Proposed Rule2024-13805
Conformance of Cost Accounting Standards to Generally Accepted Accounting Principles for Compensated Personal Absence and Depreciation of Tangible Capital Assets
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 27, 2024
Issuing agencies
Management and Budget OfficeFederal Procurement Policy Office
Abstract
The Office of Federal Procurement Policy (OFPP), Cost Accounting Standards Board (CAS Board or the Board), is releasing this advanced notice of proposed rulemaking (ANPRM) to elicit public comments on proposed changes to the Cost Accounting Standards (CAS) on conformance to Generally Accepted Accounting Principles (GAAP) related to CAS 408, Accounting for costs of compensated personal absence, and CAS 409, Cost accounting standard depreciation of tangible capital assets, to GAAP. This ANPRM follows issuance of an SDP 84 FR 9143 (March 13, 2019).
Full Text
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[Federal Register Volume 89, Number 124 (Thursday, June 27, 2024)]
[Proposed Rules]
[Pages 53575-53584]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-13805]
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OFFICE OF MANAGEMENT AND BUDGET
Office of Federal Procurement Policy
48 CFR Part 9904
Conformance of Cost Accounting Standards to Generally Accepted
Accounting Principles for Compensated Personal Absence and Depreciation
of Tangible Capital Assets
AGENCY: Cost Accounting Standards Board, Office of Federal Procurement
Policy, Office of Management and Budget.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Office of Federal Procurement Policy (OFPP), Cost
Accounting Standards Board (CAS Board or the Board), is releasing this
advanced notice of proposed rulemaking (ANPRM) to elicit public
comments on proposed changes to the Cost Accounting Standards (CAS) on
conformance to Generally Accepted Accounting Principles (GAAP) related
to CAS 408, Accounting for costs of compensated personal absence, and
CAS 409, Cost accounting standard depreciation of tangible capital
assets, to GAAP. This ANPRM follows issuance of an SDP 84 FR 9143
(March 13, 2019).
DATES: Comments must be in writing and must be received by August 26,
2024.
ADDRESSES: Respondents are strongly encouraged to submit comments
electronically to ensure timely receipt. Electronic comments may be
submitted to <a href="/cdn-cgi/l/email-protection#430c0e0100021001032c2e216d262c336d242c35"><span class="__cf_email__" data-cfemail="84cbc9c6c7c5d7c6c4ebe9e6aae1ebf4aae3ebf2">[email protected]</span></a>. Be sure to include your name, title,
organization, and reference case 2021-02. If you must submit by regular
mail, please do so at Office of Federal Procurement Policy, 725 17th
Street NW, Washington, DC 20503, ATTN: John L. McClung.
Privacy Act Statement: The CAS Board proposes the rule to elicit
public views pursuant to 41 U.S.C. 1502. Submission of comments is
voluntary. The information will be used to inform sound decision-
making. Please note that all comments received in response to this
document may be posted or released in their entirety, including any
personal and business confidential information provided. Do not include
any information you would not like to be made publicly available.
Additionally, the OMB System of Records Notice, OMB Public Input System
of Records, OMB/INPUT/01, 88 FR 20913 (available at
<a href="http://www.federalregister.gov/documents/2023/04/07/2023-07452/privacy-act-of-1974-system-of-records">www.federalregister.gov/documents/2023/04/07/2023-07452/privacy-act-of-1974-system-of-records</a>), includes a list of routine uses associated
with the collection of this information.
FOR FURTHER INFORMATION CONTACT: John L. McClung, Manager, Cost
Accounting Standards Board (telephone: 202-881-9758; email:
<a href="/cdn-cgi/l/email-protection#7d17121513531153101e1e1108131a4f3d12101f5318120d531a120b"><span class="__cf_email__" data-cfemail="ea80858284c486c4878989869f848dd8aa858788c48f859ac48d859c">[email protected]</span></a>).
SUPPLEMENTARY INFORMATION:
I. Background
On March 13, 2019, the Board published a Staff Discussion Paper (84
FR 9143) to solicit views with respect to the Board's initial
assessment of CAS 408 and CAS 409 to conform them, where practicable,
to GAAP. Respondents were invited to comment, among other things, on
the differences identified between CAS and GAAP, the frequency and
magnitude of issues identified with CAS non-compliances, and
recommendations of any changes to the Standards to conform them to
GAAP.
II. CAS 408 Overview and Conclusion
CAS 408 was initially published September 19, 1974, at 39 FR 33681.
The preamble for the original publication of CAS 408 states, ``This
Standard deals primarily with the
[[Page 53576]]
amount and time of recognition of costs of compensated personal
absence.'' and'' Detailed criteria for the allocation of costs of
compensated personal absence are not included in this Standard.'' \1\
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\1\ 39 FR 33681.
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The preamble explained the need for the Standard as follows: ``The
most significant problems and issues relate to the amount and timing of
recognition of costs of compensated personal absence appear to stem
from the reliance of existing procurement regulations on the Internal
Revenue Code [IRC] and income tax regulations to govern accounting for
these costs.'' The primary disadvantage identified in the initial
promulgation was in reliance on the IRC accrual accounting for vacation
pay that permitted, but did not require, the accrual of costs and the
lack of rules identifying the amount to be accrued. The preamble makes
no mention of GAAP rules related to compensated personal absences.
The principal need for the promulgation of the initial CAS 408,
which remains nearly unchanged, no longer exists. GAAP has been revised
significantly with additional content, since the original promulgation
of CAS 408 in 1974.
Furthermore, as explained in greater detail in the response to
public comments in Section III, below, a comparison of CAS 408 with
pertinent GAAP content revealed significant overlap and nearly
completely equivalent requirements. For each requirement in CAS 408,
the Board identified that a comparable requirement existed in GAAP,
FAR, or other CAS Standard that would protect the Government's
interests and promote uniformity and consistency. The alignment is so
close as to make CAS 408 nearly duplicative of GAAP. The Board reasoned
that where such comparable requirements exist between CAS and GAAP, the
CAS 408 requirement could be eliminated. Furthermore, the content
related to allocation in CAS 408 for which there is not equivalent
content in GAAP, the Board concluded that content in other CAS
Standards, such as CAS 418, is adequate to protect the Government's
interests.
The Board identified only one potential difference between CAS and
GAAP that required further consideration. This difference is the GAAP
requirement to accrue accumulated rights in addition to vested rights
in the year earned, unlike CAS which only requires the accrual of
entitled (i.e., vested) rights. As described below in Section III., the
Board has provisionally concluded that reliance on GAAP would
materially achieve the uniformity and consistency necessary for
Government contracting.
For the reasons stated above, the Board has provisionally concluded
that CAS 408 has become unnecessary to protect the Government's
interests which may be achieved through reliance on GAAP and other CAS
Standards. Therefore, the Board is considering a proposed rule that
would eliminate CAS 408 and seeks comment on such action in this ANPRM.
This action would be consistent with the Board's guiding principles for
conforming CAS to GAAP because it would eliminate CAS content to
minimize the burden on contractors while protecting the interests of
the Federal Government. Furthermore, the Board's provisional conclusion
on CAS 408 would align with the guiding principles to rely on coverage
in GAAP when it would materially achieve uniformity and consistency in
cost accounting without bias or prejudice to either party, rely on
other CAS Standards which may protect the Government's interests, and
eliminate CAS coverage no longer necessary.
The Board solicits public comments regarding the treatment of
changes to cost accounting practices to conform to GAAP that would be
made by this ANPRM, such as assigning the costs to earlier cost
accounting periods than CAS 408 permits. Specifically, should these
changes be treated as a required change, a unilateral change, or a
desirable change in accordance with 48 CFR 9903.201-4(a)(4)(i), (ii),
or (iii), respectively. In addition, the Board is interested in views
on the anticipated impact, if any, of these changes and whether these
changes should be exempted from the required cost impact process.
III. Summary of Public Comments for CAS 408
The Board received seven public comments to the SDP. These comments
came from companies, industry associations, professional associations,
and individuals. The Board appreciates the efforts of all parties that
submitted comments and found the depth and breadth of the comments to
be informative.
In addition to the public comments, this ANPRM reflects research
accomplished by the Board in the respective subject areas. The Board
used the side-by-side comparison of CAS and GAAP requirements to
identify any material differences. Unique CAS requirements were
assessed for their necessity in protecting the interests of the
Government. The Board also examined if the existing requirements in
other CAS standards or in other relevant rules may protect the
interests of the Government. This ANPRM is issued by the Board in
accordance with the requirements of 41 U.S.C. 1502(c).
Responses to specific comments for CAS 408:
Potential CAS-GAAP difference: Accumulated rights. The SDP
identified and described one potential difference between CAS and GAAP.
The Board observed that CAS limits recording cost in the year earned to
employees' who are entitled to payment if terminated, where entitlement
is considered earned when an employer would be required to pay the
employee for the benefit, in the event of employee termination on a
basis other than disciplinary action. The corresponding concept to
``entitlement'' in GAAP is ``vested.'' The Board observed that in
addition to vested rights, GAAP provides for cost recognition in the
year earned of ``accumulated rights.'' Accumulated rights are those
benefits earned during the period that may be carried forward to future
periods, although not paid if an employee is terminated. The Board made
various queries, among them whether the CAS and GAAP requirements are
equivalent.
Comment: Three respondents provided comments to this potential
difference identified by the Board. All three stated that the
requirements of CAS and GAAP are materially equivalent. Two respondents
observed that ``GAAP requires accrual if certain conditions are met,
which closely mirror the definition of entitlement. In close alignment
with CAS, there is a requirement that if a liability (obligation to pay
the employee) exists, then the costs are to be accrued; otherwise, as
with CAS, the cost of the benefits would be recognized in the year
taken on a cash basis.'' The respondents further observed that, ``GAAP
requires accrual of employee's compensation for future absences if all
of these criteria are met: (1) The employer's obligation is
attributable to employee's services already rendered; (2) The
obligation relates to rights that either: vest-those rights for which
the employer has an obligation to make payment even if an employee
terminates; thus, they are not contingent on an employee's future
service; or accumulate--those rights that are earned and when unused
may be carried forward to one or more periods subsequent to that in
which they are earned (although the amount an employee can carry
forward may be limited); (3) Payment of the
[[Page 53577]]
compensation is probable; and (4) The amount can be reasonably
estimated.''
Response: Both CAS and GAAP require the costs of compensated
personal absences to be assigned in the year in which the employee
right to payment is earned. GAAP permits, in certain circumstances, the
cost of non-vested personal absence costs, where the employee has no
right to payment, to be assigned in the year earned but not necessarily
paid. In contrast, CAS 408 requires the cost of non-vested personal
absences to be assigned in the period in which payment is made.
Recording costs in the period earned achieves uniformity and
consistency, as well as predictability and stability, because employee
rights to payment are generally earned evenly over accounting periods.
By comparison, the use of the rights by employees, for example taking
vacation time, is generally not even over accounting periods, so if the
cost was recorded when used, uniformity and consistency would be
compromised.
CAS limits the costs assigned to the period earned to those for
which entitlement exists. The term ``vested rights'' in GAAP are those
for which the employer has an obligation to make payment even if the
employee terminates; thus, they are not contingent on an employee's
future service. GAAP, however, also requires that the cost for which
employees have accumulated rights be assigned in the year earned.
``Accumulated'' means that earned but unused rights to compensated
absences may be carried forward to one or more periods subsequent to
the extent that it is probable that employees will be paid in
subsequent years for the accumulated rights. The Board notes that, like
CAS, GAAP specifically requires anticipated forfeitures to be
considered in determining the accruals for personal absence costs.
Therefore, if accumulated rights have a high forfeiture rate, there
would be little net cost accrued in accordance with GAAP. Conversely,
if accumulated rights have a low forfeiture rate, by accruing their
cost in the year earned in accordance with GAAP requirements, this
would achieve a higher degree of uniformity and consistency than CAS
with regard to the recognition of costs for compensated personal
absences. In either case, whether forfeiture rates are high or low,
conformance to GAAP rules from CAS 408 may result in the cost of some
non-vested personal absences to be assigned to earlier cost accounting
periods than CAS 408 permits. Therefore, the rules for transitioning to
a revised cost accounting practice in 48 CFR 9903.201-4 would be
applicable. The Board is considering a proposed rule that would
eliminate the CAS requirements to record costs when entitlement is
earned and rely on GAAP to achieve the uniformity and consistency
required for Government contracting. This action would be consistent
with the Board's guiding principle to eliminate content from CAS where
reliance on coverage in GAAP would materially achieve uniformity and
consistency in cost accounting, without bias or prejudice to either
party.
Allocation of the cost of compensated personal absence. The side-
by-side analysis in the SDP identified two areas with allocation
requirements in CAS (CAS 408-40(b), CAS 408-50(e)) with no
corresponding content in GAAP. The Board asked if requirements in other
CAS addressed this difference.
Comment: Two respondents provided comments to the Board's query.
Both respondents believe that other CAS requirements address this
difference.
Response: The Board has provisionally concluded that although GAAP
does not have requirements for the allocation of the costs to cost
objectives, as a practical matter the allocation of these costs to
final cost objectives (i.e., contracts) would be required by Government
contractors to achieve recovery through contract billings. Most often,
the allocation of these costs would be through fringe benefit cost
pools whose allocation methods used by contractors would be covered by
other Standards, such as CAS 418. The Board is considering a proposed
rule that would eliminate the CAS 408 requirements related to
allocation. The other CAS requirements, such as those in CAS 418, would
be relied on to achieve the uniformity and consistency required for
Government contracting. This action would be consistent with the
Board's guiding principle to eliminate content from CAS where existing
requirements in other CAS Standards may protect the Government's
interests.
Application of entitlement criteria. The side-by-side analysis in
the SDP compared the requirements in CAS with GAAP for the application
of the requirements for determining when entitlement is earned. The
Board observed that in order to apply GAAP, each compensated absence
plan (e.g., vacation time, sick time, military leave) would need to be
evaluated separately. The Board queried whether the CAS and GAAP
requirements are equivalent.
Comment: Three respondents provided comments to the Board's query.
All three respondents stated that the CAS and GAAP requirements are
equivalent. Two respondents observed on this equivalency that, ``The
rules are written to set out criteria that need to be applied
separately to each type of compensated personal absence, as CAS
requires.''
Response: The Board has provisionally concluded that in order to
determine if entitlement, vesting or accumulating rights exist, each
plan would need to be assessed separately whether applying CAS or GAAP
because the facts of each plan would be different. While CAS refers to
the separate consideration of each plan, GAAP refers to ``individual
facts and circumstances'' to reflect the need to assess the requirement
to accrue a liability. When the facts of a plan are changed, an
assessment regarding entitlement/vesting or accumulation would need to
be made to comply with both CAS and GAAP. The Board is considering a
proposed rule that would eliminate the CAS requirement to apply CAS by
individual plan and rely on GAAP to achieve the uniformity and
consistency required for Government contracting. This action would be
consistent with the Board's guiding principle to eliminate content from
CAS where reliance on GAAP would materially achieve uniformity and
consistency in cost accounting, without bias or prejudice to either
party.
Calculating the accrual amount. The side-by-side analysis in the
SDP compared the requirements in CAS with GAAP for the calculation of
the accrued liability. The Board made various queries, among them
whether the CAS and GAAP requirements are equivalent.
Comment: Two respondents provided comments to the Board's queries.
Both respondents commented that ``. . . liabilities under GAAP are
recorded based on current wage rates.'' The respondents observed that
like CAS, GAAP does allow for the accrual of personal absences based on
salary rates expected to be in effect when the employee uses the
vacation or sick days, but that this is a less common practice. The
same two respondents commented on all of the Board's queries with
regard to the CAS requirements for the determination of the employer's
liability that CAS and GAAP are equivalent.
Response: The Board has provisionally concluded that consistent
with CAS, GAAP requires that the liability be accrued for all
compensated personal absence plans when certain conditions are met
(e.g., employee has rights to payment, payment is probable and the
amount can be reasonably estimated). In addition, both CAS and GAAP
require the estimated liability be reduced for the same concept, which
is ``anticipated non-utilization'' or ``estimated forfeitures,''
respectively.
[[Page 53578]]
GAAP requires the accrual of the current liability in the period. This
is commonly calculated using current wage rates. In contrast, CAS is
permissive in allowing the liability to be measured consistently using
current or anticipated wage rates. CAS provides for calculation of the
liability by individual or group and use of sample or other appropriate
means, with the critical point being that the liability is ``estimated
with reasonable accuracy.'' GAAP requires that the liability be
``reasonably estimated,'' which is consistent with the objective of the
CAS language. Although CAS has more content than GAAP, the content
provides options without prescribing exactly how the calculation must
be done, best exemplified by the phrase ``or other appropriate means.''
Nevertheless, it is clear that the goal of both CAS and GAAP is a
reasonably accurate estimate of the liability, which may be achieved
through application of either requirements. The Board notes that none
of the commenters raised concerns about the potential elimination of
this content in CAS or reliance on the less detailed GAAP, relative to
calculation of the liability.
The Board is considering a proposed rule that would eliminate the
CAS requirements for calculation of the employer's liability and
instead rely on GAAP to achieve the uniformity and consistency required
for Government contracting. This action would be consistent with the
Board's guiding principle to eliminate content from CAS where reliance
on GAAP would materially achieve uniformity and consistency in cost
accounting, without bias or prejudice to either party.
General recommendations and compliance history. The SDP asked for
recommendations of any changes to CAS 408 to conform it to GAAP.
Comment: Four of the seven respondents recommended that the Board
eliminate the entire Standard. One respondent stated that ``The
differences [between CAS and GAAP] are not material.'' Another
respondent recommended removal of CAS 408 and allowing contractors to
follow GAAP in its place, further observing that ``The standard is
unnecessary . . .'' One of the large industry associations observed in
their comments that, ``There is virtually no history of CAS 408 non-
compliance issues raised at AIA member companies.'' Another
professional association similarly observed that ``A survey of FEI-
CGB's membership shows virtually no history of contractor non-
compliance with CAS 408 . . .''
Response: The Board has provisionally concluded that CAS 408 and
the corresponding requirements in GAAP are not materially different.
Furthermore, the lack of material non-compliance provides evidence of
little risk to the Government should CAS 408 be eliminated. The Board
is considering a proposed rule that would eliminate CAS 408 and instead
rely on GAAP to achieve the uniformity and consistency required for
Government contracting. This action would be consistent with the
Board's guiding principle to eliminate content from CAS where reliance
on GAAP would materially achieve uniformity and consistency in cost
accounting, without bias or prejudice to either party.
IV. CAS 409 Overview and Conclusion
Based on the preamble for CAS 409 published in the Federal Register
for its initial promulgation on January 29, 1975, depreciation cost was
an issue since the 1960's. A number of Contractors at that time
primarily relied on the Internal Revenue Code (IRC) to measure
depreciation costs. The IRC contained accelerated depreciation methods
for tax purposes, and the Board viewed this as inequitable and improper
cost accounting because the methods did not match the depreciation
expense over the useful life of the asset.
GAAP now prohibits using the accelerated depreciation methods in
the IRC for financial reporting purposes if the amounts do not fall
within a reasonable range of the asset's useful life. Thus, the
principal concern for the promulgation of CAS 409 may no longer exist.
GAAP has added significant content since the initial promulgation of
CAS 409, while CAS for the most part has not changed subsequent to the
initial promulgation. A comparison of the current requirements in CAS
409 with GAAP reveal nearly completely equivalent content.
Additionally, FAR includes substantive content regarding the
allowability of depreciation costs in certain circumstances that may
further protect the interests of the Government.
A comparison of CAS 409 with pertinent GAAP content revealed
significant overlap and nearly completely equivalent requirements. For
each requirement in CAS 409, the Board identified that a comparable
requirement existed in GAAP, Federal Acquisition Regulation (FAR), or
other CAS Standard that would protect the Government's interests, with
the exception of the requirements at CAS 409-50(e)(5), CAS 409-
50(j)(1), and CAS 409-50(j)(4). The alignment is so close as to make
CAS 409 nearly duplicative of GAAP. The Board reasoned that where such
comparable requirements exist between CAS and GAAP, the CAS 409
requirement could be eliminated. With respect to the three requirements
in CAS 409 related to allocation cited above, for which there is no
equivalent content in GAAP, the Board concluded that content in other
CAS Standards is not adequate to protect the Government's interests.
For the reasons stated above, the Board has provisionally concluded
that most of CAS 409 has become unnecessary to protect the Government's
interests which may be achieved through reliance on GAAP and existing
requirements in other CAS Standards and the FAR. Therefore, the Board
is considering a proposed rule that would eliminate CAS 409 with the
exception of three requirements in CAS 409-50(e)(5), CAS 409-50(j)(1),
and CAS 409-50(j)(4), which would be retained.
Because of the limited amount of content that would be proposed for
retention, the Board is considering a proposed rule that would relocate
the three requirements to other Standards, specifically a new CAS 406-
50(g)(1) and (2) and a new CAS 418-50(h), instead of maintaining an
entire Standard 409. This proposed action would be consistent with the
Board's guiding principles to eliminate content from CAS where GAAP,
other CAS Standards, or other relevant rules may protect the interests
of the Government. In addition, the Board provisionally concluded that
moving the retained requirement to another Standard, rather than
maintain CAS 409 with minimal content, would best achieve the goal of
streamlining CAS. The Board is seeking comments on such actions in this
ANPRM.
As detailed in the side-by-side analysis in the SDP, and discussed
in the details below, so far, the Board has not identified any instance
where the elimination of CAS 409, as contemplated, would result in a
change to a contractor's disclosed cost accounting practices for
government contracts. The Board is interested in comments on this
provisional determination, and any instances that have not been
considered.
V. Summary of Public Comments for CAS 409
The Board received seven public comments to the SDP. These comments
came from companies, industry associations, professional associations,
and individuals. The Board appreciates the efforts of all parties that
submitted comments and found the depth and
[[Page 53579]]
breadth of the comments to be informative.
In addition to the public comments, this ANPRM reflects research
accomplished by the Board in the respective subject areas. The Board
used the side-by-side comparison of CAS and GAAP requirements to
identify any material differences. Unique CAS requirements were
assessed for their necessity in protecting the interests of the
Government. The Board also examined if the existing requirements in
other CAS standards or in other relevant rules may protect the
interests of the Government. This ANPRM is issued by the Board in
accordance with the requirements of 41 U.S.C. 1502(c).
Responses to specific comments for CAS 409:
Potential CAS-GAAP difference: Record keeping related to service
lives. The SDP identified the record-keeping to support selection of
service life as a potential difference between CAS and GAAP. CAS 409-
50(e) specifically requires record keeping adequate to show the age of
assets at retirement to support the selection of service lives. GAAP
has no explicit requirement for such record keeping. The Board was
interested in whether the record keeping, as required by CAS, would be
expected to continue for GAAP regardless of the elimination of
requirements in CAS 409. In particular, the SDP asked which detailed
records contractors would keep and for what purpose, if the requirement
in CAS 409 to support service lives with actual historic records was
eliminated. The Board made various queries, among them the detailed
records contractors would keep and for what purpose if the requirement
in CAS 409 to support service lives with actual historic records was
eliminated.
Comment: Three respondents responded to this query. All three of
the respondents commented that asset records maintained during the
ordinary course of business would be expected to remain the same
without the CAS requirement. Two respondents provided similar detailed
reasoning supporting this conclusion. One stated, ``AIA agrees that
during the ordinary course of business most contractors maintain some
records of assets through disposition that would include dates the
assets were put in use and disposed. Notably, contractors that are not
subject to CAS 409 are able to demonstrate allowability of their
depreciation costs by keeping records that support allowability. Other
factors that would encourage recordkeeping on asset acquisition and
disposition include: Enterprise Resource Planning (ERP) system asset
modules, tax record keeping requirements, the FAR record keeping clause
and GAAP requirements to match expected expenses with period of
benefit.''
Response: The Board appreciates these comments and the reasoning
provided by the respondents. Although GAAP does not have prescriptive
language on record-keeping, contractors would still maintain records
for assets, including ready for use and disposition dates, to support
audits of financial reporting and tax filings, in particular. At large
companies of the size to perform contracts subject to CAS 409, software
applications would typically be used for asset accounting, which would
standardly contain such information. The Board has provisionally
concluded that the explicit CAS requirement for record keeping is
unnecessary and is considering a proposed rule that would eliminate the
requirement in CAS 409. This action would be consistent with the
Board's guiding principle to eliminate content from CAS which is no
longer necessary.
Potential CAS-GAAP difference: Selection of service lives. The SDP
identified the selection of service life as a potential difference
between CAS and GAAP. CAS 409-50(e) requires that estimated service
lives be based on supporting records of actual experienced lives of the
contractor. GAAP uses the term ``useful life,'' while CAS uses the term
``service life'' with the same meaning. GAAP requires that the cost of
an asset be spread over the expected useful life of the asset, but does
not require that the expected useful life of the asset be based solely
on the contractor's asset experience history. Although actual asset
experience history may be a consideration in the selection of service
lives in accordance with GAAP, it would not be the only consideration.
The Board made various queries, among them the impact to service lives
used if the requirement to use estimated service lives based on
contractor historical experience was eliminated.
Comment: Three respondents provided comments to the SDP queries for
the potential difference between CAS and GAAP in selecting service
lives. One respondent observed that ``Under GAAP, the service life of
the asset is to be the contractor's best estimate of the useful life
and not expressly required (nor blindly constrained) to be based on the
contractor's actual asset history. Neither is there a requirement that
a contractor justify estimated service lives which are shorter than
such experienced lives when the persuasive justification exists for the
service life assigned.'' The respondent further observed, ``If a
contractor uses arbitrary useful lives with no basis to support the
useful life of the asset, they would violate GAAP.''
One of the respondents offered reasoning regarding the use on
historic experience in selecting service lives, ``Historic context is
important, but its utility is diminished due to rapid advances in
technology in modern day. Historically, automobile lives were often
impaired by corrosion of ferrous metals, whereas today, more and more
automobile parts are made of composites impervious to corrosion. On the
other end of the spectrum, a personal computer may have historically
had a certain useful life that coincided with its physical durability,
over time the pace of technical obsolescence has reduced practical
useful lives.'' Another respondent similarly observed, ``Experience may
not be a good criterion for future performance. In the past, when most
things were mechanical prior to 1970, mechanical items could have a
predictable useful life. Now, when items are more digital and perhaps
deemed expendable, these items will probably not last as before.
Conditions have changed.''
Response: Both CAS and GAAP require consideration of actual asset
experience when selecting service lives and reviewing depreciation
estimates and making changes to them, as necessary. The Board notes
that the existing CAS language provides for some reliance on GAAP
records for estimated service lives before actual experience exists,
although CAS reverts solely to actual experience once it is available.
The Board has provisionally concluded that conditions have changed, in
particular with regard to technological advances in a variety of asset
categories from automobiles to production equipment, and sole reliance
on actual asset history may no longer reflect the best estimate of
future service lives for assets.
Both CAS and GAAP require selection of service life or useful life,
respectively, which is a reasonable estimate of the accounting periods
over which services are expected to be obtained from the use of the
asset. CAS and GAAP share a common objective, which is uniformity and
consistency. Because GAAP and CAS require adopting a depreciation
practice for service lives, following it consistently, and making
changes if reviews of actual experience are needed, it follows that
compliance with either CAS or GAAP should achieve a materially similar
result. The Board has
[[Page 53580]]
provisionally concluded that based on the changed conditions,
development of service lives should include considerations in addition
to a contractor's actual asset experience history to reflect a
reasonable estimate of the service life. The Board is considering a
proposed rule that would eliminate the CAS requirements for determining
service lives and rely on GAAP to achieve the uniformity and
consistency required for Government contracting. This action would be
consistent with the Board's guiding principle to eliminate content from
CAS where reliance on GAAP would materially achieve uniformity and
consistency in cost accounting, without bias or prejudice to either
party.
Potential CAS-GAAP difference: Gains/losses on dispositions within
12 months of transfer. The SDP identified as a potential CAS-GAAP
difference the treatment of gains and losses for tangible capital
assets dispositioned within twelve months of a less than arm's-length
transaction. CAS 409-50(j)(4) requires that gains and losses on
disposition of tangible capital assets transferred in other than an
arm's-length transaction and subsequently disposed of within 12 months
from the date of the transfer shall be assigned to the transferor. GAAP
has no comparable requirement. The Board made various queries, among
them: the frequency of such transfers; the magnitude of the gains/
losses experienced on the assets transferred; and how the selection of
service life, depreciation method, and residual value mitigate the risk
of a significant gain/loss at disposition.
Comment: Two respondents provided comments to the SDP queries. One
large industry association commented, ``This CAS 409 requirement
seemingly intends to address a contractor seeking to thwart sharing a
gain that offsets previous depreciation with the government by a non-
arm's-length transfer, such as through a related party at less than
fair market value. This action would seem to run afoul of other
prohibitions with more serious consequences than those resulting from
violating CAS regulations. The U.S. Securities and Exchange Commission
(SEC) would find such a practice fraudulent and manipulative. AIA
believes that the elimination of CAS 409 and the requirement related to
asset dispositions within 12 months of transfer will have no influence
on the practices used by contractors that maintain fair and transparent
financial reporting.'' The other respondent, a group of asset
management experts, suggested eliminating the CAS requirement,
observing that such transfers would be ``extremely rare,'' however
acknowledging there ``can be reasonable situations where in a plant
closing, one from another unit believes an available excess unit would
be useful but upon receipt and closer evaluation by others, the item is
determined not useful. Essentially a judgment error.'' This respondent
similarly observed that ``Any abusive transactions are prohibited and
would be unreasonable and unallowable'' and ``Normal internal controls
will prevent and detect abusive actions.''
Regarding the magnitude of the gains/losses experienced on such
transfers, the large industry association commented, ``In general,
selection of an appropriate service life, depreciation method, and
residual value for a tangible capital asset would result in a net book
value during the asset's lifetime that mitigates the risk of a
significant gain/loss at disposition.''
Response: The Board initially identified the treatment of these
gains/losses as a potential difference between CAS and GAAP. The
Board's concern was that a contractor would transfer an asset between
segments just prior to disposition with no purpose other than to
recover a loss or avoid sharing a gain. There are several mitigating
factors to this concern.
First, regarding the recovery of a loss on an asset transferred to
a new segment, the asset may have no causal or beneficial relationship
to the work of the new segment and therefore the depreciation cost and
any gain/loss on disposition would be unallocable to contracts at the
new segment receiving the asset. Thus, the risk of Government contracts
being allocated a loss on the disposition of an asset which was never
used to provide services for those contracts is mitigated.
Second, most assets depreciate in value rather than appreciate,
meaning the likelihood is greater of a loss on disposition than a gain,
especially a sizable gain which is most likely to occur for land, which
is not depreciable property subject to CAS 409. Thus, the risk of the
Government contracts not sharing in a gain on disposition seems low.
Third, for property, plant, and equipment (excluding buildings) if
the service lives reasonably align with experience (as required by both
CAS and GAAP) and the method of depreciation reasonably aligns with
productivity of the asset (as required by both CAS and GAAP), then the
net book value of the asset during its lifetime of use should be
generally aligned with its fair value, meaning any gain or loss from
disposition at fair value would be minimized.
Finally, if an asset is near the end of its useful life and the net
book value (remaining depreciable value) is approaching the residual
value, the amount of any gain or loss may be immaterial.
Although there are a variety of mitigating factors, the Board
believes this difference between CAS and GAAP may create an exposure of
unknown materiality. Furthermore, should the Board eliminate the CAS
requirements for service life, residual value and depreciation method
and instead rely on GAAP to achieve uniformity and consistency, it is
unclear to the Board what impact, if any, this change to GAAP would
have on the magnitude of these gains/losses on disposition. For these
reasons, the Board is considering a proposed rule that would retain the
requirement in CAS 409-50(j)(4) and move it to new CAS 418-50(h). This
proposed action would be consistent with the Board's guiding principles
to eliminate content from CAS where GAAP, other CAS Standards, or other
relevant rules may protect the interests of the Government. In
addition, the Board provisionally concluded that moving the retained
requirement to another Standard, rather than maintain CAS 409 with
minimal content, would best achieve the goal of streamlining CAS. The
Board is seeking comments on such actions in this ANPRM.
Potential CAS-GAAP difference: Residual values. The SDP identified
as a potential CAS-GAAP difference the CAS requirement that no
depreciation costs can be recognized, which would significantly reduce
book value of a tangible capital asset below its residual value. The
Board made various queries. Among them these queries, the Board asked
how contractors set residual values. Additionally, the Board asked how
often for a particular asset the residual value used for CAS and a
salvage value used for GAAP are the same.
Comment: Two respondents provided comments to the SDP queries. One
large industry association commented, ``Residual value is determined by
the value a contractor believes an asset will be worth after its period
of use . . . Incorrect residual value would consistently lead to
unexpected gains or losses during asset disposition that would indicate
incorrect application (thus a violation) of the fundamental GAAP
matching principle.''
The same large industry association also observed, ``GAAP (see ASC
360-10-35-4) includes a requirement to deduct the salvage value, which
has the
[[Page 53581]]
same meaning as residual value in CAS, from the value of the tangible
capital asset to be depreciated.'' The inference being that if residual
value (CAS) and salvage value (GAAP) share the same definition, the
amount estimated for each must also be the same.
Response: The Board has provisionally concluded that residual value
for CAS and salvage value for GAAP have the same meaning and,
therefore, would be expected to be the same estimated amount. Both CAS
and GAAP require the residual value or salvage value, respectively, be
subtracted from the cost of the capital asset to establish the
depreciable value. CAS sets a threshold of ten percent residual value
for requiring an adjustment to calculate the depreciable value, while
GAAP sets no threshold. In practice, the Board understands most assets
are estimated to have a residual or salvage value of zero. Therefore,
for most assets, the depreciable value for both CAS and GAAP is the
same as the cost of the capital asset. For assets whose residual value
is greater than zero, if the depreciable amount is calculated correctly
(asset cost less residual cost), the net book value of the asset when
fully depreciated would equal the residual value. When net book value
of the asset is equal to the residual value no additional depreciation
would be recognized, for CAS or GAAP, which would reduce the net book
value below the residual value. In addition, should a contractor record
any depreciation which would reduce the net book value of the asset
below its residual value, FAR 31.205-11(a) would require treatment of
that depreciation amount as unallowable.
The Board is considering a proposed rule that would eliminate the
requirements in CAS 409 related to residual value and rely on FAR to
mitigate the risk of excessive depreciation as an unallowable cost to
protect the Government's interests, and instead rely on GAAP to achieve
the uniformity and consistency required for Government contracting.
This proposed action is consistent with the Board's guiding principles
to eliminate content from CAS, where reliance on GAAP would materially
achieve uniformity and consistency and other relevant rules, such as
the FAR, may protect the Government's interests.
Assignment of costs to cost accounting periods. The side-by-side
analysis in the SDP compared the requirements in CAS with GAAP for the
assignment of the cost of tangible capital assets to cost accounting
periods. The Board queried whether the CAS and GAAP requirements are
equivalent.
Comment: Three respondents provided comments to the side-by-side
analysis. All three responded that the concepts between CAS and GAAP
for assigning tangible capital assets to cost accounting periods are
equivalent.
Response: As with CAS, the purpose of corresponding GAAP
requirements for depreciation accounting is to distribute the cost of
an asset to accounting periods in a systematic and rational manner. In
addition, CAS and GAAP share the concept that the depreciation costs be
identified with the accounting periods over the expected life of the
asset during which services are obtained from the use of the asset.
The approach is the same for both CAS and GAAP, which is to
distribute the cost of a tangible asset, less its estimated residual
value (CAS) or salvage value (GAAP), over the estimated service life
(CAS) or useful life (GAAP), using a method of depreciation that
reflects the pattern of consumption (CAS) or productivity (GAAP) of the
asset over its life. In addition, when a capital asset is
dispositioned, a gain or loss is recognized for both CAS and GAAP.
The Board has provisionally concluded that the fundamental
requirements in CAS and GAAP for the concepts of depreciable cost,
service lives, and depreciation methods are equivalent. Therefore, the
Board is considering a proposed rule that would eliminate the CAS
requirements for depreciable cost, service lives, and depreciation
methods, and instead rely on GAAP to achieve the uniformity and
consistency required for Government contracting. This action would be
consistent with the Board's guiding principle to eliminate content from
CAS where reliance on GAAP would materially achieve uniformity and
consistency in cost accounting, without bias or prejudice to either
party.
Allocation of depreciation to cost objectives. The side-by-side
analysis in the SDP identified two areas with allocation requirements
in CAS (CAS 409-40(b), CAS 409-50(k)) with no corresponding content in
GAAP. The Board asked if requirements in CAS 402 and CAS 418 addressed
this difference.
Comment: Two respondents provided comments to the Board's query.
Both respondents believe that other CAS requirements address this
difference. One respondent commented, ``While CAS 409-40(b)
specifically addresses allocation, it seems CAS 418, that purports to
address allocation of all costs, should not be wanting if it alone
provided the requirements for allocation of depreciation costs assigned
to a period.''
Response: Although GAAP does not have requirements for the
allocation of the costs to cost objectives, as a practical matter the
allocation of these costs to final cost objectives (i.e., contracts)
would be required by Government contractors to achieve recovery through
contract billings. The allocation content in CAS 409 is generally
covered by applicable CAS requirements in other Standards. CAS 402-30
provides definitions of ``direct costs,'' which are any costs which are
identified specifically with a particular final cost objective, and
``indirect costs,'' which are costs not directly identified with a
single final cost objective, but identified with two or more final cost
objectives or with at least one intermediate cost objective. These
definitions provide a framework for the treatment of depreciation costs
as either direct or indirect, as with CAS 409-40(b)(1)-(3).
Furthermore, CAS 402-40 requires that ``All costs incurred for the
same purpose, in like circumstances, are either direct costs only or
indirect costs only with respect to final cost objectives. No final
cost objective shall have allocated to it as an indirect cost any cost,
if other costs incurred for the same purpose, in like circumstances,
have been included as a direct cost of that or any other final cost
objective . . .'' Therefore, as required in CAS 409-40(b)(1) treating
like assets used for similar purposes in the same manner, the
application of CAS 402-40 would achieve the same result.
Additionally, CAS 418 provides more detailed requirements for the
allocation of direct and indirect costs than exist in CAS 409. For
example, CAS 418-40(c)(2) requires the use of a resource consumption or
output measure allocation base. The gain or loss on disposition of an
asset would be allocated using the same practice for the asset
depreciation, as the amounts would be subject to the same direct and
indirect cost definitions and treatment under CAS 418, which is
required to be followed consistently.
The Board has provisionally concluded that other Standards address
the allocation of the depreciation costs and would protect the
Government's interests. Therefore, the Board is considering a proposed
rule that would eliminate the CAS 409 requirements related to
allocation, and instead the other CAS requirements (e.g., CAS 402, CAS
418) would be relied on to achieve the uniformity and consistency
required for Government contracting. This action would be consistent
with the Board's guiding principle to eliminate content from CAS where
existing requirements
[[Page 53582]]
in other CAS Standards may protect the Government's interests.
Selection of depreciation method. The side-by-side analysis in the
SDP compared the requirements in CAS with GAAP for the selection of the
method of depreciation for tangible capital assets. The Board made
various queries, among them whether the selection criteria in CAS and
GAAP of matching the pattern of asset consumption to the method of
depreciation are equivalent.
Comment: Three respondents provided comments to these queries. All
three commented that the selection criteria in CAS and GAAP of matching
the pattern of asset consumption to the method of depreciation are
equivalent. Both a large industry association and a professional
association observed, ``CAS 409 provides criteria for assigning costs
of tangible capital assets to cost accounting periods and for
consistent allocation of those costs to benefitted cost objectives over
the service lives of the assets. GAAP similarly require that the cost
of an asset be spread over the expected useful life of the asset in
such a way as to allocate it as equitably as possible to the periods
during which services are obtained from the use of the asset.''
Response: The Board has provisionally concluded that the
requirements of CAS and GAAP are equivalent. CAS already relies on GAAP
for selecting the method of depreciation unless the method does not
reflect the consumption of services or is unacceptable for Federal
income tax purposes. Because GAAP now requires that the method of
depreciation satisfactorily reflects the expected productivity of the
asset during its useful life, the condition in CAS 409-50(f)(1)(i)
would not be met. Both CAS and GAAP generally reject the use of
accelerated depreciation using the Internal Revenue Service rules, so
the condition in CAS 409-50(f)(1)(ii) would not be met. Thus, any
method selected for GAAP would now be acceptable for CAS 409.
The Board is considering a proposed rule that would eliminate the
CAS 409 requirements related to the selection of the depreciation
method, and instead GAAP be relied on to achieve the uniformity and
consistency required for Government contracting. This action would be
consistent with the Board's guiding principle to eliminate content from
CAS where reliance on GAAP would materially achieve uniformity and
consistency in cost accounting, without bias or prejudice to either
party.
Changes in service life, residual value, or method of depreciation.
The side-by-side analysis in the SDP compared the requirements of CAS
with GAAP for reexamination and changes to the service life, residual
value, or method of depreciation for tangible capital assets. The Board
made various queries, among them whether CAS and GAAP are equivalent.
Comment: Three respondents provided comments to the queries. Two
respondents commented CAS and GAAP are equivalent. The third respondent
commented CAS and GAAP are mostly equivalent and identified the
difference as the impairment reviews that are required by GAAP. This
respondent noted the related content in FAR 31.205-11(g)(2), which
treats the costs of a write-down from carrying value to fair value as a
result of impairment as an unallowable cost in the period recorded.
Response: Both CAS and GAAP require that once adopted, an
accounting practice is followed consistently from period to period. In
addition, both CAS and GAAP require that service lives and useful
lives, respectively, and residual values and salvage values,
respectively, be reviewed and changed, as necessary. When a change is
made, both CAS and GAAP apply it prospectively and do not require
retroactive adjustment to prior accounting periods for existing assets.
The Board is considering a proposed rule that would eliminate the CAS
409 requirements for reexamination and changes to the service lives,
residual value, or method of depreciation for tangible capital assets
be eliminated and instead GAAP relied on to achieve the uniformity and
consistency required for Government contracting.
There is currently no content in CAS that addresses the treatment
of the costs of a write-down from carrying value to fair value, as a
result of impairment. Regarding this treatment of these costs for
Government contracting, the Board proposes to continue relying on the
existing requirement in FAR 31.205-11(g)(2).
Recognition of gains or losses from disposition. The side-by-side
analysis in the SDP compared the requirements in CAS with GAAP for the
treatment of changes in service lives, residual value, or method of
depreciation for tangible capital assets. The Board made various
queries, among them whether the CAS and GAAP requirements for
recognition of a gain or loss on disposition in the period in which it
occurs are equivalent.
Comment: Three respondents provided comments to these queries. All
three commented that the CAS and GAAP requirements for recognition of a
gain and loss on disposition in the period in which it occurs are
equivalent.
Response: The Board agrees that the measurement of gains and losses
for CAS and GAAP are equivalent. Both CAS and GAAP require the
recognition of gains and losses related to the disposition of tangible
assets and measure the gain or loss as the difference between the
carrying value of the asset, also referred to as the net book value or
undepreciated balance, and the amount of consideration received, also
referred to as proceeds or net amount realized. There are certain
circumstances in which gains and losses on the disposition of tangible
capital assets are not recognized for CAS, as described in CAS 409-
50(j)(2)(i) and (ii). The same language is also found in FAR 31.205-
16(f)(1) and (2).
CAS 409-50(j)(2)(i) requires that gains and losses on dispositions
in which assets are grouped and that such gains and losses are
processed through the accumulated depreciation account. The Board is
not aware of any use of this practice by contractors nor did any
respondent raise concerns about this requirement. The Board proposes
that this CAS 409 requirement be eliminated and GAAP be relied on to
achieve the uniformity and consistency required for Government
contracting.
CAS 409-50(j)(2)(ii) addresses two circumstances, where an asset is
given in exchange as part of the purchase price of a similar asset and
where disposition of an asset results from an involuntary conversion.
When an asset is given in an exchange, CAS includes the gain or loss in
computing the depreciable cost of the new asset. Unlike CAS, GAAP
requires recognition of gains and losses for asset exchanges
(nonmonetary transactions) when it is clearly evident the fair value of
the assets exchanged is not comparable. CAS does not specifically
address exchanges of assets with different fair values. Most exchanges
would presumably be arm's length transactions, so it seems unlikely
that such exchanges would be of assets with considerably different fair
values. Therefore, for both CAS and GAAP in most circumstances, the
computation of the depreciable cost of the new asset would include the
gain or loss. The Board proposes that this CAS 409 requirement be
eliminated and GAAP be relied on to achieve the uniformity and
consistency required for Government contracting.
The second circumstance addressed in CAS 409-50(j)(2)(ii) is where
disposition of an asset results from an involuntary conversion. CAS
provides two options for the treatment of a gain or loss on assets
replaced as a result of an involuntary conversion (e.g., asset is
[[Page 53583]]
destroyed by fire). The gain or loss may be recognized in the period of
disposition or used to adjust the depreciable amount of the new asset.
GAAP generally treats the involuntary conversion of an asset the same
as the first CAS option to recognize a gain or loss on the disposition
of the old asset in the period in which it occurs and separately
treating the replacement as a new asset. Where the same practice can be
used for both CAS and GAAP, contractors seem likely to follow the
commonly accepted practice, so it seems unlikely that the elimination
of the second option to adjust the replacement asset's depreciable
value by the converted asset value would cause contractors concern.
Notably, no comment letter raised this as a concern. The Board proposes
that this CAS 409 requirement be eliminated and GAAP be relied on to
achieve the uniformity and consistency required for Government
contracting.
Mass or extraordinary dispositions of assets are a rare occurrence.
Although CAS acknowledges them, the language is limited to identifying
that the contracting parties may negotiate special treatment of the
gains and losses for an equitable outcome. GAAP does not include
content for mass or extraordinary dispositions. Because these rarely
occur and CAS doesn't include prescriptive rules for the treatment,
elimination of the CAS language would not impact the treatment of such
dispositions, nor inhibit the ability of the contracting parties to
negotiate an agreement for government contracting. Furthermore, FAR
31.205-16(g) also identifies that mass or extraordinary dispositions
shall be considered on a case-by-case basis. The Board proposes that
this CAS 409 requirement be eliminated.
General recommendations. The SDP asked for recommendations of any
changes to CAS 409 to conform it to GAAP.
Comment: Four of the seven respondents provided a response to this
query. Three respondents recommended that the Board eliminate the
entire Standard. One other respondent stated that CAS 409 appears to be
a good candidate for conformance, but cautioned that ``CAS 409
provisions covering agreements on special asset lives and accounting
for gains and losses on disposition of assets may be needed to provide
appropriate results in specific circumstances that may be encountered
by the Government and contractors.''
Response: The Board concurs that CAS 409 is a good candidate for
conformance because many of the corresponding requirements in GAAP are
not materially different from those in CAS. Therefore, GAAP can be
relied on for the majority of CAS requirements to achieve the
uniformity and consistency required for Government contracting. The
Board is proposing to eliminate the majority of CAS 409.
The Board understands the respondent's concern regarding special
asset lives to be found at CAS 409-50(e)(5), which reads, ``The
contracting parties may agree on the estimated service life of
individual tangible capital assets where the unique purpose for which
the equipment was acquired or other special circumstances warrant a
shorter estimated service life than the life determined in accordance
with the other provisions of this 9904.409-50(e) and where the shorter
life can be reasonably predicted.''
Furthermore, the Board understands the respondent's concern
regarding accounting for gains and losses to be found at CAS 409-
50(j)(1), which reads, ``Gains and losses on disposition of tangible
capital assets shall be considered as adjustments of depreciation costs
previously recognized and shall be assigned to the cost accounting
period in which disposition occurs except as provided in subparagraphs
(j) (2) and (3) of this subsection.'' Thus, for Government contracting
purposes, any gain recognized is limited to the cumulative amount of
depreciation recognized on contracts. The result of this requirement is
that the credit Government contracts receive for a gain on disposition
cannot exceed the cumulative amount of depreciation cost paid by the
Government through allocation to contracts. This limitation is also
addressed in FAR 31.205-16(d) which limits the gain recognized for
government contracting to the difference between the acquisition cost
and the undepreciated balance. The Board believes, however, that as
this requirement relates to measurement of costs, it should be retained
in CAS.
The Board concurs these two requirements in CAS for which
equivalent GAAP requirements do not exist need to be retained to
protect the interests of the Government and contractors. The Board is
proposing to move these two requirements found at CAS409-50(e)(5) and
409-50(j)(1) to CAS 406.
Compliance history. The SDP requested facts and data on the history
of CAS 409 non-compliance issues raised and how they were resolved. In
particular, the SDP requested the frequency and magnitude of the issues
identified on Government contracts. Furthermore, the SDP requested
whether the issue raised would have been considered non-compliant with
GAAP, other CAS, or FAR.
Comment: Two respondents provided comments in response to these
requests. One of the professional associations responded that ``A
survey of FEI-CGB's membership shows . . . minimal history of
noncompliance with CAS 409. The issues that were identified with CAS
409 generally had immaterial impacts to US Government contracts and
were corrected through contract adjustments to the distribution of
depreciation costs between accounting periods and contracts (i.e.,
generally a net zero adjustment).''
One of the large industry associations responded that, ``There is
little history of CAS 409 non-compliance issues raised and resolved at
individual contractors. Where identified, these issues did not have a
significant monetary impact on the Government and could have been
identified by other accounting rules (i.e., GAAP, FAR). Of note, the
few CAS 409 non-compliances identified by contractors were generally
immaterial and were resolved without direct payments to the Government.
Instead, they were typically corrected through contract adjustments to
the distribution of depreciation costs between accounting periods and
contracts. Since adjustments are a redistribution of cost between
contracts, there is likely not a significant cost impact to the
Government as a whole.'' This respondent provided further analysis of
the three categories of compliance issues identified.
The first category of issues is contractors found recognizing
multiple years of depreciation during a single year because they failed
to recognize depreciation in the first year the asset was put into
service. The respondent observed ``This would be a GAAP violation. Such
circumstances would also be covered as a non-compliance with CAS 406-
40(b).''
The second category of issues is contractors ``found to have
selected service lives for assets that were not based on historical
experience and contractors could not justify the shorter service lives
selected, as required by CAS 409-50(e)(2).'' The respondent observed
that ``The use of inappropriate service lives is also a violation of
GAAP because it would mislead users of financial statements.''
The third category of issues is contractors not establishing
``appropriate residual value amounts for assets. This condition would
result in higher depreciation being recognized for the asset during its
useful life,
[[Page 53584]]
potentially creating a gain to be recognized when the asset was
disposition later. Both the depreciation and the later gain would be
allocated to Government contracts; however, this influences the timing
of cost recognition and reimbursement for the asset cost in an
equitable manner.'' The respondent observed that ``GAAP (see ASC 360-
10-35-4) includes a requirement to deduct the salvage value, which has
the same meaning as residual value in CAS, from the value of the
tangible capital asset to be depreciated. In addition, FAR further
mitigates the risk of a contractor setting no or too low of a residual
value.'' FAR 31.205-11 reads in part, ``[d]epreciation cost that would
significantly reduce the book value of a tangible capital asset below
its residual value is unallowable.'' The respondent concluded that ``If
a contractor depreciated a tangible capital asset significantly below
its residual value, the Government's interests are protected by
recovering the excess depreciation as an unallowable cost.''
Response: The Board appreciates the effort of this large
association and its members to gather and provide this information and
analysis. Based on the comments and additional research conducted by
the Board, the Board has provisionally concluded that the instances of
CAS 409 compliance issues involving significant cost impact to the
Government have been limited to rare occurrences related to
extraordinary events. Furthermore, the Board has also provisionally
concluded that GAAP, FAR, and other Standards may protect the
Government's interests in the specific areas in which non-compliance
issues have been raised. Therefore, the Board is considering a proposed
rule that would eliminate CAS 409, except for the three requirements
described above, which would be moved to other CAS standards.
List of Subjects in 48 CFR 9904
Government Procurement, Cost Accounting Standards.
Christine J. Harada,
Senior Advisor Office of Federal Procurement Policy, and Chair, Cost
Accounting Standards Board, performing by delegation the duties of the
Administrator for Federal Procurement Policy.
For the reasons set forth in the preamble, The Federal Procurement
Policy Office proposes to amend 48 CFR part 9904 as set forth below:
PART 9904--COST ACCOUNTING STANDARDS
0
1. The authority citation for part 9904 continues to read as follows:
Authority: Pub. L. 100-679, 102 Stat. 4056, 41 U.S.C. 422.
0
2. In Sec. 9904.406-50, add paragraph (g) to read as follows:
Sec. 9904.406-50 Techniques for application.
* * * * *
(g)(1) When gains and losses are recognized on disposition of
tangible capital assets, the gains or losses shall be considered as
adjustments of depreciation costs previously recognized and shall be
assigned to the cost accounting period in which disposition occurs. The
gain to be recognized for contract costing purposes shall be limited to
the difference between the original acquisition cost of the asset and
its undepreciated balance.
(2) The contracting parties may agree on the estimated service life
of individual tangible capital assets where the unique purpose for
which the equipment was acquired or other special circumstances warrant
a shorter estimated service life and where the shorter life can be
reasonably predicted.
Subpart 9904.408--[Removed and Reserved]
0
3. Remove and reserve subpart 9904.408.
Subpart 9904.409--[Removed and Reserved]
0
4. Remove and reserve subpart 9904.409.
0
5. In Sec. 9904.418-50, add paragraph (h) to read as follows:
Sec. 9904.418-50 Techniques for application.
* * * * *
(h) Gains and losses on disposition of tangible capital assets
transferred in other than arm's-length transaction and subsequently
disposed of within 12 months from the date of transfer shall be
assigned to the transferor.
[FR Doc. 2024-13805 Filed 6-26-24; 8:45 am]
BILLING CODE 3110-01-P
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