Cost Accounting Standard (CAS) 409 - Depreciation of Tangible Capital Assets

Cost Accounting Standard (CAS) 409 provides the criteria for assigning costs (i.e., depreciation) of tangible capital assets to cost accounting periods and allocating those costs to contracts in an objective and consistent manner.

CAS 409 does not address the amortization of intangible capital assets (e.g., software).

What are the Requirements of CAS 409?

The fundamental requirements of CAS 409 are:

• The depreciable cost of a tangible capital asset is the capitalized cost less its estimated residual value.
• The estimated service life of a tangible capital asset is used to determine the cost accounting periods to which the depreciable cost will be assigned.
• The method of depreciation should reflect the pattern of consumption the tangible capital asset over its estimated service life.
• Any gain or loss is assigned to the cost accounting period in which the tangible capital asset is dispositioned.

Depreciation is a charge to current operations for the cost of the use of tangible capital assets during that cost accounting period.

CAS 409 requires a written policy that is consistently applied.

What if I Don’t Have Any Contracts Subject to Full CAS?

Contractors that do not have any contracts subject to CAS 409, follow FAR 31.205-11 Depreciation and FAR 31.205-16 Gain or loss on disposition or impairment of depreciable property or other capital assets which we will address later.

Estimated Residual Values

CAS 409 requires estimated residual values that exceed ten percent of the capitalized cost of the asset to be used in determining the depreciable value of the asset when using the straight-line depreciation method. Estimated residual values are not required when using the declining balance or sum of the year digits method. What we find is that contractors do not always document its records when the estimated residual is less than 10 percent. DCAA is quick to cite a CAS noncompliance when the policy is silent and residual values are not addressed. It is a best practice for contractors to state in its policy that when the estimated residual value is 10 percent or more of the capitalization cost, the capitalization cost will be reduced by the estimated residual value. We recommend that annually the contractor review its asset dispositions to average residual values by asset type.

Estimated Service Lives

When CAS 409 is applicable, contractors need to ensure the estimated services lives reflect the actual period of usefulness, not just rely on the services lives from IRS regulations or financial accounting. Contractors should be reviewing the actual useful lives of asset groupings based on retirements or withdrawal from use. A dead giveaway to DCAA is an asset register full of fully depreciated assets. A best practice would be to identify assets that are not in use during an annual inventory and disposition them (e.g., sell, scrap, etc.). It is important that contractors maintain records of retirements or withdrawals of assets to support useful lives.

NOTE – Contractors do not have to revise service lives for assets acquired prior to compliance with CAS 409.

Method of Depreciation

CAS 409 states for Government contract costing, contractors can use the method of depreciation used for financial accounting purposes unless the method does not reflect the expected consumption of services, or it is unacceptable for federal income taxes. If the financial accounting method of depreciation does not reflect consumption, other methods such as accelerated methods or surrogate methods (e.g., hours, units produced, etc.) can be used.

Gain or Loss on Disposition

When an asset is sold or disposed of, any gain or loss is assigned as an adjustment to depreciation costs in the period of disposition. Gains are limited to the difference between the original acquisition cost of the asset and its net book value. For example, in year one a truck is purchased for $28,000, depreciation $4,000 and NBV is $24,000. At the beginning of year two, the truck is sold for $30,000. While the difference between the amount received ($30,000) and the net book value ($24,000) is $6,000, the gain is limited to $4,000 the difference between the acquisition cost and the net book value.

What if I Don’t Have Any Contracts Subject to Full CAS?

Contractors that do not have any contracts subject to CAS 409 would follow the guidance in FAR 31.205-11 Depreciation and FAR 31.205-16 Gains and losses on disposition or impairment of depreciable property. FAR 31.205-11 states the allowable depreciation shall not exceed the amount used for financial accounting purposes when a contractor does not have full-CAS covered contracts subject to CAS 409. The largest difference between FAR 31.205-11 and CAS 409 is that the depreciation method and estimated useful life can be the same as for financial accounting vs. tracking and using the actual useful life. Residual values expected to exceed 10 percent of the asset cost needs to be used in establishing the depreciable costs, same as CAS 409.

FAR 31.205-16 contains similar language to CAS 409 on gains and losses. Gains and losses are the difference between the net amount realized and the undepreciated balance and is an adjustment to depreciation costs in the period received.

Takeaways

Government contractors should:

• Ensure they have a written policy addressing capitalization and depreciation tangible capital assets.
• Maintain historical records and market research to support estimated residual values and useful lives.
• Perform annual asset register reviews to clean up and dispose of assets no longer in use.

One positive thing is that CAS 409 does not require you to change the depreciation methods or estimated service lives for assets acquired prior to compliance with this standard.

Redstone GCI can assist your company with various aspects of compliance and training. We offer services such as assessing your actual depreciation accounting practice for compliance with CAS 409 and determining the actual useful lives of asset groupings. Additionally, we can draft written policies and procedures, assist with responses to DCAA audit findings or ACO determinations of CAS 409 noncompliance, and provide training on Cost Accounting Standards.