Finding Text
2025-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2025. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001. d. Contractor Response SRC concurs with our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.