CAS 409 - Depreciation of Tangible Capital Assets - Illustrations

Illustrations

First Example

Based on a sample of asset dispositions/withdrawals for the last three years, the contractor now estimates 10 years service life for lathes. The records in the sample supporting the 10-year life classified several machines as "withdrawn from active use" although the machines are still on hand, in good working condition, and physically located in the plant machine shop. Neither the property records nor any other records reflected any change in the assets from active to inactive status. Records reflect a comparatively low usage of these specific machines for the past year due to a slack period. Solution. The machines should not be classified as "Withdrawn from active use" unless the contractor provides adequate documentation substantiating the change in status. Machines temporarily idled for lack of work are not "withdrawn from active service." The contractor’s written policies and procedures should define (1) the conditions under which capital assets may be withdrawn from active use and (2) the property records which must be prepared for processing the asset from active to inactive status. The records should clearly support that assets "withdrawn from active service" are in actuality intended only for standby or incidental use.

Third Example

The capitalized cost of a lathe is $50,000. The lathe is projected to have a residual value of $4,500, which is determined to be immaterial in amount based on the criteria in 48 CFR 9903.305, and an estimated service life of 10 years. The contractor utilizes a straight-line depreciation method. The asset is sold in Year 11 for $5,000.

Because the $4,500 residual value is less than 10 percent of the capitalized cost, the annual depreciation charges may be based on a depreciable cost base of $50,000. In addition, since the $4,500 is immaterial, the asset is depreciated to zero. However, since the contractor is required to provide a credit for the difference between the sales price and the book value, a credit of $5,000 is recognized in Year 11, as shown below: Depreciable cost base $50,000 Accumulated depreciation: 10 years @ $5,000 per year 50,000 Net book value at end of 10th year $ -0- Year 11: Credit for Gain on Sale of Asset (Sales price of $5,000 less book value of zero) $5,000

Fourth Example

Contractor A acquires Contractor B and accounts for the business combination using the purchase method of accounting. Prior to the business combination, the net book value of Contractor B’s assets was $10.5 million. Contractor B’s assets generated depreciation expense and cost of money charges that were allocated to government contracts negotiated on the basis of cost in its most recent cost accounting period. The difference between the original acquisition cost of Contractor B’s assets and its undepreciated balance is $3.0 million. For GAAP purposes, the difference between the sales price and net book value of assets results in a gain of $4.0 million. The revised CAS 409 applies to the business combination.

The provisions of the amended CAS 404.50(d)(1), effective April 15, 1996, would apply to the business combination because the seller’s (Contractor B’s) assets generated depreciation or cost of money charges that were allocated to government contracts negotiated on the basis of cost in its most recent cost accounting period. Therefore, the provisions of CAS 409.50(j) dealing with the recapture of gains and losses on disposition of capital assets would not apply to the business combination. For CAS purposes, Contractor B would not recognize the gain. Consequently, the gain would not be reflected in Contractor B’s total cost input G&A base because the gain was not measured for CAS purposes.

Fifth Example

Same facts as Problem d. above, except that Contractor B has not performed government contracts for several years and consequently, its assets did not generate depreciation expense or cost of money changes that were allocated government contracts negotiated on the basis of cost, in its most recent cost accounting period.

The provisions of the amended CAS 404.50(d)(2), effective April 15, 1996, would apply to the business combination because the seller’s (Contractor B’s) assets did not generate depreciation expense or cost of money charges on government contracts in its most recent cost accounting period. Therefore, the provisions of CAS 409.50(j) dealing with the recapture of gains and losses on disposition of capital assets would apply to the business combination. For CAS purposes, Contractor B would recognize the $3.0 million difference between the original acquisition cost and the undepreciated balance and credit the appropriate indirect cost pool(s). For contracts awarded prior to April 24, 1998, the gain would not be recognized under FAR 31.205-16 and 31.205-52. However, for contracts awarded on or after April 24, 1998, the gain would be recognized.

Related Pages

CAS 409 - Depreciation of Tangible Capital Assets