Auditor Strikes Back: Appreciating Depreciation

February 22, 2017

The Selected Areas of Cost guidebook replaces Chapter 7 of the Defense Contract Audit Agency (“DCAA”) Contract Audit Manual (“CAM”). One of the 13 sections that have been rewritten and updated covers depreciation. Below we will take a deep dive into some of the new updates.

When a contractor typically owns tangible personal property which provides services for a number of years, that cost is recorded as an asset (rather than expense) in the year the asset is acquired. According to the matching principle, a portion of the asset should be reported as an expense during each period of the asset’s useful life, which is depreciation.

In summary, the newly rewritten and updated depreciation section reflects a more clear and concise understanding of the regulations around depreciation. Below we have summarized the changes.


No significant changes.

Normal depreciation is generally considered allowable contract costs if they are reasonable and allocable. In computing depreciation, any rational and systematic method that is consistently applied may be used. The provisions of Federal Acquisition Regulation (“FAR”) 31.205-11 govern the allowability of depreciation costs. Contractors with contracts subject to the Cost Accounting Standards (“CAS”) must comply with all provisions within CAS 404 & 409.

For non-CAS covered contracts, costs are reasonable if the contractor follows policies and procedures that are consistent with those followed in the same cost center for business other than government, and reflected in the contractor’s books of accounts and financial statements.

Depreciation Methods

This section has significantly changed from the older version by explicitly listing the following depreciation methods and applicability of each.

  • Straight-Line Method
  • Declining-Balance Method
  • Sum-of-Years’-Digits Method
  • Other Methods

Estimated Useful Life

No significant changes.

The estimated useful life of an asset should represent the prospective period of economic usefulness to the contractor as presented in the “depreciation” definition under FAR 2.101.

Salvage Value

No significant changes.

Salvage value is the amount the contractor expects to receive in cash or trade-in allowance upon disposing of the asset at the end of its useful life. There is no fixed basis for determining salvage value. If the full inherent life of an asset is used, salvage may be no more than junk value.


The previous section broke down general consistency, depreciation method changes without IRS approval, consistency by asset, not for all assets, and consistency in accounting and estimating. The new updated version is consolidated into a high level of consistency of depreciable property.

Any method otherwise permissible may be applied to a particular depreciable property “account” (which may represent an individual item or a group of related items). However, once a method is adopted for any specific “account,” it must be applied consistently thereafter.

Special Areas of Concern

No significant changes.

  • Asset valuation resulting from business combination
  • Class life asset depreciation range system
  • Depreciation of leased property
  • Depreciation on assets acquired from the government and depreciation of fully depreciated assets
  • Depreciation on intracompany transfers of assets
  • Depreciation or amortization of leasehold improvements
  • Depreciation under novation agreements
  • Gain or loss on disposition of assets

Over the next few months, Cherry Bekaert’s Government Contractor Services Group will continue to provide information regarding the updated areas of cost within the CAM. If you have any questions, please do not hesitate to contact one of our experienced GovCon professionals for assistance.