are considered to consist of specific functions which, but for the existence of a home office, would be performed or acquired by solne or all of the segments individually. Examples include centrally performed personnel administration and centralized data processing. (2) Staff management of certain specific activities of segments. The expenses incurred by a home office for staff management or policy guidance functions which are significant in amount and in relation to total home office expenses shall be allocated to segments receiving more than a minimal benefit over a base, or bases, representative of the total specific activity being managed. Staff management or policy guidance to segments Is commonly provided in the overall direction or support of the performance of discrete segment activities such as manufacturing, accounting, and engineering (but see subparagraph (6) of this paragraph). (3) Line management of particular segments or groups of segments. The expense of line management shall be allocated only to the particular segment or group of segments which are being managed or supervised. If more than one segment is managed or supervised, the expense shall be allocated using a base or bases representative of the total activity of such segments. Line management is considered to consist of management or supervision of a segment or group of segments as a whole. (4) Central payments or accruals. Central payments or accruals which are made by a home office on behalf of its segments shall be allocated directly to segments to the extent that all such payments or accruals of a given type or class can be identified specifically with individual segments. Central payments or accruals are those which but for the existence of a number of segments would be accrued or paid by the individual segments. Common examples include centrally paid or accrued pension costs, group Insurance costs, State and local income taxes and franchise taxes, and payrolls paid by a home office on behalf of its segments. Any such types of payments or accruals which cannot be identified specifically with individual segments shall be allocated to benefited segments using an allocation base representative of the factors on which the total payment is based. (5) Independent research and development and bidding and proposal costs. Notwithstanding any other provisions herein, the costs of independent research and development and bidding and proposal efforts allocated by a home office shall continue to be allocated pursuant to provisions of existIng laws, regulations, and other controlling factors. (6) Staff management not identifiable with any certain specific activities of segments. The expenses incurred by a home office for staff management, supervisory, or policy functions, which are not identifiable to specific activities of segments shall be allocated in accordance with paragraph (c) of this section as residual expenses. (c) Residual expenses. (1) All home office expenses which are not allocable in accordance with paragraph (a) of this section and subparagraphs (1) through (5) of paragraph (b) of this section shall be deemed residual expenses. Typical residual expenses are those for the chief executive, the chief financial officer, and any staff which are not Identifiable with specific activities of segments. Residual expenses shall be allocated to all segments under a home office by means of a base representative of the total activity of such segments, except where subparagraph (2) or (3) of this paragraph applies. (2) Residual expenses shall be allocated pursuant to subparagraph (1) of § 403.50 (c) if the total amount of such expenses for the contractor's previous fiscal year (excluding any unallowable costs and before eliminating any amounts to be allocated in accordance with subparagraph (3) of this paragraph) exceeds the amount obtained by applying the following percentage(s) to the aggregate operating revenue of all segments for such previous year: 3.35 percent of the first $100 million; 0.95 percent of the next $200 million; 0.30 percent of the next $2.7 billion; 0.20 percent of all amounts over $3 billion. The determination required by this subparagraph for the first year the contractor is subject to this standard shall be based on the proforma application of this standard to the home office expenses and aggregate operating revenue for the contractor's previous fiscal year. (3) Where a particular segment receives significantly more or less benefit from residual expenses than would be reflected by the allocation of such expenses pursuant to subparagraph (1) or (2) of this paragraph (see $403.50 (d)), the Government and the contractor may agree to a special allocation of residual expenses to such segment commensurate with the benefits received. The amount of a special allocation to any seginent made pursuant to such an agreement shall be excluded from the pool of residual expenses to be allocated pursuant to subparagraph (1) or (2) of this paragraph, and such segment's data shall be excluded from the base used to allocate this pool. $403.50 Techniques for application. (a) (1) Separate expense groupings will ordinarily be required to implement 5 403.40. The number of groupings will depend primarily on the variety and significance of service and management functions performed by a particular home office. Ordinarily, each service or management function will have to be separately identified for allocation by means of an appropriate allocation technique. However, it is not necessary to identify and allocate different functions separately, if allocation in accordance with the § 1-3.1220-3 can relevant requirements of § 403.40 (b) (2) Where the expense of a given function is to be allocated by means of a particular allocation base, all segments shall be included in the base unless: (1) Any excluded segment did not receive significant benefits from, or contribute significantly to the cause of the expense to be allocated and, (11) any included segment did receive significant benefits from or contribute significantly to the cause of the expense in question. (b) (1) Section 403.60 illustrates various expense pools which may be used together with appropriate allocation bases. The allocation of centralized service functions shall be governed by a hierarchy of preferable allocation techniques which represent benefical or causal relationships. The preferred representation of such relationships is a measure of the activity of the organization performing the function. Supporting functions are usually labor-oriented, machineoriented, or space-oriented. Measures of the activities of such functions ordinarily can be expressed in terms of labor hours, machine hours, or square footage. Accordingly, costs of these functions shall be allocated by use of a rate, such as a rate per labor hour, rate per machine hour or cost per square foot, unless such measures are unavailable or impractical to ascertain. In these latter cases the basis for allocation shall be a measurement of the output of the supporting function. Output is measured in terms of units of end product produced by the supporting function, as for example, number of printed pages for a print shop, number of purchase orders processed by a purchasing department, number of hires by an employment office. (2) Where neither activity nor output of the supporting function can be practically measured, a surrogate for the beneficial, or causal relationship must be selected. Surrogates used to represent the relationship are generally measures of the activity of the segments receiving the service: for example. for personnel services reasonable surrogates would be number of personnel, labor hours, or labor dollars of the segments receiving the service. Any surrogate used should be reasonable measure of the services received and, logically, should vary in proportion to the services received. A (c) (1) Where residual expenses are required to be allocated pursuant to § 403.40 (c) (2), the three factor formula described below must be used. This formula is considered to result in appropriate allocations of the residual expenses of home offices. It takes into account three broad areas of management concern: The employees of the organization, the business volume, and the capital invested in the organization. The percentage of the residual expenses to be allocated to any segment pursuant to the three factor formula is the arithmetical average of the following three percentages for the same period: (1) The percentage of the segment's payroll dollars to the total payroll dollars of all segments. (11) The percentage of the segment's opto erating revenue the total operating revenue of all segments. For this purpose, the operating revenue of any segment shall include amounts charged to other segments and shall be reduced by amounts charged by other segments for purchases. (111) The percentage of the average net book value of the sum of the segment's tangible capital assets plus inventories to the total average net book value of such assets of all segments. Property held primarily for leasing to other shall be excluded from the computation. The average net book value shall be the average of the net book value at the beginning of the organization's fiscal year and the net book value at the end of the vear. (2) The first time a change is made from a technique previously followed to the techniques specified ir. § 403.50 (c) (1), such change shall be deemed to be within the scope of paragraph (a)(3) of the clause appearing at § 351.50 of the Board's regulation entitling a contractor to an equitable adjustment under paragraph (a)(4)(A) of the contract clause. (d) The following subparagraphs provide guidance for implementing the requirements of § 403.40 (c)(3). (1) An indication that a segment received significantly less benefit in relation to other segments can arise if a segment, unlike all or most other segments performs on its own many of the functions included in the residual expense. Another indication may be that, in relation to its size, comparatively little or no costs are allocable to a segment pursuant to § 403.40 (b)(1) through (5). Evidence of comparatively little communication or interpersonal relations between a home office and a segment, in relation to its size, may also indicate that the segment receives significantly less benefit from residual expenses. Conversely, if the opposite condi. tions prevail at any segment, a greater allocation than would result from the application of § 403.40 (c) (1) or (2) may be indl cated. This may be the case, for example. If a segment relies heavily on the home office for certain residual functions normally per formed by other segments on their own. (2) Segments which may require special allocations of residual expenses pursuant to § 403.40 (c) (3) include, but are not limited to foreign subsidiaries. GOCO's, domestic subsidiaries with less than a majority ownership, and joint ventures. (3) The portion of residual expenses to be allocated to a segment pursuant to § 403.40 (c) (3) shall be the cost of estimated or recorded efforts devoted to the segments. (e) Home office functions may be performed by an organization which for some purposes may not be a part of the legal entity with which the Government has contracted. This situation may arise, for example, in instances where the Government contracts directly with a corporation which is wholly or partly owned by another corporation. In this case, the latter corporation serves as a "home office," and the corporation with which the contract is made is a "segment" as those Home office expense or function Centralized service functions: 1. Personnel administration___ 2. Data processing services- 3. Centralized purchasing and subcontracting. 4. Centralized warehousing----5. Company aircraft service. 6. Central telephone service.. (b) The selection of a base for allocating by the criteria established in § 403.50(b) Staff management of specific activities: 1. Personnel management_--- 2. Manufacturing policies (quality control, industrial engineering, production, scheduling, tooling, inspection and testing, etc.). 3. Engineering policies--- 4. Material/purchasing policies----- 5. Marketing policies.. Central payments or accruals: 1. Pension expenses---- 2. Group insurance expenses--- 3. State and local income taxes and franchise taxes. (c) The listed allocation bases in this section are illustrative. Other bases for allocation of home office expenses to segments may be used if they are substantially in accordance with the beneficial or causal relationships outlined in § 403.40. § 403.70 Exemptions. (a) Any contractor or subcontractor which together with its subsidiaries did not receive net awards of negotiated national de terms are defined and used in this standard. For purposes of contracts subject to this standard, the contracting corporation may only accept allocations from the other corporation to the extent that such allocations meet the requirements set forth in this standard for allocation of home office expenses to segments. § 403.60 Illustrations. (a) The following table lists some typical pools, together with illustrative allocatiou bases which could be used in appropriate circumstances: Illustrative allocation bases 1. Number of personnel, labor hours, payroll, number of hires. 2. Machine time, number of reports. 3. Number of purchase orders, value of purchases, number of items. 4. Square footage, value of material, volume. 5. Actual or standard rate per hour, mile, passenger mile, or similar unit. 6. Usage costs, number of instruments. centralized service functions shall be governed 1. Number of personnel, labor hours, payroll, number of hires. 2. Manufacturing cost input, manufacturing direct labor. 3. Total engineering costs, engineering direct labor, number of drawings. 4. Number of purchase orders, value of purchases. 5. Sales, segment marketing costs. 1. Payroll or other factor on which total payment is based. 2. Payroll or other factor on which total payment is based. 3. Any base or method which results in an allocation that equals or approximates a segment's proportionate share of the tax imposed by the jurisdiction in which the segment does business, as measured by the same factors used to determine taxable income for that jurisdiction. fense prime contracts during Federal fiscal year 1971 (July 1, 1970, through June 30, 1971) totaling more than $30 million is exempt from this Standard (40 FR 32747, Aug. 4, 1975). (b) This standard shall not apply to contractors who are subject to the provisions of Office of Management and Budget Circular No. A-21 (Principles for Determining Costs Applicable to Research and Development Under Grants and Contracts with § 1-3.1220-4 Educational Institutions and Principles for Determining Costs Applicable to Training and Other Educational Services Under Grants and Contracts with Educational Institutions (FPR Note: Federal Management Circular (FMC) 73-8, 12/19/73, replaced OMB Circular No. A-21); or Circular No. A-87 (Principles for Determining Costs Applicable to Grants and Contracts with State and Local Governments) (FPR Note: Federal Management Circular (FMC) 74-4, 7/18/74, replaced OMB Circular No. A-87). (37 FR 26680, Dec. 14, 1972, as amended at 40 FR 32747, Aug. 4, 1975) $403.80 Effective date. This standard shall be followed by each contractor as of the beginning of his next fiscal year after September 30, 1973. The effective date of this standard is July 1, 1973 [38 FR 7447, Mar. 22, 1973, as amended at 41 FR 47239, Oct. 28, 1976] § 1-3.1220-4 Capitalization of tangible assets. Fundamental requirement. 404.50 Techniques for application. 404.60 Illustrations. 404.70 Exemptions. 404.80 Effective date. AUTHORITY: 84 Stat. 796, sec. 103 (50 U.S.C App. 2168). SOURCE: 38 FR 5321, Feb. 27, 1973, unless otherwise noted. § 404.10 General applicability. This standard shall be used by defense contractors and subcontractors under Federal contracts entered into after the effective date hereof and by all relevant Federal agencies in estimating, accumulating, and reporting costs in connection with the pricing, administration, and settlement of all negotiated prime contract and subcontract national defense procurements with the United States in excess of $100,000, other than contracts or subcontracts where the price negotiated is based on (a) established catalog or market prices of commercial items sold in substantial quantities to the general public, or (b) prices set by law or regulation 404.20 Purpose. This standard requires that, for purposes of cost measurement, contractors establish and adhere to policies with respect to capitalization of tangible assets which satisfy criteria set forth herein. Normally, cost measurements are based on the concept of enterprise continuity; this concept implies that major asset acquisitions will be capitalized, so that the cost applicable to current and future accounting periods can be allo cated to cost objectives of those periods. A capitalization policy in accordance with this standard will facilitate measurement of costs consistently over time. 8 404.30 Definitions. (a) The following definitions of terms which are prominent in this standard are reprinted from Part 400 of this chapter for convenience. Other terms which are used in this standard and are defined in Part 400 of this chapter have the meanings ascribed to them in that part unless the text demands a different definition or the definition is modified in paragraph (b) of this section: (1) Asset accountability unit. A tangible capital asset which is a component of plant and equipment that is capitalized when acquired or whose replacement is capitalized when the unit is removed, transferred, sold abandoned, demolished, or otherwise disposed of. (2) Original complement of low cost equipment. A group of items acquired for the initial outfitting of a tangible capital asset or an operational unit, or a new add!tion to either. The items in the group individually cost less than the minimum amount established by the contractor for capitalization for the classes of assets acquired but in the aggregate they represent a material investment. The group, as a complement, is expected to be held for continued service beyond the current period. Initial outatting of the unit is completed when the unit is ready and available for normal operations. (3) Repairs and maintenance. Maintenance is the regularly recurring activity of keeping assets in normal or expected operating condition. Repair is the activity of putting them back into normal or expected operating condition. The total endeavor to obtain the expected service during the life of tangible capital assets is generally called repairs and maintenance. (4) Tangible capital asset. An asset that has physical substance, more than minimal value, and is expected to be held by an enterprise for continued use or possession beyond the current accounting period for the services it yields. (b) The following modifications of defin!tions set forth in Part 400 of this chapter are applicable to this standard: None. § 404.40 Fundamental requirement. (a) The acquisition cost of tangible capl. tal assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied (b) The contractor's policy shall designate economic and phyiscal characteristics for capitalization of tangible assets. (1) The contractor's policy shall designate a minimum service life criterion, which shall not exceed 2 years, but which may be a shorter period. The policy shall also desig nate a minimum acquisition cost criterion which shall not exceed $500, but which may be a smaller amount. (2) The contractor's policy may designate other specific characteristics which are pertinent to his capitalization policy decisons (e.g., class of asset, physcal size, identifiability and controllability, the extent of integration or independence of constituent units). (3) The contractor's policy shall provide for identification of asset accountability units to the maximum extent practical. (4) The contractor's policy may designate higher minimum dollar limitations for original complement of low cost equipment and for betterments and improvements than the limitation established in accordance with paragraph (b) (1) of this section, provided such higher limitations are reasonable in the contractor's circumstances. (c) Tangible assets shall be capitalized when both of the criteria in the contractor's policy as required in paragraph (b)(1) of this section are met, except that assets described in paragraph (b) (4) of this section shall be capitalized in accordance with the criteria established in accordance with that paragraph. (d) Costs incurred subsequent to the acquisition of a tangible capital asset which result in extending the life or increasing the productivity of that asset (e.g., betterments and improvements) and which meet the contractor's established criteria for capitalization shall be capitalized with appropriate accounting for replaced asset accountability units. However, costs incurred for repairs and maintenance to a tangible capital asset which either restore the asset to, or maintain it at, its normal or expected service life or production capacity shall be treated as costs of the current period. 404.50 Techniques for application. (a) The cost to acquire a tangible capital asset includes the purchase price of the asset and costs necessary to prepare the asset for use. (1) The purchase price of an asset shall be adjusted to the extent practical by premiums and extra charges paid or discounts and credits received which properly reflect an adJustment in the purchase price. (1) Purchase price is the consideration given in exchange for an asset and is determined by cash paid, or to the extent payment is not made in cash, in an amount equivalent to what would be the cash price basis. Where this amount is not available, the purchase price is determined by the current value of the consideration given in exchange for the asset. For example, current value for a credit instrument is the amount immediately required to settle the obligation or the amount of money which might have been raised directly through the use of the same Instrument employed in making the credit purchase. The current value of an equity security is its market value. Market value is the current or prevailing price of the se curity as indicated by recent market quotations. If such values are unavailable or not appropriate (thin market, volatile price movement, etc.), an acceptable alternative is the fair value of the asset acquired. (11) Donated assets which, at the time of receipt, meet the contractor's criteria for capitalization shall be capitalized at their fair value at that time. (2) Costs necessary to prepare the asset for use include the cost of placing the asset in location and bringing the asset to a condition necessary for normal or expected use. Where material in amount, such costs, including initial inspection and testing, installation and similar expenses shall be capitalized. (b) Tangible capital assets constructed or fabricated by a contractor for its own use shall be capitalized at amounts which include all indirect costs properly allocable to such assets. This requires the capitalization of general and administrative expenses when such expenses are identifiable with the constructed asset and are material in amount (e.g., when the in-house construction effort requires planning, supervisory, or other significant effort by officers or other pesonnel whose salaries are regularly charged to general and administrative expenses). When the constructed assets are identical with or similar to the contractor's regular product, such assets shall be capitalized at amounts which Include a full share of indirect costs. (c) In circumstances where the acquisition by purchase or donation of previously used tangible capital assets is not an arm's length transaction, acquisition cost shall be limited to the capitalized cost of the asset to the owner who last acquired the asset through an arm's length transaction, reduced by depreciation charges from date of that acquisition to date of gift or sale. (d) Under the "purchase method" of accounting for business combinations, acquired tangible capital assets shall be assigned a portion of the cost of the acquired company, not to exceed their fair value at date of acquisition. Where the fair value of identifiable acquired assets less liabilities assumed exceeds the purchase price of the acquired company in an acquisition under the "purchase method," the value otherwise assignable to tangible capital assets shall be reduced by a proportionate part of the excess. (e) Under the "pooling of interest method" of accounting for business combinations, the values established for tangible capital assets for financial accounting shall be the values used for determining the cost of such assets. |