• Determining Period of Usefulness

General factors. In making service life estimates, the contractor should consider both physical and economic factors. Physical factors are the outer limit and include considerations of wear and tear and decay. The economic or functional factors can be classified under three categories: inadequacy, supersession and obsolescence. Inadequacy results when an assets ceases to be useful to the contractor because higher demands have increased e.g. need for a large building. Supersession is the replacement of one asset for another more efficient or economical one.

Obsolescence is a catchall phrase for situations not involving inadequacy or supersession. Sometimes physical and sometimes economic factors are more important where the CAS 409 lists the following as being the factors to be considered: (1) quantity and quality of expected output and timing (2) costs of repairs and maintenance and timing factors (3) standby or incidental use and (4) expected technical or economic obsolescence of the asset(s) or the product or service it is involved in producing.

The standard provides an illustration of where three companies estimate service lives on identical milling machines: (1) 14 Years - using an individual asset base and looking at experience from similar machines (2) 12 Years – using asset groupings determined average period for all machine tools (3) 10 Years – grouping all machinery and equipment, determined an average replacement life for all.

Records of past experience. The requirement to maintain records to support its periods of usefulness is one of the most burdensome requirements we find for contractors who are CAS covered. Without them, not only can they be considered non-compliant with CAS 409 but their depreciation costs may be questioned or it may be alleged they are using a shorter period than justified on new asset purchases. These records should show the age of the assets at either past retirement or where available, withdrawal from active use. The records should show acquisition dates, dates the assets were retired and any other factors affecting asset life. The records need not be maintained for only support of asset lives but may be records used for other purposes such as property insurance, property taxes or maintenance records. If no data exists (e.g. newly CAS covered) when a new asset is acquired, the estimated service life may be based on a projection of the expected actual period of usefulness but may not be less than the mid-range for asset guideline classes established by the IRS that are in effect as of the first day of the cost accounting period the assets were acquired. The standard also allows for use of sampling where either statistical samples or even small samples are commonly accepted.

Modifying past experience or negotiating a service life. The standard permits contractors to modify years an asset will be used from prior records. If the service life is shorter than the records would indicate, the burden falls on the contractor to justify the period where the contractor should be prepared to specifically identify the factors that will cause the change e.g. physical usefulness such as changes in output quantity or quality, economic usefulness such as technical or economic obsolescence. It is advisable to obtain an agreement as soon as possible with the ACO.

There are times when a contractor may believe shorter service lives are necessary but cannot support it from the records. CAS 409 allows the contracting parties to agree on estimated service lives of individual assets where (1) there are unique purposes for which the equipment was purchased warranting a shorter life or (2) a shorter life can be predicted. The standard provides an illustration where a test facility purchased for a new government program has an estimated 10 years of physical life but the program will be completed in six years and will not be expected to be required for other programs for the contractor. In that case, the contracting parties may agree to depreciate the facility over six years.

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