5520 Federal Register / Vol. 61, No. 30 / Tuesday, February 13, 1996 / Rules and Regulations state or imply Governmental SUMMARY: The Office of Federal This final rule is step four in the four endorsement of a product, service or Procurement Policy, step process. position which the contractor Standards Board (CASB), hereby B. Background represents. amends the Cost Accounting Standards (CAS) relating to the treatment of gains Prior Promulgations 1403.570±3 Contract clause. or losses attributable to tangible capital CO’s shall include the clause at 48 subsequent to mergers or business The issues addressed in this proposal CFR 1452.203–70, Restriction on combinations by government were first identified by commenters in Endorsements, in all solicitations, contractors, and relating to the response to the Board’s request for contracts and agreements which are not minimum acquisition cost criterion for agenda topics in November 1990. executed in accordance with SAT capitalization of tangible capital assets Subsequently, two Staff Discussion procedures. by raising the prescribed criterion from Papers (SDPs) were issued. 3. Part 1425 is amended by removing $1,500 to $5,000. The first SDP, dated August 26, 1991 Sections 1425.202 and 1425.204. To resolve the problems that have and titled ‘‘Recognition and Pricing of 4. Part 1452 is amended by adding been identified in this area, the Board Changing Capital Values Resulting new Section 1452.203–70 to read as hereby amends CAS 9904.404, from Mergers and Business Combination follows: ‘‘Capitalization of Tangible Assets’’ and by Government Contractors,’’ (56 FR CAS 9904.409, ‘‘ of 42079) raised broad issues such as the PART 1452ÐSOLICITATION Tangible Capital Assets’’. These scope of the proposed project, the basis PROVISIONS AND CONTRACT amendments are based on an approach for any Government claim to gains or CLAUSES involving a ‘‘no step-up, no step-down’’ losses resulting from a business 1452.203±70 Restriction on endorsements. of asset bases and no recognition of gain combination and the likely economic consequences of a policy that would As prescribed in 48 CFR 1403.570–3, or loss on a transfer of assets following a business combination by contractors prohibit revaluation of assets following insert the following clause in all a merger. solicitations, contracts and agreements subject to CAS. The responses to this SDP were used which are expected to exceed the Section 26(g)(1) of the Office of by the Board as the basis for discussing simplified acquisition threshold. Federal Procurement Policy Act requires that the Board, prior to the the basic issues involved in this case. As Restriction on Endorsements—Department promulgation of any new or revised Cost a result of this discussion, the Board of the Interior (Nov 1995) Accounting Standard, publish a final decided to issue a second SDP dealing The contractor shall not refer to contracts rule. This final rule addresses the with a series of questions concerning awarded by the Department of the Interior in Board’s proposal to amend CAS the specific procedures needed to deal commercial advertising, as defined in FAR 9904.404 and CAS 9904.409 to deal effectively with the recognition, 31.205–1, in a manner which states or with the issue of gains and losses allocation and recovery of the gain or implies that the product or service provided loss subsequent to a merger or business is approved or endorsed by the Government, subsequent to a merger or business or is considered by the Government to be combination. combination. The second SDP, entitled ‘‘Treatment of Gains or Losses superior to other products or services. This EFFECTIVE DATE: This rule is effective restriction is intended to avoid the April 15, 1996. Subsequent to Mergers or Business appearance of preference by the Government Combinations by Government toward any product or service. The FOR FURTHER INFORMATION CONTACT: Dr. Contractors,’’ was issued on November contractor may request a determination as to Rein Abel, Director of Research, Cost 4, 1993 (58 FR 58882). On the basis of the propriety of promotional material from Accounting Standards Board (telephone comments received in response to that the CO. 202–395–3254). SDP, an Advance Notice of Proposed (End of Clause) SUPPLEMENTARY INFORMATION: Rulemaking (ANPRM) was developed and published in the Federal Register [FR Doc. 96–3205 Filed 2–12–96; 8:45 am] A. Regulatory Process BILLING CODE 4310±RF±M on May 24, 1994 (59 FR 26774). The The Cost Accounting Standards responses to the ANPRM were of Board’s rules and regulations are significant assistance to the Board in developing a Notice of Proposed OFFICE OF AND codified at 48 CFR Chapter 99. Section Rulemaking (NPRM). The NPRM was 26(g)(1) of the Office of Federal Procurement Policy Act, 41 U.S.C. published in the Federal Register on Office of Federal Procurement Policy § 422(g)(1), requires that the Board, prior March 8, 1995 (60 FR 12725). to the establishment of any new or Public Comments 48 CFR Part 9904 revised Cost Accounting Standard, complete a prescribed rulemaking Ten sets of public comments were Cost Accounting Standards Board; process. This process consists of the received in response to the NPRM from Treatment of Gains or Losses following four steps: government contractors, professional Subsequent to Mergers or Business 1. Consult with interested persons and industrial associations, law firms Combinations by Government concerning the advantages, and Federal agencies. Contractors; Increase in Minimum disadvantages and improvements The views expressed by the various Acquisition Cost Criterion for anticipated in the pricing and parties were, in essence, consistent with Capitalization of Tangible Capital administration of government contracts the views expressed by the same parties Assets as a result of a proposed Standard. earlier when the ANPRM was AGENCY: Cost Accounting Standards 2. Promulgate an Advance Notice of published. The basic no step-up, no Board, Office of Federal Procurement Proposed Rulemaking. step-down approach was supported by Policy, OMB. 3. Promulgate a Notice of Proposed the Government commenters and it was Rulemaking. generally opposed by other commenters ACTION: Final rule. 4. Promulgate a final rule. although some of these other Federal Register / Vol. 61, No. 30 / Tuesday, February 13, 1996 / Rules and Regulations 5521 commenters did not explicitly express b. The current subsection 9904.404– E. Public Comments their views on this basic issue. 50(d) is deleted and is replaced by an This final rule was developed after Besides expressing their views on the amended section that prescribes: consideration of the public comments (1) That for contract costing purposes, proposed approach outlined in the received in response to the Board’s tangible capital assets following a NPRM and the Board’s arguments NPRM published on March 8, 1995 (60 business combination shall retain their supporting this chosen approach, many FR 12725). The comments have net recognized during the commenters offered editorial as well as provided valuable input to the Board’s most recent cost prior more substantive detailed comments on rulemaking process. The comments to the business combination provided the various specific provisions of the received and the action taken by the that the assets generated either document. Board are summarized in the paragraphs depreciation or cost of money These comments are discussed below that follow: charges that were allocated during the in greater detail, under Section E., Comment: Several commenters period either as direct or indirect Public Comments. The Board and the indicated that the final rule should to Federal government contracts and CASB staff express their appreciation make it clear that this revised rule is to subcontracts negotiated on the basis of for the generally constructive and be applied on a prospective basis only. thoughtful responses provided by the cost. (2) That the cost of tangible capital One commenter suggested that the commenters. assets shall be restated after the business language in 9904.404–63 and 9904.409– Benefits combination at a figure not to exceed 63 be supplemented to reflect the the at the date of the requirements of paragraph (a)(3) of the After consideration of all the acquisition pursuant to a business contract clause at 9903.201–4(a) which comments received in response to the combination where the assets during the requires the receipt of a new CAS- NPRM, the Board continues to believe most recent cost accounting period prior covered contract for a new CAS that amendments to CAS 9904.404, to the business combination did not requirement to be applicable. ‘‘Capitalization of Tangible Assets,’’ and generate either depreciation expense or Response: Sections 9904.404–63 and CAS 9904.409, ‘‘Depreciation of cost of money charges that were 9904.409–63 have been supplemented Tangible Capital Assets,’’ as set forth in allocated either as direct or indirect to make it clear that these revisions are the ANPRM and essentially restated in costs to Federal government contracts to be applied prospectively. the NPRM, and this final rule, will negotiated on the basis of cost. Comment: Several commenters significantly improve and clarify the c. A new subparagraph 9904.409– stressed once more that they believe implementation of CAS and related 50(j)(5), is added to current subsection there is a conflict between the CAS procurement regulations in accounting 9904.409–50(j). The purpose of this new allocability provisions and the Federal for tangible capital assets after subparagraph is to make it clear that the Acquisition Regulation (FAR) completion of a merger or business CAS 9904.409 provisions dealing with allowability provisions in this area. It combination. In particular, the Board the recapture of gains and losses on was suggested again, as in earlier continues to believe that the proposal disposition of tangible capital assets comments, that the OFPP Administrator embodied in this final rule will clarify should not apply when assets are should address this issue. the current ambiguities in this area and transferred subsequent to a business Response: The Board is aware that thus should lead to reductions in combination. there is an appearance of conflict negotiations and litigation. This point is between the provisions of CAS 9904.404 of particular significance in the current C. Paperwork Reduction Act and FAR 31.205–52. As stated in the economic and budgetary environment The Paperwork Reduction Act, Public proposed rulemakings, the OFPP where the need to realize economies in Law 96–511, does not apply to this Administrator will determine whether the defense budget can be expected to rulemaking, because this rule imposes any changes may be necessary in the lead to mergers, business combinations no paperwork burden on offerors, FAR cost principles to make them fully and restructurings among contractors. It affected contractors and subcontractors, compatible with amended CAS is also anticipated that increasing the or members of the public which require 9904.404 and 9904.409. capitalization criterion for tangible the approval of OMB under 44 U.S.C. Comment: One commenter pointed capital assets in CAS 9904.404 from 3501, et seq. out the apparent inconsistency in the $1,500 to $5,000, will significantly language between sections 9904.404– reduce record keeping burden in many D. Executive Order 12866 and the 50(d) (1) and (2) when describing the instances. The Board believes that the Regulatory Flexibility Act scope of the two paragraphs. In one potential benefit to the , The economic impact of this rule on paragraph the reference is to costs negotiation, and general contract contractors and subcontractors is charged to ‘‘Federal Government administration processes accruing from expected to be minor. As a result, the contracts’’, while in the other, the the added clarity and uniformity in the Board has determined that this final rule reference is to ‘‘Federal Government measurement of the cost of depreciation will not result in the promulgation of a contracts subject to CAS’’. In addition, and cost of money subsequent to a ‘‘major rule’’ under the provisions of another commenter pointed out that business combination will be Executive Order 12866, and that a these references did not make clear substantial and will greatly outweigh regulatory impact analysis will not be whether contractors subject to modified any added costs. required. Furthermore, this final rule CAS coverage are affected by this Summary of Proposed Amendments will not have a significant effect on a amendment. substantial number of small entities Response: In order to make clear that A brief description of the proposed because small businesses are exempt the amendment applies to those tangible amendments follows: from the application of the Cost capital assets that were charged to a. The capitalization criterion for Accounting Standards. Therefore, this Federal government contracts and tangible capital assets in subsection final rule does not require a regulatory subcontracts negotiated on the basis of 9904.404–40(b)(1) is increased from flexibility analysis under the Regulatory cost before the business combination, $1,500 to $5,000. Flexibility Act of 1980. the phrase ‘‘subject to CAS’’ has been 5522 Federal Register / Vol. 61, No. 30 / Tuesday, February 13, 1996 / Rules and Regulations eliminated. This should make it clear not provide uniformity or consistency charged to Government contracts to the that this revised rule applies to tangible since it provides for different treatment extent that the restructuring results in capital assets that generated costs for acquired assets of CAS-covered from savings that exceed the costs. The allocated to Federal government non-CAS-covered contractors’’. commenters argued that the same contracts and subcontracts negotiated Response: CAS 9904.404–50(d) has rationale should be applied to increased on the basis of cost, where such costs been revised to clearly establish that the deprecation associated with the were allocated to contracts and acquired tangible capital asset revaluation of a purchased company’s subcontracts by the seller during the valuations shall be determined in a assets if the business combination is most recent cost accounting period prior consistent manner. As revised, regarded as an ‘‘external restructuring’’, to the business combination. application of the prescribed techniques and, that it would be inequitable for the Comment: Several suggestions were in 9904.404–50(d)(1) and 9904.404– Government to benefit from all of the received dealing with different aspects 50(d)(2) is dependant upon whether or savings resulting from restructuring, of in applying this revision. not the acquired assets were previously while it is unwilling to recognize all of First, several contractors and industry utilized in the performance of either the costs needed to implement such associations suggested that specific CAS-covered and/or non-CAS covered restructuring. materiality criteria be introduced, such Federal contracts that were negotiated Response: In issuing this revision, the as total dollar value of assets acquired on the basis of cost. Board does not intend to encourage or or the percentage of commercial or Comment: Several commenters discourage contractors to consolidate or competitively awarded fixed-priced expressed their disagreement with the restructure their operations. Rather, the contracts in relation to total sales. One abandonment of GAAP principles in Board’s intent, in accordance with its Government commenter suggested that this revision to CAS 9904.404. The view stated objectives, in promulgating this the coverage of the amendment should was expressed that the CASB should revision, is to increase the degree of be extended also to those tangible deviate from GAAP only in exceptional uniformity and consistency in like capital assets that generated relevant cases and, in the view of these circumstances in the cost accounting costs chargeable to CAS-covered commenters, such an approach is not practices that are used by Government contracts ‘‘anytime during the three warranted in the present case. contractors to record tangible capital accounting periods prior to the business Response: The Board has pointed out asset values subsequent to mergers or combination’’. in its Statement of Objectives, Policies business combinations. The Board Response: The Board does not believe and Concepts that it will make every believes that this action will result in that the introduction of additional reasonable effort to avoid conflict or cost allocations that are fair and materiality criteria is advisable at this disagreement with other bodies having equitable. time. By its very nature, under full CAS similar responsibilities. However, it also Comment: Several commenters coverage, the amended Standard’s pointed out that the nature of the offered editorial comments to the requirements apply to major contractors Board’s authority and its mission is proposed revisions. that perform significant amounts of such that it must retain and exercise full Response: All of these comments were CAS-covered work. responsibility for meeting its objectives. considered and, as a result, the essence CAS 9904.404–50(d) has been revised As stated in previous discussions, the of several of these comments were to clearly state that the costs of tangible Board adopted the ‘‘no step-up, no step- incorporated in the final rule. capital assets acquired from a seller down’’ approach after extensive (whether CAS-covered or non-CAS consideration of the possible alternative List of Subjects in 48 CFR Part 9904 covered) which generated depreciation approaches. In particular, the issues Cost accounting standards, expense or cost of money charges that associated with the recognition, Government procurement. were allocated to Federal government allocation and recovery of the gain or Richard C. Loeb, loss subsequent to a merger or business contracts or subcontracts shall not be Executive Secretary, Cost Accounting written up by the buyer. The primary combination were extensively explored Standards Board. issue is whether or not a material in a Staff Discussion Paper (SDP) For the reasons set forth in this amount of asset costs have been charged entitled ‘‘Treatment of Gains or Losses preamble, chapter 99 of title 48 of the to Federal government contracts and Subsequent to Mergers or Business Code of Federal Regulations is amended subcontracts that were negotiated on the Combinations by Government Contractors.’’ It was only after careful as set forth below: basis of cost, where such costs were 1. The authority citation for part 9904 consideration of the responses to the allocated to contracts and subcontracts continues to read as follows: during the most recent cost accounting SDP that the Board decided to proceed period prior to the acquisition date, not with the ‘‘no step-up, no step-down’’ Authority: Public Law 100–679, 102 Stat. the amount of CAS-covered effort approach thereby establishing a cost 4056, 41 U.S.C. 422. accounting practice that diverges from performed by the seller. PART 9904ÐCOST ACCOUNTING the corresponding practice recognized Comment: One commenter suggested STANDARDS that the acquisition cost criterion in for GAAP purposes. section 9904.404 be raised from $1,500 Comment: Several commenters 9904.404 Capitalization of tangible assets. to $5,000. pointed out that since this issue has 2. Section 9904.404–40 is amended by Response: The Board accepts this been under review by the CAS Board, revising paragraph (b)(1) to read as suggestion and therefore section there have been significant changes in follows: 9904.404–40(b)(1) is modified to the statutes and regulations covering increase the minimum acquisition cost mergers and business combinations by 9904.404±40 Fundamental requirement. criterion from $1,500 to $5,000. Government contractors. The * * * * * Comment: One Government Government, in order to encourage (b) * * * commenter expressed the view that the contractors to consolidate, has (1) The contractor’s policy shall provisions of the amendment should recognized ‘‘external restructuring’’ designate a minimum service life also be extended to non-CAS-covered which allows, in certain circumstances, criterion, which shall not exceed 2 contractors: ‘‘The proposed rule does contractors’ restructuring costs to be years, but which may be a shorter Federal Register / Vol. 61, No. 30 / Tuesday, February 13, 1996 / Rules and Regulations 5523 period. The policy shall also designate contracts or subcontracts negotiated on 9904.409±50 Techniques for application. a minimum acquisition cost criterion the basis of cost, shall be assigned a * * * * * which shall not exceed $5,000, but portion of the cost of the acquired (j) * * * which may be a smaller amount. company not to exceed their fair (5) The provisions of this subsection * * * * * value(s) at the date of acquisition. When 9904.409–50(j) do not apply to business 3. Section 9904.404–50 is amended by the fair value of identifiable acquired assets less liabilities assumed exceeds combinations. The carrying values of revising paragraph (d) to read as tangible capital assets acquired follows: the purchase price of the acquired company in an acquisition under the subsequent to a business combination 9904.404±50 Techniques for application. ‘‘purchase method,’’ the value otherwise shall be established in accordance with * * * * * assignable to tangible capital assets shall the provisions of subsection 9904.404– 50(d). (d) The capitalized values of tangible be reduced by a proportionate part of capital assets acquired in a business the excess. * * * * * combination, accounted for under the * * * * * 6. Section 9904.409–63 is revised to ‘‘purchase method’’ of accounting, shall 4. Section 9904.404–63 is revised to read as follows: be assigned to these assets as follows: read as follows: 9904.409±63 Effective date. (1) All the tangible capital assets of 9904.404±63 Effective date. the acquired company that during the (a) This Standard is effective April 15, (a) This Standard is effective April 15, most recent cost accounting period prior 1996. 1996. to a business combination generated (b) This Standard shall be applied (b) This Standard shall be applied either depreciation expense or cost of beginning with the contractor’s next full beginning with the contractor’s next full money charges that were allocated to cost accounting period beginning after cost accounting period beginning after Federal government contracts or the receipt of a contract or subcontract the receipt of a contract or subcontract subcontracts negotiated on the basis of to which this Standard is applicable. to which this Standard is applicable. cost, shall be capitalized by the buyer at (c) Contractors with prior CAS- the net book value(s) of the asset(s) as (c) Contractors with prior CAS- covered contracts with full coverage covered contracts with full coverage reported by the seller at the time of the shall continue to follow Standard transaction. shall continue to follow Standard 9904.404 in effect prior to April 15, 9904.409 in effect prior to April 15, (2) All the tangible capital asset(s) of 1996, until this Standard, effective April 1996, until this Standard, effective April the acquired company that during the 15, 1996, becomes applicable after the 15, 1996, becomes applicable after the most recent cost accounting period prior receipt of a contract or subcontract to receipt of a contract or subcontract to to a business combination did not which this revised Standard applies. which this revised Standard applies. generate either depreciation expense or 5. Section 9904.409–50 is amended by cost of money charges that were adding a new paragraph (j)(5) to read as [FR Doc. 96–3061 Filed 2–12–96; 8:45 am] allocated to Federal government follows: BILLING CODE 3110±01±P