Valuation Approaches

Opening Balances

Opening balances are account balances that exist at the beginning of the reporting period. Opening balances are based upon the closing balances of the prior period and reflect the effects of transactions and events of prior periods and accounting policies applied in the prior period. Opening balances also include matters requiring disclosure that existed at the beginning of the period, such as contingencies and commitments.

Deemed Cost

SFFAS 50 allows for the application of Deemed Cost when establishing opening balances. FASAB is also in the process of issuing a Technical Release for SFFAS 50 implementation. This additional guidance is expected to be released in the Fall of 2017.

According to SFFAS 50, deemed cost is an acceptable valuation method for opening balances of general PP&E. The FASAB Exposure Draft for SFFAS 50 provides several options for valuing assets based on Deemed Cost. Because the reporting entity may have multiple component or subcomponent reporting entities using various valuation methods simultaneously, deemed cost should be based on one, or a combination, of replacement cost, estimated historical cost or fair value. DoD Components must consider each Deemed Cost method and select the approach that will be the most efficient in producing an auditable value. However, for General Equipment the most practical methods continue to be estimating historical costs.

Below you will find an explanation of the different methods acceptable to establish a deemed cost value. For additional information on these methods please refer to SFFAS 50 or the Strategy and Implementation Guidance for General Equipment Valuation Memo.

Replacement Cost

Replacement cost is the amount required for an entity to replace the remaining service potential of an existing asset in a current transaction at the reporting date, including the amount that the entity would receive from disposing of the asset at the end of its useful life.

Estimated Historical Cost

Cost of similar assets at the time of acquisition

This method is frequently used for commercial off-the-shelf (COTS) General Equipment, but may also be used for other General Equipment, such as Weapon Systems when appropriate. When using this method, DoD Components will consider:

Contract Based Estimates

This methodology involves valuing General Equipment using the pricing data included in contracts. A complete understanding of the acquisition program, including the structure of all related contracts is required to implement this methodology. DoD Components must align activities and costs of General Equipment with relevant accounting standards to isolate the costs that are to be capitalized versus those that are to be expensed (e.g., research and development costs, factory training). When using this methodology, DoD Components will consider the complexity of multiple contracts used to develop or acquire General Equipment assets.

Budget Based Estimates

This methodology utilizes information included in DoD Component budget which exhibits to estimate the value of the General Equipment. The key requirement is that the available Procurement Budget detail must allow DoD Components to clearly associate budgeted amounts with the General Equipment end items. When using this methodology DoD Components must consider:

Current cost of similar assets discounted for inflation since the time of acquisition (deflating current costs to costs at the time of acquisition by general price index)

Fair Value

Fair value is the amount at which an asset or liability could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

Fair value is not typically used for General Equipment in the possession of the DoD Components. The assets are not “used in the ordinary course of business”, therefore there is no market that sets the value for these types of assets.

If this method is to be used, please contact FIAR or the P&EP Office for further approval.

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