Federal Acquisition Regulation; Transfer of Assets Following a Business Combination

DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 31

[FAR Case 96-006]

RIN 9000-AH56

Federal Acquisition Regulation; Transfer of Assets Following a

Business Combination

AGENCIES: Department of Defense (DOD), General Services Administration

(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Proposed rule with request for comments.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense

Acquisition Regulations Council are proposing to amend the Federal

Acquisition Regulation (FAR) to implement a final rule of the Cost

Accounting Standards (CAS) Board regarding the treatment of gains and

losses attributable to tangible capital assets subsequent to business

mergers or combinations. This regulatory action was not subject to

Office of Management and Budget review under Executive Order 12866,

dated September 30, 1993, and is not a major rule under 5 U.S.C. 804.

DATES: Comments on the proposed rule should be submitted in writing to

the FAR Secretariat at the address shown below on or before September

2, 1997 to be considered in the formulation of the final rule.

ADDRESSES: Comments: Interested parties should submit written comments

to: General Services Administration, FAR Secretariat (MVR), 1800 F

Street, NW, Room 4035, Washington, DC 20405.

Internet: E-mail comments should be addressed to: farcase.96-

[email protected].

Please cite FAR case 96-006 in all correspondence related to this

case.

FOR FURTHER INFORMATION CONTACT: Jeremy Olson at (202) 501-3221 in

reference to this FAR case. For general information, contact the FAR

Secretariat, Room 4035, GS Building, Washington, DC 20405 (202) 501-

4755. Please cite FAR case 96-006.

SUPPLEMENTARY INFORMATION:

A. Background

On February 13, 1996, the CAS Board published a final rule in the

Federal Register (61 FR 5520) amending CAS 9904.404, Capitalization of

Tangible Assets, and CAS 9904.409, Depreciation of Tangible Capital

Assets. These amendments provide for ``no step-up, no step-down'' of

asset bases (values would remain the same) after a business combination

using the purchase method of accounting if tangible capital assets

generated depreciation or cost of money charged to Government contracts

in the seller's prior accounting year. However, if these costs were not

charged to Government contracts in the seller's prior accounting

period, the rule allows the assets to be adjusted to their fair values.

The proposed FAR rule is consistent with the CAS Board's approach

and the Government's long-standing policy that the Government be placed

in no worse of a position by virtue of a change in business ownership

than it would have been had the change not taken place. This policy

recognizes that costs related to asset write-ups do not add value or

produce additional benefits for the Government. When a contractor's

assets are written up following a business combination, an inherent

inequity is present if the Government is charged depreciation and cost

of money more than once for the same assets, with no added value or

benefit to Government contracts. Since the proposed rule's approach

does not recognize that the sale of the asset took place, i.e., ``no

step-up, no step-down,'' the proposed rule also does not recognize any

gains or losses when assets generated depreciation or cost of money

charged to Government contracts in the seller's prior accounting

period.

The Councils considered, but did not adopt, a significant

alternative which would have retained the current FAR cost principles'

approach of following Generally Accepted Accounting Principles (GAAP),

not CAS, for non-CAS covered contracts. The current cost principles, in

concert with GAAP, do not recognize asset write-ups, but do require

assets to be written-down if the book value of acquired assets is

reduced to be consistent with the purchase price of an acquired

company. The Councils believe that the ``no step-up, no step-down''

approach of the proposed rule is more equitable to contractors with

non-CAS covered contracts than retention of the current approach. In

addition, the proposed rule will avoid complications that could arise

from differences in accounting between CAS covered and non-CAS covered

contracts for companies that come in and out of being CAS covered.

B. Regulatory Flexibility Act

The proposed change to FAR part 31 is not expected to have a

significant economic impact on a substantial number of small entities

within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et

seq., because most contracts awarded to small entities use the

simplified acquisition procedures or are awarded on a competitive

fixed-price basis, and the cost principles do not apply. In addition,

this rule is limited to contractors who have undergone a business

merger or combination. An Initial Regulatory Flexibility Analysis has,

therefore, not been performed. Comments from small entities concerning

the affected FAR part will be considered in accordance with 5 U.S.C.

610 of the Act. Such comments must be submitted separately and should

cite 5 U.S.C. 601, et seq. (FAR case 96-006), in correspondence.

C. Paperwork Reduction Act

The Paperwork Reduction Act does not apply because the proposed

changes to the FAR do not impose recordkeeping or information

collection requirements, or collections of information from offerors,

contractors, or members of the public which require the approval of the

Office of Management and Budget under 44 U.S.C. 3501, et seq.

List of Subjects in 48 CFR Part 31

Government procurement.

Dated: June 24, 1997.

Edward C. Loeb,

Director, Federal Acquisition Policy Division.

Therefore, it is proposed that 48 CFR Part 31 be amended as set

forth below:

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

1. The authority citation for 48 CFR Part 31 continues to read as

follows:

Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42

U.S.C. 2473(c).

2. Section 31.205-10 is amended by revising paragraph (a)(5) to

read as follows:

31.205-10 Cost of money.

(a) * * *

(5) The requirements of 31.205-52 shall be observed in determining

the allowable cost of money attributable to including asset valuations

resulting from business combinations in the facilities capital employed

base.

* * * * *

3. Section 31.205-52 is revised to read as follows:

[[Page 35901]]

31.205-52 Asset valuations resulting from business combinations.

(a) For tangible capital assets, when the purchase method of

accounting for a business combination is used, whether or not the

contract or subcontract is subject to CAS, the allowable depreciation

and cost of money shall be the amount measured and assigned in

accordance with 48 CFR 9904.404-50(d), if allocable, reasonable, and

not otherwise unallowable.

(b) For intangible capital assets, when the purchase method of

accounting for a business combination is used, allowable amortization,

cost of money, and depreciation shall be limited to the total of the

amounts that would have been allowed had the combination not taken

place.

[FR Doc. 97-17151 Filed 7-1-97; 8:45 am]

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