. Any resulting adjustment to the undepreciated cost will be assigned only to the cost accounting period in which the change occurs and to subsequent periods. No retroactive adjustments will be made.

Gains and Losses

The standard outlines the following accounting treatment for gains or losses associated with the disposition of tangible capital assets. An impairment loss under FASB Statement No. 121 is recognized only upon disposal of the impaired asset.

• (1) Where the asset is disposed of without an exchange, the gain or loss is generally treated as an adjustment to the appropriate indirect expense pool in the cost accounting period in which the disposition occurs. However, the auditor should be aware that, in such circumstances, the standard limits the gain to be recognized for contract costing purposes to the difference between the asset’s original acquisition cost and its net book value.
• (2) Where an asset is exchanged for like property, two options are available to the contractor: either the gain or loss can be recognized as discussed above, or the depreciable cost base of the new asset may be adjusted for the entire gain or loss.
• (3) Where an asset disposition results from an involuntary conversion and the asset is replaced by a similar asset, the same two options as described above for exchanges of like property are available to the contractor.
• (4) Where assets are grouped, gains or losses are not recognized. Instead they are processed through the accumulated depreciation account.
• (5) Assets dispositioned in a business combination meeting the criteria in CAS 404.50(d)(1). The revised CAS 409, effective April 15, 1996, added a new subparagraph CAS 409.50(j)(5) to make it clear that the CAS 409.50(j) provision dealing with the recapture of gains and losses on disposition of tangible capital assets should not apply when assets are transferred subsequent to a business combination meeting the criteria in CAS 404.50(d)(1). The revised CAS 409.50(j)(5) stipulates that the provisions of CAS 409.50(j) do not apply to business combinations and that the carrying values of tangible capital assets acquired subsequent to a business combination are to be established by the acquiring company in accordance with the provisions of CAS 404.50(d)(1). Consequently, since CAS 404.50(d)(1) does not recognize an increase or decrease in the asset values as a result of a business combination, any gain or loss realized by the seller on disposition of assets as a result of the business combination is also not recognized.
• (6) Assets dispositioned in a business combination meeting the criteria in CAS 404.50(d)(2). The April 15, 1996 revision to CAS 409.50(j)(5) does not apply to assets dispositioned in a business combination meeting the criteria in CAS 404.50(d)(2), i.e., the tangible capital assets acquired in the business combination did not generate either depreciation expense or cost of money charges during the most recent cost accounting period. Therefore, the provision on the recapture of gains and losses would apply to the dispositioned assets. However, for contracts awarded prior to April 24, 1998, tangible capital assets meeting the requirements of CAS 404.50(d)(2) must still comply with the requirements of FAR 31.205-16 and 52. Consequently, although the gain or loss may be recognized for CAS purposes, no gain or loss would be allowed per FAR. Effective April 24, 1998 (FAC 97-04), FAR 31.205-52 was revised to conform to the revised CAS 404 and 409. Therefore, gain or loss would be allowed for assets dispositioned in a business combination meeting the criteria in CAS 404.50(d)(2).

Related Pages

CAS 409 - Depreciation of Tangible Capital Assets - Illustrations