The Financial Accounting Standards Board issued a Statement of Financial Accounting Standards (FAS) 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" a few years ago. FAS 121 provides the owner of a long-lived asset must write down the asset’s value when it is impaired and must do so in the period the impairment takes place. Hence, the owner can not carry the asset on its books at the acquisition value less accumulated depreciation. FAS 121 addresses assets that are held and used and assets that are to be disposed of in the single Statement because to do otherwise would allow an entity to avoid recognizing the impairment by simple declaring the asset was being held for sale.

In FAR 31.205-16(g) the government has taken the position that FAS 12 requirement to write-down the value of the asset for the impairment will not be recognized as an allowable cost for contract costing purposes. The FAR provision further states that depreciation or amortization on the pre-write down carrying value of the impaired asset will continue to be recovered. For contractors, this means that the FAR provision means that any loss due to impairment cannot be recognized until the asset is disposed of and the amount of depreciation on tangible assets or amortization on intangible assets will continue to be the same amount as if there was no writedown. The FAR requirements has the accounting treatment of impaired assets join the list (e.g. business combinations, pensions, etc.) where there are significant differences between the accounting required for financial reporting and government contracting.

There are innumerable events that can trigger an impairment of an asset (e.g. change in market value, physical change, change in use, change in expected cash flow from the asset) and the question arises as to how the contractor is to recover the loss due to impairment. If the long lived asset continues in use, depreciation and amortization charges will continue at a higher level than the asset’s fair market value. Ultimately, the asset will be disposed of and any unrecognized loss will be charged to indirect cost pools where the asset’s depreciation was originally charged. This process really charges bits and pieces of the loss over time against work that may fluctuate widely means that the contractor may not really recover the loss, but must just charge it against profits. Additionally, the loss may not be charged against the government work that was responsible for the impairment in the first place. Even though the loss may be recovered, the cash flow impact to the contractor can be substantial.

The government’s approach to handling impairment is consistent with its general treatment of fair market values. The government uses book values and does not consider fair market values as a basis for depreciation or amortization charges. Some commentators have alluded to the impact of the decision on how cost of money is computed and how home office and G&A allocations are made. For cost of money, CAS 414 and FAR 31.205-10, the investment base used for facilities capital should be from the "accounting data fused for contract cost purposes" so the impairment writedown is not recognized, making the prewrite-down values the relevant base. For allocation of home office expenses under CAS 403, the third element of the three factor formula used to allocate these costs is the average net book value and the amounts should be the prewrite-down amounts. Also for allocation of G&A costs when depreciation costs are included in the base, the depreciation used should be based on pre-impairment write-down asset values.

Accounting for Disposition of Assets. CAS 409 contains some detailed requirements for treating gains and losses on disposition of an asset. The general requirement is that gains and losses are considered to be adjustments to depreciation costs previously recognized and they must be assigned to the cost accounting period in which disposition occurs. Though contractors frequently write-off assets for financial reporting purposes before they are sold or scraped, disposition of assets for government costing purposes is not considered to occur until it is disposed of physically. Once the period of disposition is identified and a gain or loss calculated, if material in amount, the gain or loss recognized must be "allocated in the same manner as the depreciation cost of the asset has been or would have been allocated for the cost accounting period in which the disposition occurs." If the gain or loss is immaterial, then it "may be included in an appropriate indirect cost pool."

{TAG_FORM_TITLE}