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  • Question

    Is there a reference in the FAR, DFARS, or CFR that speaks about maintaining the original value of Government Property throughout the life of the property? There is a reference to "unit acquisition cost" in FAR 52.245-1 (j) (1) (ii), but this reference doesn't have anything to do with depreciation. Your assistance is appreciated. Ozma Ragan


    Answer

    There is no specific policy that speaks to maintaining the “original value or “Unit Acquisition Cost” of Government Property throughout its useful life. In fact, all it does state is that the Government must maintain records documenting the “Unit Acquisition Cost”.  You will find the requirement to record the “Acquisition Cost” in FAR 52.245-1, DoDI 5000.64, and DoDM 4160.21.  It is important to note here that there is a difference between recording the unit acquisition cost and maintaining original value.  You are correct the FAR Government Property Clause does not mention depreciation. To better understand why let’s first discuss a little bit about accounting and the practice of capitalization/depreciation.

     

    When the Contractor pays for utilities, wages, or services, it is paying for benefits/services already received. These costs would be considered fully expensed.  However, when the contractor purchases a piece of equipment, the value or benefit remains until the assets useful life has ended. This is what capitalization is about.  Now, why would a contractor care about capitalization and depreciation of their own capital assets? Well since the value of the item still exists, the contractor can add the value of their capital equipment (not the Governments) to its overall net worth; however, as the item is used, it gets depreciated.  For example, if Contractor A spent $20,000 on a generator (contractor owned) and determined that it has a useful life of 10 years, Contractor A would depreciate the generator each year until year 10 where it would become fully expensed down to a worth of $0.  

     

    If contractors expensed the full acquisition cost when the item was purchased then their financial statements would be inaccurate or distorted showing their net worth and or profits to be much less than what they actually are.  The contractors records will still have the unit acquisition cost recorded in the items records but they utilize the capitalization/depreciation number for reporting and profit purposes.  Contractors would not depreciate Government Property since the value of Government Property is not used as part of a contractors net worth. As the Government we only have a need to show what we own, what we paid for it, where it is, and how it is being utilized.  Our financial reporting is not for the purposes of declaring profit, paying taxes or establishing net worth to shareholders. Thus there is no need to capitalize/depreciate.

     

    Remember we mentioned earlier there are various areas of the FAR and DoD Manuals that speak to records requirement for “recording/reporting” the Unit Acquisition Cost.  Now to assume that because the Government keeps record of the “Unit Acquisition Cost” (what we paid for it), does not mean that the Government considers this to be what the asset is currently worth. For example, if a contractor destroys a piece of Government Property and they are fully liable, the contractor can request the Administrative Contracting Officer to consider a reduction in the liability amount based on the items actual material value or depreciated cost. It is up to the ACO/PCO to evaluate the true intrinsic value of the destroyed asset and the make a determination to approve or reject the request for reduced amount of liability due to the Government. 

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