• Allocation of Depreciation Costs Directly to Cost Objectives

(Editor’s Note. We commonly encounter government resistance of reimbursing contractors for asset purchases used only on a contract even when there are no other uses for it but the government nonetheless will often accept direct charges of depreciation costs if such treatment is part of its accounting practices.) CAS 409 recognizes that depreciation costs may be charged both directly and indirectly. Unless one of the conditions for direct charging exists, the normal procedure is to include depreciation costs in appropriate indirect cost pools. Depreciation costs may be charged directly to a cost objective if (1) the charges are made on the basis of usage (in effect, requiring the use of units-of-production method of depreciation) and (2) depreciation costs of all like assets used for similar purposes are charged in the same manner. So, if direct charged depreciation costs represent a group of similar assets the amount charged for usage will be an average charging rate based on costs of those assets. The contractor must be capable of determining the amount of variance between the charges and actual costs and be able to dispose of the variance in its accounting records (unless a fixed amount can be negotiated, which is highly recommended). Another method of direct charging depreciation costs is through a service center where those costs are included as a part of a function or organizational unit whose costs are charged to cost objectives on the basis of service provided. The standard is silent on the base or bases used for charging service center costs.

• Gain or Loss on Disposition

The standard provides some rather detailed requirements governing the treatment of gains or losses on disposition of assets which are not fruitfully addressed here. The general requirement is that the gains or losses are considered to be adjustments to depreciation costs previously charged and should be assigned to the cost accounting period the disposition of the assets occur. Firms commonly write off assets for financial purposes prior to disposing of them but such write-offs are not allowable costs until the assets is physically disposed of. Questions concerning treatment of gains and losses when an asset is exchanged for like property, involuntary conversions, grouped assets, mass or extraordinary dispositions or other than arms-length transactions should be answered by looking at the standard.

• Usage Charges for Fully Depreciated Assets

(Editor’s Note. We find that contractors seldom take advantage of opportunities to have usage rental charges.) Though CAS 409 does not address the issue of how to handle fully depreciated assets the appeal boards have maintained the right of contractors to rent or charge a reasonable amount for use of those assets. FAR 31.205-11 states in determining the charge the contracting parties should consider the cost, total estimated useful life, effects of increased maintenance or decreased efficiency due to age and amount of depreciation previously charged on contracts. The last item refers primarily to cost type contracts so if say 30% of depreciation costs were charged to cost plus contracts that amount should be reduced from the basis of costs to be written off for usage charges.

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