Badlands9

Far Clause reads as follows: (d) The capitalized values of tangible capital assets acquired in a business combination, accounted for under the “purchase method” of accounting, shall be assigned to these assets as follows: (1) All the tangible capital assets of the acquired company that during the most recent cost accounting period prior to a business combination generated either depreciation expense or cost of money charges that were allocated to Federal government contracts or subcontracts negotiated on the basis of cost, shall be capitalized by the buyer at the net book value(s) of the asset(s) as reported by the seller at the time of the transaction. (2) All the tangible capital asset(s) of the acquired company that during the most recent cost accounting period prior to a business combination did not generate either depreciation expense or cost of money charges that were allocated to Federal government contracts or subcontracts negotiated on the basis of cost, shall be assigned a portion of the cost of the acquired company not to exceed their fair value(s) at the date of acquisition. When 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. Situation - Government contractor A is acquired by Contractor B. Some of contractor A's assets generated depreciation costs in the prior accounting period that were charged to Government contracts. Other of contractor A's assets were fully depreciated and did not generate depreciation costs in the accounting period prior to the acquisition. Contractor B divide its assets into two categories - those that generated depreciation in the accounting period prior to the acquisition and those that did not generate depreciation in the prior accounting period. Contractor B "steps up" the second category of assets to current market value based upon (d)(2) above. Is this a proper interpretation of the CAS clause or do all of the assets have to fall into either d(1) or d(2)?