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Barry McVay's FEDERAL CONTRACTS DISPATCH

DATE: July 19, 2000

FROM: Barry McVay, CPCM

SUBJECT: Department of Defense; Public Meetings on Cost Accounting Standards (CAS) Administration and CAS Streamlining

SOURCE: Federal Register; July 19, 2000, Vol. 65, No. 139, pages 44710 and 44765

AGENCIES: Department of Defense (DOD)

ACTION: Notice of Public Meetings

SYNOPSIS: The Office of the Director of Defense Procurement, in conjunction with the National Contract Management Association (NCMA), is sponsoring two public meetings on CAS: (1) on August 2, to discuss the April 18, 2000, proposed Federal Acquisition Regulation (FAR) rule on CAS administration; and (2) on August 3, to discuss potential areas for streamlining the CAS.

EDITOR'S NOTE: The CAS are 19 standards which apply to large contractors performing large contracts. The CAS are in Chapter 99 of Title 48 of the Code of Federal Regulations (CFR) and are included as an appendix to the paper-version of the FAR for information purposes. They are available on the Internet at http://www.arnet.gov/far/97/html/appendix.html.

For more on the proposed FAR rule on CAS administration, see the April 18, 2000, FEDERAL CONTRACTS DISPATCH "Federal Acquisition Regulation (FAR); Cost Accounting Standards Administration."

For more on a recent Cost Accounting Standards Board (CASB) change to its regulations regarding cost accounting practices, see the June 14, 2000, FEDERAL CONTRACTS DISPATCH "Cost Accounting Standards Board; Changes In Cost Accounting Practices."

DATES: The meeting to discuss the proposed FAR rule will be held on August 2, 2000, from 9 a.m. until 1 p.m. The meeting to discuss potential CAS streamlining will be held on August 3, 2000, from 9 a.m. until 1:00 p.m. Upon identification of the key issues, subsequent public meetings will be held to hear views of interested parties regarding specific proposed language and recommendations. The dates and times of those meetings will be published by the Defense Office of Cost, Pricing, and Finance at http://www.acq.osd.mil/dp/cpf.

ADDRESSES: The meetings will be held at the NCMA, 1912 Woodford Drive, Vienna, VA 22182. Directions may be found on the Internet at http://www.acq.osd.mil/dp/cpf.

FOR FURTHER INFORMATION CONTACT: Mr. David Capitano, Office of Cost, Pricing, and Finance, 703-695-7249, fax: 703-693-9616, e-mail: capitadj@acq.osd.mil.

SUPPLEMENTAL INFORMATION: On April 18, 2000, a proposed rule was published that would amend FAR Subpart 30.6, CAS Administration, to more clearly and completely explain the cost-impact process that the government and contractor must follow when a contractor makes a compliant change to a cost accounting practice or follows a noncompliant practice.

The Director of Defense Procurement would like to hear the views of interested parties on what they believe to be the key issues pertaining to the proposed rule, so the Director will be holding a meeting on August 2 to hear the views of interested parties. The following is a list of possible issues that has been prepared by DOD and posted at http://www.acq.osd.mil/dp/cpf:

• When materiality determinations are made and what documentation is needed to make those determinations.
  
• The amount of effort required to generate a General Dollar Magnitude (GDM) proposal.
  
• The distinction between a GDM proposal and a Detailed Cost Impact proposal.
  
• The amount of flexibility provided for in the format of cost impact proposals.
  
• The method of computing cost impacts (use of estimates to complete, original contract prices, forward pricing rates).
  
• "Cost estimating" versus "cost accumulation" noncompliances.
  
• The requirement to notify the government 60 days prior to implementing an accounting change.
  
• Definition of offsets.
  
• Criteria for using the offset process.
  
• Offsetting cost increases on one type of contract (for example, fixed price) with cost decreases on another type of contract (for example, cost reimbursable).
  
• Offsetting cost impacts of multiple changes that occur within the same year.
  
• The treatment of undisclosed cost accounting practice changes.
  
• Adjustments to firm fixed price contracts for cost impacts resulting from voluntary accounting changes.
  
• Treatment of immaterial cost impacts as noncompliances.
  
• Submission of a cost impact proposal when a contractor does not agree there is a noncompliance or an accounting change.
  
• Adjustment of future indirect cost pools to reflect cost impacts.
  
• Criteria for what constitutes a desirable change.
  
• Adjustment of profit/fee.
  

In addition, the Director will be holding an additional meeting on August 3 to hear the views of interested parties regarding any CAS or parts of CAS that present streamlining opportunities (elimination, revision, and/or amendment) in light of changes that have occurred since the standards were promulgated in the 1970s, including the evolution of Generally Accepted Accounting Principles (GAAP), the advent of acquisition reform, and experience gained from implementation. The following is the list of some possible streamlining areas that has been prepared by DOD and posted at http://www.acq.osd.mil/dp/cpf:

• CAS 401 -- Consistency in Estimating, Accumulating and Reporting Costs: Review the requirements for consistency. Should the standard be expanded to specifically address accounting practices of the business unit and/or accounting practices of the contract? For example, if a contract is transferred from one business unit to another, and the two business units, is this a change in accounting practice? The accounting practices used for the contract have changed, but the accounting practices of the contractor business units have not.
  
  
• CAS 402 -- Consistency in Allocating Costs Incurred for the Same Purpose: Review the requirement at paragraph (e) of Section 9904.402-50, Techniques for Application, that permits any direct cost of a minor dollar amount to be treated as an indirect cost for reasons of practicality. For example, if a contractor normally charges sales commissions as a direct cost, can the contractor charge sales commissions as an indirect cost when they are a minor dollar amount, or can the contractor only charge sales commissions as an indirect cost if all the sales commissions are of a minor dollar amount?
  
  
• CAS 403 -- Allocation of Home Office Expenses to Segments: Review Section 9904.403-61, Interpretation. Does it continue to be necessary, and if so, can the interpretation be written in a manner that more closely relates it to the fundamental requirement/techniques for application.
  
  
• CAS 404 -- Capitalization of Tangible Assets: Review the minimum capitalization thresholds. Should the current minimum capitalization threshold of $5,000 be revised? Also review paragraph (a) of Section 9904.404-60, Illustrations, which is based on a prior capitalization threshold of $1,500.
  
  
• CAS 405 -- Accounting for Unallowable Costs: Review the requirements for separate identification and supporting documentation of unallowable costs. Could these be revised to provide more flexibility while continuing to protect the government's interest? Also review the requirements for the treatment of directly associated costs to determine if any revision or clarification is warranted.
  
  
• CAS 406 -- Cost Accounting Period: Review the requirements for use of an annual period other than a fiscal year and/or a transitional period. Can these requirements be revised to provide additional flexibility while continuing to enhance and promote objectivity, consistency, verifiability, and uniformity?
  
  
• CAS 407 -- Use of Standard Costs for Direct Material and Direct Labor: None
  
  
• CAS 408 -- Accounting for Costs of Compensated Personal Absence: Review the provisions for duplication with GAAP. Can all or part of this CAS be eliminated?
  
  
• CAS 409 -- Depreciation of Tangible Capital Assets: Review the limitation on when depreciation costs may be charged direct in paragraph (b)(1) of Section 9904.409-40, Fundamental Requirement. Also review the references in Section 9904.409-50(e)(4) that require use of asset guideline classes under Internal Revenue Procedures, and in Section 9904.409-50(f)(1)(ii) that require the depreciation method be acceptable for federal income tax purposes.
  
  
• CAS 410 -- Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives: Review the transition method in Appendix A of CAS 410, Transition from a Cost of Sales or Sales Base to a Cost Input Base.
  
  
• CAS 411 -- Accounting for Acquisition Costs of Material: Review the acceptable inventory costing methods. Are there any acceptable inventory costing methods other than the five listed in paragraph (b) of Section 9904.411-50, Techniques of Application (first-in, first-out (FIFO) method; moving average cost method; weighted average cost method; standard cost method; last-in, first out (LIFO) method)?
  
  
• CAS 412 -- Composition and Measurement of Pension Cost: Review the definition of a pension plan in Section 9904.412-30, Definitions, as well as what constitutes a basic plan and a supplemental plan. Review the feasibility of applying the GAAP concept of "negative" pension costs to government contract costing.
  
  
• CAS 413 -- Adjustment and Allocation of Pension Cost: None
  
  
• CAS 414 -- Cost of Money as an Element of the Cost of Facilities Capital, and CAS 417 -- Cost of Money as an Element of the Cost of Capital Assets Under Construction: Can these two CAS be combined to form a single CAS?
  
  
• CAS 415 -- Accounting for the Cost of Deferred Compensation: Review the requirements to determine whether there are any specific types of deferred compensation plans or arrangements that warrant special treatment, particularly in light of specific GAAP pronouncements issued subsequent to the promulgation of CAS 415 in 1976 (for example, stock based compensation plans and employee stock ownership plans).
  
  
• CAS 416 -- Accounting for Insurance Costs: Does self-insurance, which is not recognized by GAAP, continue to be a viable concept for government contract accounting? If so, can any improvements be made in its application? For example, can the criteria for measurement of projected average loss and/or the circumstances where use of actual losses is permitted be improved? Also review the definition of catastrophic insurance. Does the term need to be revised to avoid potential confusion with its use in the FAR?
  
  
• CAS 418 -- Allocation of Direct and Indirect Costs: Can the term "homogeneous" be revised to improve or clarify its application? For example, if a company has two buildings, one that performs government contracts and one that performs commercial contracts, does the standard adequately describe the circumstances when the costs of these buildings can be included in the same indirect cost pool and when they cannot?
  
  
• CAS 420 -- Accounting for Independent Research and Development Costs and Bid and Proposal Costs (IR&D/B&P): Review the standard for possible revision as a result of the elimination of the FAR ceilings on IR&D/B&P costs. For example, does there continue to be a need to segregate B&P/IR&D costs by project? Also review the standard to determine if it can be eliminated by merging key elements with another CAS.

FOR FURTHER INFORMATION CONTACT: Barry McVay at 703-451-5953 or by e-mail to BarryMcVay@FedGovContracts.com.

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