Tuesday, September 2, 2014

Applications - CAS 404 - Capitalization of Tangible Assets

Over the years, we've covered all of the CAS (Cost Accounting Standards) Standards to some extent. Usually, the postings have been high-level summaries of the fundamental requirements of the particular standard. We have produced an index of those summaries here. These CAS summaries continue to be some of our most popular postings. Sometimes, we receive comments - questions really - on how to apply these requirements to specific fact situations  Today begins a periodic series on applying CAS standards to real-life situations. These postings should be read in concert with the overview series and we will be adding these to our CAS index as we go.

Today we begin with CAS 404, Capitalization of Tangible Assets. The overview of the standard can be found here. Essentially, this standard allows contractors to establish minimum capitalization policies for purchased assets. These minimums cannot exceed a useful life of two years or a value of $5 thousand, although they may be lower. The Standard also requires contractors to establish minimum dollar amounts for the capitalization of original complements of low cost equipment and for betterments and improvements. While it doesn't establish specific minimum thresholds, the aggregate represents a material investment.

Here are some examples of how this Standard should be implemented.

A contractor that has a policy of capitalizing tangible assets which have a service life of more than one year and a cost of more than $6 thousand, would be in noncompliance. The contractor would have to modify its policy to conform to the $5 thousand minimum established by CAS 404.

A contractor that has a policy of capitalizing assets with a service life of more than one year and a cost of $250 would have to capitalize an asset with an 18 month service life and a cost of $300. Note, the Standard requires that capitalization be based on the contractor's written policy and capitalization policies may be less than the 2 year/$5,000 thresholds above which purchased assets must be capitalized.

A contractor has an established policy of capitalizing tangible assets which have a service life of two years and a cost of $500. The contractor acquires an asset with a useful life of 18 months and a cost of $5 thousand. This asset does not need to be capitalized because the service life is less than that required by CAS and required by its capitalization policy.

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