One would think this is a straightforward calculation. However, nothing is that straightforward when it comes to applying the Federal Acquisition Regulations (FAR) cost principles in FAR part 31.
A recent ASBCA decision can help us through this calculation (ASBCA Nos. 62269, 62270, 62425, 62426, 62680, 62974 – Parsons Government Services, Inc.). The board issued this decision on March 26, 2025.
What Did the Board Conclude?
The board concluded that the allowable rental costs following the sale and leaseback of the building based on FAR 31.205-36(b)(2) and other related cost principles is the “net book value of the asset … adjusted for any gain or loss recognized in accordance with 31.205-16(b),” with the FAR 31.205-16(d) cap on the recognized gain between acquisition cost of the building and the undepreciated balance at the time of the sale and leaseback.
FAR 31.205-36, Rental costs and FAR 31.205-11, Deprecation both address the limitation of allowable lease costs. FAR 31.205-36 deals with “operating” (right to use assets under the ASC) leases and FAR 31.205-11 deals with “capital” leases. The board decision would apply equally to both.
Step-by-Step Framework for Applying FAR to Sale and Leaseback Costs
You have to apply the requirements in steps:
Step 1
Addressing the sale of the asset: FAR 31.205-16 requires that upon the sale of an asset the contractor determine if there is gain or loss that must be dealt with. The gain or loss is considered an adjustment to the depreciation cost previously charged to the government. So, even though this is sale and lease back the sale portion of the transaction triggers this required adjustment. FAR 31.205-16 limits the governments share of the adjustment in the form of a gain to no more than depreciation previously charged to the government and any adjustment in the form of a loss to no more than the remaining net book value of the asset.
Yes, this means that if you sell the asset for a gain the government is going to get a current period credit for the previously charged depreciation, which could be as much as the entire amount of the previous depreciation expenses.
Step 2
Addressing the allowable amount of lease/rental costs: Both FAR 31.205-11(h)(1) and FAR 31.205-36(b)(2) limit costs under a sale and leaseback arrangement “only up to the amount the contractor would be allowed if the contractor retained title, computed based on the net book value of the asset on the date the contractor becomes a lessee of the property adjusted for any gain or loss recognized in accordance with 31.205-16(b).” Under step 1 above, we adjusted the amount of cost the contractor could have charged the government had it retained title, so we must take that into account.
Yes, the government got a credit or a charge on the sales transaction, so the allowable cost had the contractor retain the asset is now the adjusted amount.
Get Expert Support for Complex FAR Transactions
Navigating complex transactions like sale and leaseback arrangements under FAR can be challenging, and costly if handled incorrectly. Redstone Government Consulting works with contractors across the U.S. and internationally to interpret government requirements and apply the appropriate cost principles in real time, not after the fact. Our team includes Directors with extensive DCAA and corporate compliance experience who can guide you through the proper treatment of asset sales, gain or loss recognition, and allowable rental costs. Getting it right at the time of the transaction helps you avoid penalties, reduce audit risk, and maintain compliance with FAR Part 31. Let us help you take a proactive approach to complex cost and compliance challenges.
John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant