Thursday, August 1, 2013

Gains and Losses on Disposition of Assets - Part II

Involuntary conversions occur when a contractor's property is destroyed by events over which the owner has no control, such as fires, windstorms, hurricanes, floods, accidents, thefts, etc. Essentially the assets are destroyed or in the case of theft, gone.

If there is no insurance to cover the loss, there is most likely a loss on the disposition of the asset, assuming the asset(s) still had book value. Paragraph (e) of FAR 31.205-16 covers involuntary conversions when an insurance award is recovered.

When there is a cash award and the converted asset is not replaced, gain or loss shall be recognized in the period of disposition (or involuntary conversion). The gain recognized for contract costing purposes shall be limited to the difference between the acquisition cost of the asset and its undepreciated balance. The contractor gets to keep the "excess" insurance proceeds.

When the converted asset is replaced, the contractor shall either

  1. Adjust the depreciable basis of the new asset by the amount of the total realized gain or loss, or
  2. Recognize the gain or loss in the period of disposition.

There are a couple of situations where gains and losses on the disposition of depreciable property shall not be recognized as a separate charge or credit. These are very rare situations but include cases where

  1. Gains and losses are processed through the depreciation reserve account and reflected in the depreciation allowable under 31.205-11 or
  2. The property is exchanged as part of the purchase price of a similar item, and the gain or loss is taken into consideration in the depreciation cost basis of the new item.

Tomorrow we will look at "mass or extraordinary" sales and assets held for future use.

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