Cost Accounting Standard 404 - Preambles

Preambles to Cost Accounting Standard 404

Capitalization of Tangible Assets

Preamble A

Preamble to Original Publication of Part 404, 12-27-73

Preamble, Published at 38 FR 5318, Feb. 27, 1973, to the original Publication of this part.

The Standard on Capitalization of Tangible Assets published today is one of a series being promulgated by the Cost Accounting Standards Board pursuant to section 719 of the Defense Production Act of 1950, as amended (Pub.L.91-379, 50 U.S.C.App. 2168), which provides for the development of Cost Accounting Standards to be used in connection with negotiated national defense contracts.

Work preliminary to the development of this Standard was initiated as the result of recognition that the general subject of fixed asset accounting has been the source of continuing problems between contractors and the Government concerning equitable determinations of the costs attributable to performance of specific contracts. The problems include

(1) determination of the acquisition costs to be capitalized as opposed to those which are charged against revenues of the current period,

(2) determination of appropriate depreciation charges for a given fiscal period,

(3) determination of the appropriate allocation of depreciation charges among contractor activities, and

(4) determination of appropriate techniques for treating dispositions of fixed assets. The Standard establishes the beginning point for fixed asset accounting as described in (1) above. It does not cover the other related topics.

Early research on this Standard included an extensive review of available literature on the subject and a review of decisions of contract appeals board and courts. A preliminary analysis of the entire topic of fixed asset accounting was made and a number of issues were identified; comments on this analysis were obtained in response an extensive mailing. After careful evaluation of the comments, the Board developed and circulated a questionnaire on tangible fixed asset accounting practices. The replies to the questionnaire were considered in the preparation of a preliminary draft of the Standard on Capitalization of Tangible Assets, which was, in turn, widely distributed for informal comment by interested parties.

The Standard now being promulgated is derived from the proposal which was published in the Federal Register for October 5, 1972, with an invitation for interested parties to submit data views, and arguments to the Board. The Board supplemented that Federal Register publication by sending copies of the Federal Register material directly to organizations and individuals who were expected to be interested. Responses were received from 107 sources, including individual companies, Government agencies, professional associations, industry associations, public accounting firms, universities, and others. All of the comments have been carefully considered by the Board.

Most of those who commented expressed general concurrence with the provisions of the proposal. Many of the contractors who commented indicated that their practices in most respects already complied with the Standard; most suggested that the proposal should be modified only in a few respects. The Board takes this opportunity to express its appreciation for the helpful suggestions and criticisms which have been furnished. Many companies and individuals have devoted significant talent and effort to the improvement of this Standard.

The comments below summarize the major issues discussed in connection with the October 5 proposal and explain the major changes which have been made.

(1) Adequacy of existing situation

Some commentators contended that the Board should not promulgate any rules in this area because the applicable principles have been well established and accepted. The Board, however, finds that the existing regulations have failed to establish reasonable uniformity of capitalization practices among comparable organizations.

(2) Specificity

Some interested parties criticized the proposed Standard on the basis that it was “too procedural.” Those who comment in this vein tend to assert that this Cost Accounting Standard should deal only with criteria and policies. Others criticized the October 5 proposal as being too general and failing to provide sufficient guidance about treatment of specific types of costs (such as sales tax) or certain types of transactions (such as deferred maintenance).

The Standard provides practical implementation for the basic concept of direct identification of costs with final cost objectives to the maximum practical extent. The acquisition costs of tangible assets should be identified and capitalized wherever the service lives and amounts involved are so significant that contract costs would be distorted if the acquisition costs were not capitalized. The main feature of this Standard is the requirement that contractors consistently apply reasonable capitalization policies in accordance with criteria stated in the Standard.

A policy for capitalization is a policy for distinguishing between assets and expenses. Immediate charge-off is justifiable as a practical expedient in those situations where the improved allocation of cost among cost objectives and accounting periods which would be attainable by capitalization is worth the administrative costs which would be required. Assets with either short service lives or minor acquisition costs are conveniently accounted for as charges against current revenues.

When a transaction is identified as the acquisition of a tangible capital asset, the full cost of acquiring the asset should be capitalized. The Board might have applied this concept by requiring the inclusion of specific elements of cost in the determination of acquisition cost. As one example, it would be appropriate in concept to capitalize sales and use taxes as a part of the acquisition cost because such taxes are clearly caused by the acquisition. However, as many commentators have stated, as requirement to capitalize such taxes and similar costs would require significant changes in contractor’s accounting systems, and the benefit from such increased uniformity may not exceed the expected cost to contractors if required to change from their present practices. The Standard, therefore, does not specifically require the capitalization of sales or use taxes or other collateral costs of acquiring tangible capital assets. The subject remains under active consideration by the Board and if further study should indicate that the benefits from increased uniformity in this area would outweigh probable administrative costs, the Board will take affirmative action on this subject.

This Standard does not provide procedural detail for determining the accounting treatment for some specific kinds of transactions related to existing assets. The major problems encountered in practice are those of clarification; once specific work is defined, for example, as “preventive maintenance,” “routine repair,” “major overhaul,” “extensive renovation,” “addition,” “betterment,” or some other such classification in accordance with contractor policy, the appropriate accounting treatment can readily be agreed upon.

The Standard leaves latitude to the contractor in establishing his capitalization policy, but it provides some reasonable limits. A major purpose of Cost Accounting Standards is increased uniformity and consistency; this goal implies some reduction in the flexibility which was formerly available.

(3) Capitalization as an independent issue

As indicated above, the research which has led to this Standard began as a broad inquiry into a number of closely related issues. Capitalization is only one of those issues. Interested parties have suggested that the Board should not issue a Standard on any single part of the subject of fixed asset accounting until it is prepared to deal comprehensively with all related issues. The major objection is that changes in this Standard may be found to be appropriate when the details of a Standard on depreciation are agreed upon.

After careful consideration of all issues presented, the Board is confident that the Standard being promulgated will be compatible with future Standards. Nonetheless the Board acknowledges that because of future Standards, or for other reasons, modification in this, or indeed in any Standard which it promulgates, may be necessary. Should such modifications be needed, they will be made. This Standard, by helping identify those acquisitions which should be capitalized, will be useful immediately in connection with identifying items whose cost should not be allocated to current contracts.

(4) Definition of tangible capital asset

The term “Tangible Capital Asset” has already been defined by the Board in connection with the Cost Accounting Standard on Allocation of Home Office Expenses to Segments. The definition provides that such assets “are to be held for continued use or possession * * * for the services they yield.” Some interested parties have suggested that this definition could apply to inventories which are held for sale. The Board considers that the phrase “for the services they yield” is sufficient to show that the term does not apply to inventories. No change is deemed necessary in the published definition.

(5) Nature of limits

The Standard requires that each contractor establish and adhere to a reasonable capitalization policy. The Board feels that, in most cases, the contractor is best able to determine what policy will be most suitable for his situation, and that all interested parties will be benefited by consistent application of appropriate criteria for distinguishing between capital items and those which should be charged off at time of acquisition. In consideration of the possible distortion and inequity which might result from application of an unreasonable policy (significant amounts of long-term fixed asset costs charged to expense at acquisition), the Board considered the desirability of a specific definition of the limits of reasonableness. The proposal published in October, as well as earlier drafts distributed informally, included the requirements that the policy deal with both the expected service life and the acquisition cost. An acceptable policy would not allow an asset to be charged off immediately against revenue if its service life was expected to be in excess of 2 years and its acquisition cost was in excess of $500.

The Board received many comments on the provision of these specific limitations. Critics have used the term “arbitrary.” The Board has considered carefully all the pertinent points and has continued the limits which were earlier proposed. Disclosure statements and other research data obtained by the Board indicate that very few contractors will be required change their present policies and those few required changes will impact only a few acquisitions. A review of disclosure statements filed with the Board indicates that only 3 percent of the reporting companies had dollar capitalization criteria in excess of $500. In addition, the fact that specific limits, appropriate today, may need to be revised in the future is not a reason to avoid establishing them today. Limitations can be revised promptly if developments warrant a change.

There have been no established limits on capitalization policies.

Accordingly, wide diversity exists among contractors. The Board does not seek to establish a single uniform accounting system for all contractors, but it believes that limits for total cost and useful life should be placed under some uniform constraints. Indeed, the Board feels that procurement authorities are entitled to assurance that contractor capitalization policies will result in the capitalization of those acquired assets which are within specific limits of reasonableness.

(6) Comparing benefits and cost

The Congress provided, in section 719(g) of the Act which established the Board, that in promulgating Cost Accounting Standards “the Board shall take into account the probable, costs of implementation compared to the probable benefits.” Those commenting on the Board’s work show considerable interest in this aspect; the comments on the October proposal included a number of remarks on this comparison.

The Board considers the benefits and the costs which can be related to each specific proposal and also to the total program of developing Cost Accounting Standards. This Standard has, for most contractors, almost no cost. It requires the adoption of a policy; most contractors already have policies which comply with the criteria. Some contractors, however, will have to establish or modify capitalization policies; for these contractors there may be costs. Benefits will be available immediately; contract administration will be improved. Once a capitalization policy is established in accordance with the standard, individual acquisitions can be handled in accordance with the established policy, with a reduction in controversy. This Standard establishes the beginning point for the determination of the costs associated with use of capitalized tangible assets. One of the major benefits of this Standard is, therefore, the provision of a more uniform basis on which the Government and contractors may deal with depreciation expense.

During the development process which led to this Standard, the Board asked for, and received, a number of comments from contractors about the likely costs attributable to the implementation of a proposal such as this one. Most replies indicated little or no cost. Some indicated compliance with this Standard will cause divergence from practices now accepted for other purposes. The Board has found no requirement imposed by other authoritative bodies for continuance of practices inconsistent with this Standard. Divergence, therefore, will occur only if an affected contractor elects, for other purposes, practices inconsistent with the criteria set forth in this Standard.

The Board concludes that this Standard will provide benefits which outweigh the costs of implementation.

(7) Accounting for assets acquired by lease

Many commentators suggested to the Board various methods of accounting for assets acquired by lease. This problem is not a new one. Tangible assets can be acquired by various kinds of business transactions and relationships. The accounting principles related to capitalization are most readily applied in connection with purchases. Some lease agreements provide to the user of an asset many of the attributes of ownership. The accounting profession has long been cognizant of difficulties related to determining when assets acquired by lease should be treated as purchases.

The Board agrees that assets actually purchased should (if otherwise appropriate for capitalization) be capitalized even when the purchase transaction is in the form of a lease agreement. This same determination must be made for other accounting purposes. The accounting profession is now guided, in this regard, primarily by opinions of the Accounting Principles Board; it is our understanding that the Financial Accounting Standards Board will soon undertake to provide a new statement for the profession on this issue. This Board will carefully consider all authoritative statements of accounting principles to the extent that it can do so while maintaining progress toward its own primary goal of increased uniformity and consistency in cost accounting for contracts.

Those lease acquisitions which are treated as purchases will be subject to this standard; those which are treated as leases will for the time being be subject to the existing procurement regulations which deal with rental costs. The Board is, therefore, willing that the contractor determine, for each acquisition, whether it is a

purchase and hence subject to his capitalization policy (which must comply with the criteria established in this in Standard) or a rental transaction and hence subject to established regulations on rental costs. In either case, determination of the reasonableness of the lease costs remains the responsibility of the procurement agencies and is not dealt with here by the Cost Accounting Standards Board.

(8) Investment Credit

The October proposal included a specific provision that the Investment Credit pursuant to the Revenue Act of 1971, Pub.L.92-178, need not be deducted from the purchase price of tangible capital assets in establishing the acquisition cost of the assets. Several interested parties criticized the language used in this provision. Public policy on the point is clear; the Board, by including a specific provision, did not intend to change the situation. The Investment Credit need not be deducted, and there is no need for a specific provision on this point. The Board has, therefore, removed the provision.

(9) Indirect cost for constructed assets

The October 5 proposal contained a provision that the acquisition costs of assets constructed or fabricated by a contractor should include the indirect costs allocable to final cost objectives. The Board specifically drew in attention to this treatment of such an assets and requested that anyone advocating an alternative treatment should set it forth in detail with reasons for favoring it. Numerous commentators opposed the Board’s proposed treatment of constructed assets, stating variously that the allocation of general and administrative expenses to such assets was contrary to generally accepted accounting principles (since such expenses are period costs), was not required by existing Government regulations, and no one accounts for such assets in this manner. A few suggestions for alternative treatment were made. Most of them dealt with allocating to constructed assets only variable indirect costs that could be directly identified with the assets constructed.

For financial reporting purposes some indirect costs are identified as period costs and are not considered to be inventoriable. Consistent application of the full costing concept generally applicable to Government contract costing is not compatible with that period cost concept; for such contract costing, all costs -- including those otherwise considered as period costs -- must be associated with final cost objectives. The October 5 proposal identified constructed assets as projects which should be treated as final cost objectives and share in indirect cost allocations. This treatment is consistent with the casting practice which would be followed if the Government contracted for the construction of fabrication of the assets in question.

The Board continues to be of the view that application of the full costing techniques applicable to Government contract costing requires that full consideration be given to the applicability of fixed overhead including general and administrative expense to constructed assets. Some fixed overhead at the operations level and certain general and administrative expenses are often allocable to constructed assets based on their beneficial relationship to the construction effort. Costs generally not so allocable could include selling expenses, bid and proposal expenses, and the like.

Therefore, tangible capital assets constructed which are identical with or similar to the contractor’s normal product should receive an appropriate share of all indirect cost including general and administrative expenses. In addition, other constructed tangible capital assets requiring significant indirect support also should be burdened with their allocable share of indirect costs, where such indirect costs are material. The revised 404.50(b) reflects this position.

(10) Grouping of assets

The proposed standard as published October 5 was construed by a number of readers to imply that capital assets should be accounted for on a unit basis and not in groups. The Board did not intend any such implication. The Board’s interest is in costing principles and the requirements to capitalize does not extend to the specific type of records to be maintained.

(11) Rearrangement costs

Many of the controversies related to capitalization are encountered in connection with costs incurred subsequent to the acquisition of an asset. Routine repair costs are unquestionably to be charged off against current revenues, while costs of major betterments are clearly to be capitalized. Costs which are not at either extreme are more difficult to account for. The October 5 proposal included a restatement of the principle that “costs incurred subsequent to the acquisition of a tangible capital asset for activities which extend the life or increase the usefulness of the asset (e.g., betterments) and which meet the contractor’s established criteria for capitalization shall be capitalized.” This aspect of the proposal was generally favored by commentators. The proposal continued with the requirement that expenditures for rearrangement and reconversion of tangible capital assets, if they extend the life or increase the usefulness of those assets, and which meet the capitalization criteria, should be capitalized. This requirement has been criticized; many contractors assert that rearrangement costs, as they use the term, should never be capitalized.

The Board agrees that rearrangements of the sort normally expected to maintain the usefulness of assets should not be capitalized. The Board expects that rearrangements of the sort which extend the life or increase the usefulness otherwise anticipated from tangible capital assets, will be classified as betterments and capitalized in accordance with the requirements of the standard. Accordingly, the term “rearrangement” has been deleted from the standard.

(12) Special purpose equipment

The Board has received a number of suggestions that the Standard should provide explicit coverage for special purpose assets. Consideration was given to this issue in the research which led to the October 5 proposal. “Special tooling” and “special test equipment” are defined in Government procurement regulations; expenditures of such assets are properly charged against the contracts for which their acquisition is authorized. The suggestions for modification of the October 5 proposal on this point mostly deal with acquisitions which do not qualify as “special tooling” or “special test equipment.”

Contractors do acquire assets which are expected to have technological or engineering capabilities for long periods but for which the contractor does not foresee any significant utility after the completion of a particular contract. Such assets are not “special purpose” assets. Rather they are assets for which the contractor expects relatively short economic service life (as compared with the physical potential). Most suggestions for a change in the standard at this point seemed to be based on the belief that these assets should not be capitalized. The standard being promulgated today is applicable to all acquisitions; each contractor’s policy is required to include appropriate criteria (e.g., estimated service life and economic usefulness) for identification of capitalizable assets, including those which are unusual.

(13) Donated assets

Some commentators opposed that part of the standard which requires the capitalization of assets donated by the Government. These commentators pointed out that such treatment may eventually result in depreciation charges to Government contracts and that Government regulations today make such depreciation charges unallowable. The allowability of depreciation costs of assets as donated by the Government will not be influenced by the requirement that such assets be capitalized.

(14) Original complements of low cost equipment

A number of interested parties were concerned with the concept of original complement. Those who commented asserted that there was an inconsistency in capitalizing items of little value, that it would be difficult to identify or control individual items, and that alternative accounting methods were used to achieve the same results of normalization of cost between periods.

The Board’s primary purpose in requiring the capitalization of original complements is to assure allocation of incurred cost to applicable current and future accounting periods. The Board sees no inconsistency in this purpose.

The total original complement should be treated as a tangible capital asset. Therefore, the Board expects that a contractor will identify and control the original complement as an entity rather than account separately for each individual item which comprises the total complement.

The Board recognizes that several methods are used to distribute the cost of original complements to future accounting periods:

(1) Treating the complement as a tangible capital asset subject to depreciation,

(2) treating the cost as a deferral charge, or

(3) treating the original complement as an inventoriable asset. A standard on depreciation is expected to prescribe acceptable methods for charging the cost of original complements to accounting periods; the standard being promulgated today requires that the complement be capitalized.

(15) Asset accountability unit.

A number of interested parties indicated problems with both the concept and definition of a retirement unit as published in the October proposal. The term retirement unit has been changed to “Asset Accountability Unit” which the Board believes to be more descriptive of the concept actually applied in identifying components of major assets. These units, to the maximum extent practical, should be identified and separately capitalized upon acquisition and, whether or not they have been previously separately capitalized, they should be removed from the asset accounts when disposed of. Replacement units should also be capitalized.

(16) Application of the standard

Several universities commented that the proposed Standard should not apply to them because universities generally do not use depreciation techniques. Under existing procurement regulations, universities are entitled to use allowance for fixed assets in lieu of a depreciation charge. The Board believes that the Standard on Capitalization is applicable to universities and others in determining capitalized cost for computation of use allowances or similar purposes and for identifying those items which are not appropriate for current charges. Therefore, no exemptions are provided for by this Standard.

There is also being published today (38 FR 5318) and amendment to Part 400, Definitions, to incorporate in that part the words and phrases defined in 404.30 of the Standard.

Preamble B

Amendments, 11-7-73

This publication, 38 FR 30725. Nov. 7, 1973, amended 404.30(a)(4) by revising the definition of “tangible capital assets”.

The purpose of this publication by the Cost Accounting Standards Board is to amend Parts 331, 351, 400, 401, 402, 403, and 404 of its rules and regulations. The amendments, which are minor clarifications to the regulation, were published in the Federal Register of September 5, 1973 (38 FR 23971). The amendments:

(a) Renumber Parts 331 and 351 to facilitate insertion of future modifications those parts;

(b) clarify one section the contract clause at 331.5; and

(c) (modify certain definitions in Parts 400, 401, 402, 403, and 404 for the Purposes of uniformity among the various Parts. Only one comment in response to the September publication has been received by the Board. This expressed agreement with the proposed changes.

In view of the foregoing, the following amendments to the Board’s regulations are being made effective November 7, 1973.

Preamble C

Preamble to Document Published 6-8-78

The document published on June 8, 1978 at 43 FR 24819, revised 404.10. This amendment was part of a publication which added 331.30(b)(3). Only the portion of the preamble which describes the revision to 404.10 is printed here. The remainder of the preamble appears as preamble K of the supplemental to Part 331.

• • • •

In the Federal Register of February 16, 1977 (42 FR 9391), the Board proposed to amend section. 10, General Applicability, of standards 401 through 409 to conform these sections to the general applicability section as it appears in standard 410 et seq. No comments were received on this proposed amendment. The Board considers this change to be appropriate and is amending standards 401 through 409 as set forth below.

Preamble D

Amendments Published 3-3-80

This publication, 45 FR 13721, Mar. 3, 1980, revised 404.40(b)(1) and 404.80(b) and amended 404.60(a)(1) introductory text, (a)(1)(i) and (ii).

Summary

Part 404 includes a requirement that defense contractors have written policies for capitalization of tangible assets. Each such policy must include a minimum acquisition cost criterion, which has not been allowed to exceed $500. The Standard is being amended to raise the limit to $1,000. The purpose of the change is to permit contractors to adopt practices appropriate in today’s economy.

Effective Date

December 20, 1980.

Supplementary Information

(1) Background

The amendment being promulgated today was, in one sense, anticipated at the time the Board promulgated Cost Accounting Standard 404. In its publication of February 27, 1973 the Board commented “.that specific limits, appropriate today, may need to be revised in the future. Limitations can be revised promptly if developments warrant a change.” This amendment is a specific recognition that a change is warranted.

The amendment now being promulgated is derived directly from the proposal which was published in the Federal Register for January 2, 1980 (45 FR 48) with an invitation for interested parties to submit comments. The Board sent copies of the proposal directly to organizations who were expected to be interested. The Board received 25 letters of comment on the January 2 proposal. The Board appreciates the participation by interested parties in its continuing effort to maintain the effectiveness of its Standards and regulations.

The remarks which follow summarize the major issues discussed in the comments on the January 2 proposal.

(2) The specific change from $500 to $1,000

CAS 404, as promulgated in 1973, contained a requirement for a written capitalization policy. The policy was required to include a minimum acquisition cost criterion, and that criterion was not allowed to exceed $500. The $500 limitation, selected as a ceiling to prevent unreasonable policies, encompassed the practices of 97% of the companies whose Disclosure Statements were filed with the Board.

The Board, recognizing that circumstances have changed significantly since the promulgation of Standard 404, authorized an inquiry into capitalization practices. With the cooperation of the National Association of Accountants, the Board mailed a questionnaire to about 200 NAA members who were able to describe the practices of large, medium, and small manufacturing firms which had not been influenced by the limitation of Standard 404. The Financial Executives Institute also mailed a similar questionnaire to about 900 of its members and asked them to furnish information directly to the Board. The responses received by the Board indicated that capitalization practices have indeed changed since the promulgation of Standard 404. Freely adopted policies now tend to include higher monetary criteria than were common in 1973.

The Board is persuaded that the change is related to changing economic circumstances, and that a change in the acquisition cost criterion is warranted. The January 2 proposal was to change from $500 to $1,000. Those who commented on the proposal were generally in favor of the specific change which had been proposed. The amendment being promulgated is unchanged from the January 2 proposal in this regard.

(3) Use of index techniques for future changes

The Board received several suggestions dealing with the idea that, in considering similar revisions in future years, the Board should use index techniques. The Board considered this general idea before making the January 2 proposal. The Board had reviewed the performance of several official measures which might have been used if an index technique were to be adopted. The increases from 1972 to 1979 were from about 60%, to about 80%, suggesting that if $500 was the right limit at the time Standard 404 was developed, a limit of about $800 or $900 might be appropriate at the end of 1979. The questionnaire responses included a significant number of business units using $1,000. The Board will continue to consider to the appropriateness of the $1,000 limitation now being imposed. The impact of inflation, as recorded in several official indexes, will be among the factors considered. The Board is, however, not prepared to provide for any automatic amendment of the dollar limitation in Standard 404.

(4) Other clarifying language

It was he suggested that, while the Standard is being amended anyway, the Board could reduce possible misunderstandings by modifying the language in two places.

The fundamental requirement of the Standard calls for a written capitalization policy which designates “. economic and physical characteristics for capitalization of tangible assets.” The suggestion was made that this provision be modified by adding a clarifying phrase so that it would read “. economic and physical characteristics which must be met before an item is required to be capitalized.” This suggestion was made in order to emphasize that the service life and unit cost are not the only characteristics to be considered in making a capitalization decision. The basic belief behind the suggestion is valid. The Board agrees that other criteria, such as ability to maintain physical identifiability, may be appropriately included in a policy, and items which are not capitalizable because of failure meet one of the criteria specified in the policy should not be capitalized even if the estimated service life and monetary cost are in excess of those stated in the policy. The Board believes that the existing language 404.40(b) is clear in this regard, and no change is considered necessary.

The Standard now provides, at 404.40(b)(4), that “. higher minimum dollar limitations.” may be designated for betterments and for original complements. Some accountants believe that the distinction between an expenditure for “repair” and one for “betterment or improvement” can best be made by considering the relationship between the expenditure and the original cost or the replacement value of the item being rebuilt or modernized. They believe it is reasonable to propose a capitalization policy which includes a percentage criterion which will, in turn, result in a different dollar criterion in each situation. One commentator suggested that the Board should eliminate the word “dollar,” so that the amended Standard would allow the designation “. higher minimum limitations.” The Board has no objection to policies which are stated in percentage terms over the range typical application. The Board, however, feels that it is quite reasonable to provide a monetary limit above which any betterment will be capitalized even if its cost is a low percentage of some other asset’s cost. The Board is therefore not making the suggested change, but it does take this opportunity to recognize that a capitalization policy for betterments can quite reasonably include a sliding scale or percentage technique provided that it also includes a specific monetary limit.

(5) Effective date

The January 2 proposal would have applied to asset acquired in contractors’ cost accounting periods which begin on or after January 10, 1981. Several commentators urged an earlier effective date. The Board always tries to allow adequate time for contract administrators to prepare for changes. This amendment does not require any action; rather it provides the possibility for action. The Board has changed the effective date to December 20, 1980. This change will make the amendment effective much sooner for many contractors while still allowing sufficient time for administrative implementation of the amendment.

(6) Comparing Costs and Benefits

The Board’s January 2 publication included an explicit request for advice with respect to probable costs of implementation as compared with probable benefits. Only a few commentators dealt at all with this issue, and none of them in quantitative terms. All those who discussed this issue indicated that they expected benefits from the amendment, and that the benefits would outweigh any costs of implementation. No commentator objected to the proposal. The Board is persuaded that the probable benefits will exceed the probable costs of implementation.

Title 4 CFR 404, Capitalization of Tangible Assets is amended as follows: