Today we will conclude our series on how Government contractors are to treat gains and losses on disposition of assets by looking at a few miscellaneous events and considerations. Before we begin that however we should point out that when it comes to gains and losses, the Government also closely considers whether any losses are truly "allocable" to its contracts. Allocability is always a consideration in contracting but never more so than when contractors claim losses when disposing assets.The Government will do its best to determine whether those losses are proportional to the Government's use of those assets.This would involve historical and current analysis of both Government participation and contract type mix in the pool in which depreciation and gains are charged.
Paragraph (g) of FAR 31.205-16 covers mass or extraordinary sales, retirements and dispositions. It simply states that gains and losses shall be handled on a case-by-case basis. This means that you had better secure an advance understanding with your contracting officer before the event.
Paragraph (h) prevents contractors from charging gains and losses on non-depreciable property (e.g. real property) to the Government. Back in the 60s, a major Government contractor bought 80 acres of prime Silicon Valley land. It developed 40 of those acres for a plant and held the remaining 40 acres for future use. Every year, the contractor tried to include property tax (and other "upkeep" expenses) for the 40 vacant acres in its indirect expense rates. Every year, the Government questioned the amount. The contractor never did develop that land and many years later sold it to Intel at a huge gain. Too bad the Government didn't get to share in that gain.
Finally, paragraph (i) of FAR 31.205-16 covers "write-downs" of long-lived and identifiable intangible assets. Due to environmental damage, idle facilities arising from a declining business base, or other impairment, contractors sometimes write-down the carrying value of assets to a fair value. Once those assets are disposed of, the question arises as to whether the gain/loss should be calculated based on the original book value or the new fair value. FAR answers that by requiring that measurement be based on the original book value, before write-down.
To read the other parts in this series, see Part I and Part II.