Rule2026-17903
Conformance of Cost Accounting Standards to Generally Accepted Accounting Principles for CAS 407 Use of Standard Costs for Direct Material and Direct Labor
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
September 1, 2026
Effective
October 1, 2026
Issuing agencies
Management and Budget OfficeFederal Procurement Policy Office
Abstract
The Office of Management and Budget (OMB), Cost Accounting Standards Board (the Board), is publishing a final rule rescinding Cost Accounting Standard (CAS) 407 to conform it with Generally Accepted Accounting Principles (GAAP). One definition is transferred to a different location within chapter 99 of title 48, Code of Federal Regulations. This final rule follows issuance of a Notice of Proposed Rulemaking (NPRM) (91 FR 13562).
Full Text
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<title>Federal Register, Volume 91 Issue 168 (Tuesday, September 1, 2026)</title>
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[Federal Register Volume 91, Number 168 (Tuesday, September 1, 2026)]
[Rules and Regulations]
[Pages 56061-56063]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-17903]
[[Page 56061]]
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OFFICE OF MANAGEMENT AND BUDGET
Office of Federal Procurement Policy
48 CFR Parts 9903 and 9904
RIN 0348-AB91
Conformance of Cost Accounting Standards to Generally Accepted
Accounting Principles for CAS 407 Use of Standard Costs for Direct
Material and Direct Labor
AGENCY: Cost Accounting Standards Board, Office of Federal Procurement
Policy, Office of Management and Budget.
ACTION: Final rule.
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SUMMARY: The Office of Management and Budget (OMB), Cost Accounting
Standards Board (the Board), is publishing a final rule rescinding Cost
Accounting Standard (CAS) 407 to conform it with Generally Accepted
Accounting Principles (GAAP). One definition is transferred to a
different location within chapter 99 of title 48, Code of Federal
Regulations. This final rule follows issuance of a Notice of Proposed
Rulemaking (NPRM) (91 FR 13562).
DATES: Effective date: October 1, 2026.
FOR FURTHER INFORMATION CONTACT: Nathaniel L. Whayland, Cost Accounting
Standards Board Staff (telephone: 202-881-9199; email:
<a href="/cdn-cgi/l/email-protection#83cccec1c0c2d0c1c3eceee1ade6ecf3ade4ecf5"><span class="__cf_email__" data-cfemail="b0fffdf2f3f1e3f2f0dfddd29ed5dfc09ed7dfc6">[email protected]</span></a>).
SUPPLEMENTARY INFORMATION:
I. Background
On March 20, 2026, the Board published a NPRM to solicit views on
the Board's provisional conclusions regarding conformance of CAS 407 to
GAAP. See the NPRM for background on the purpose of CAS 407. The NPRM
noted that the vast majority of CAS 407 could be rescinded. The Board
determined that despite the difference in general focus between CAS and
GAAP, there has been significant convergence over the years as GAAP has
evolved to address cost measurement and assignment of costs to
accounting periods. GAAP now contains codified content in these areas
very similar to the requirements contained in CAS 407. In addition, the
creation of the Financial Accounting Standards Board (FASB) and the
Accounting Standards Codification (ASC) as the recognized financial
accounting and reporting standards for GAAP fosters increased
uniformity and consistency. The FASB is recognized today by the U.S.
Securities and Exchange Commission as the designated accounting
standard setter for public companies. FASB standards are also
recognized as authoritative by many other organizations, including
State Boards of Accountancy and the American Institute of Certified
Public Accountants (AICPA). The Board concluded that these developments
have created opportunities to amend or rescind overlapping CAS
requirements where GAAP standards under ASC may be applied as a
reasonable substitute for CAS to support contract cost and pricing.
The Board concluded that nearly all of the content in CAS 407 has
become unnecessary because the Government interests addressed by that
content are adequately protected through reliance on GAAP, and existing
requirements in other CAS standards. Due to the minimal amount of
content identified for retention, the Board concluded that moving the
retained requirements to another standard rather than maintaining CAS
407 with minimal content would best achieve the goal of streamlining
CAS. This final rule reflects input from the public, as well as
research conducted by the Board. This action complies with applicable
requirements of 41 U.S.C. 1502 and furthers the Board's performance of
its duties under 41 U.S.C. 1501(c), which requires, among other things,
that the Board: (1) ensure that the cost accounting standards used by
Federal contractors rely, to the maximum extent practicable, on
commercial standards and accounting practices and systems; and (2)
conform CAS, where practicable, to GAAP.
II. CAS 407--Use of Standard Costs for Direct Material and Direct Labor
A. Overview and Conclusion
As noted in the NPRM, the Board's comparison of CAS 407 with
pertinent GAAP content, other CAS Standards, and the Federal
Acquisition Regulation (FAR) revealed significant overlaps and
equivalent requirements. These comparable requirements protect the
Government's interests and promote the uniformity and consistency that
was the basis for promulgating CAS 407 more than 50 years ago, when
comparable GAAP coverage did not exist.
The Board has concluded that, for the vast majority of the
requirements in CAS 407, with the exception of certain limited
requirements (i.e., CAS 407-30(a)(7), CAS 407-40(b), CAS 407-
50(a)(4)(i) and (ii), CAS 407-50(d)(1) and (2), CAS 407-50(e), and CAS
407-60(b)), the Government's interests are adequately protected by
relying on disclosed GAAP practices that are consistently followed and
subject to notice of changes and cost recovery pursuant to CAS 401.
Specifically, all contractors, whether subject to full or modified CAS
coverage, are subject to CAS 401 and will continue to be required to
consistently follow their disclosed or actual cost accounting
practices. In addition, they will continue to be bound by the 9903.201-
4 CAS contract clauses requiring disclosure and consistency in cost
accounting practices regardless of whether a specific standard exists.
These contract clauses implement the statutory requirements for
disclosure of 41 U.S.C. 1502(f)(1), and protections from payment of
increased costs as a result of changes to contractor's cost accounting
practices provided by 41 U.S.C. 1502(f)(2). The limited requirements
that are being retained address standard costs and related variances at
the production unit level which are not currently covered by GAAP. The
Board has concluded to move these requirements to CAS 418--Allocation
of direct and indirect costs.
This action is 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 Government. Furthermore, rescinding CAS 407 aligns 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 rescind CAS coverage no longer necessary.
As noted in the NPRM the Board did not identify any instance where
the rescinding of CAS 407 would result in a change to a contractor's
disclosed cost accounting practices for government contracts. With the
noted exceptions, the current CAS requirements are nearly identical to
GAAP. The Board expects that contractors would continue to follow their
existing practices as they are both compliant with CAS and GAAP. As
such, having identified no cost accounting practice changes as a result
of this final rule any current or future changes related to standard
costing of direct material or labor and the treatment of variances
would be considered unilateral as defined in 9903.201-6(b)(2). As
discussed further in the ``Summary of Public Comments'' section below,
respondents did not identify any instances or issues requiring further
consideration by the Board regarding this determination.
[[Page 56062]]
B. Summary of Public Comments
The Board received three sets of public comments to the NPRM; two
from industry associations and one from a consulting firm. All
commentors agreed with the provisional decision to rescind CAS 407 and
were supportive of the Board's progress with CAS to GAAP conformance.
Specific comments and discussion are detailed below.
Comment: One commentor believes the Board has not gone far in
enough in conformance because it proposes to retain certain limited
requirements around the concept of the production unit. However, the
other two commentors concur with the Board's conclusion that GAAP does
not address the concept of the production unit and agree with the
Board's decision to retain these requirements in CAS 418.
Response: The Board considered all current GAAP requirements and
concluded that full adoption of GAAP does not provide adequate
protection of the Government's interest. Retaining the requirements for
accounting at the production unit level is necessary to ensure
homogeneity while still providing contractors flexibility in setting
and revising direct material and/or direct labor standards based on
individual needs and circumstances. The Board, therefore, has not
adopted the suggestion to rescind 407 in its entirety.
Comment: One commentor expressed concern that the Board appears to
be expanding the ``disclosure and consistency in cost accounting
practices'' to all GAAP accounting practices. The example given by the
commentor was a contractor changing its inventory practices from first-
in-first-out (FIFO) to last-in-first-out (LIFO).
Response: As noted in the NPRM, the Board is streamlining CAS 407
where reliance on existing standards and GAAP provides adequate
protection of the Government's interests. A change from FIFO to LIFO
would need to be disclosed by the contractor as this is a requirement
for the Disclosure Statement (CASB DS-1) section 2.2.2. Furthermore, 41
U.S.C. 1502(f)(1) covers the disclosure in writing of all cost
accounting practices, including methods of distinguishing direct costs
from indirect costs and the basis used for allocating indirect costs.
The Board is not expanding the disclosure requirement, but simply
highlighting that these disclosures are already required under 41
U.S.C. 1502(f)(1).
Comment: One commentor suggested that the elimination of CAS 407
could result in a change to a contractor's disclosed cost accounting
practice since GAAP allows for additional methodologies not prescribed
under CAS 407 and believes that these changes should be deemed
``required'' or ``desirable'' under CAS 9903.201-6.
Response: While GAAP may allow for additional methodologies, all
currently compliant CAS 407 practices are also currently compliant with
GAAP and therefore, any current or future changes related to standard
costing of direct material or labor and the treatment of variances
would be considered unilateral as defined in 9903.201-6(b)(2). The
Board, therefore, rejects the suggestion that any change should be
deemed required or desirable.
III. Expected Impact of the Rule
This final rule is deregulatory in furtherance of 41 U.S.C.
1501(c), which requires the Board ensure that the Cost Accounting
Standards used by contractors rely, to the maximum extent practicable,
on commercial standards and accounting practices and systems. In
addition, 41 U.S.C. 1501(c) requires the Board to eliminate or conform
CAS requirements, where practicable, to GAAP. This final rule
eliminates 12 of the 16 individual requirements contained in CAS 407,
retaining only the minimal content the Board identified as needed to
protect the Government's interest by moving it to another standard.
This eliminates the need for a separate CAS standard addressing
standard costs for direct material and direct labor. This final rule
will result in the removal of almost 2,000 words of unnecessary
regulatory text currently in place in this standard. Reliance on a
contractor's disclosed GAAP practices for CAS purposes significantly
reduces the regulatory footprint associated with CAS and places
reliance on commercial accounting practices under GAAP consistent with
41 U.S.C. 1501(c).
These changes, as finalized, are expected to reduce burden for
contractors, external auditors, government auditors, and oversight
functions by reducing duplicative compliance requirements. These
changes individually and in conjunction with the Board's ongoing
broader CAS to GAAP conformance efforts and modernization of the CAS
programmatic requirements are expected to simplify CAS administration
and reduce barriers to entry for non-traditional contractors including
new mid-size entities who no longer qualify as small businesses. These
actions should increase competition in federal contracting.
IV. Regulatory Flexibility Act
CAS Board rules do not impact small entities within the meaning of
the Regulatory Flexibility Act 5 U.S.C. 601-612. Contracts and
subcontracts with small business concerns are exempted from all CAS
requirements.
V. Executive Orders 12866, 13563, and 14192
Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess
all costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits E.O. 13563 emphasizes the importance of quantifying both
costs and benefits, of reducing costs, of harmonizing rules, and of
promoting flexibility. OMB's Office of Information and Regulatory
Affairs (OIRA) has determined that this is a significant regulatory
action under section 3(f) of E.O. 12866, Regulatory Planning and
Review, dated September 30, 1993, and OIRA has reviewed this rule under
E.O. 12866. This rule is deregulatory action under E.O. 14192 based on
the discussion in the ``Expected Impact of the Rule'' section.
VI. Paperwork Reduction Act
The Paperwork Reduction Act, Public Law 96-511, does not apply to
this final rule because this rule imposes no paperwork burden on
offerors, affected contractors and subcontractors, or members of the
public that requires the approval of OMB under 44 U.S.C. 3501, et seq.
List of Subjects in 48 CFR 9903 and 9904
Cost accounting standards, Government procurement.
Kevin R. Rhodes,
Administrator, Office of Federal Procurement Policy, and Chair, Cost
Accounting Standards Board.
For the reasons set forth in the preamble, the Office of Management
and Budget is amending chapter 99 of title 48 of the Code of Federal
Regulations as set forth below:
PART 9903--CONTRACT COVERAGE
0
1. The authority citation for part 9903 continues to read as follows:
Authority: Public Law 111-350, 124 Stat. 3677, 41 U.S.C. 1502.
Subpart 9903.3--CAS Rules and Regulations
0
2. In Sec. 9903.301(a):
0
a. Revise the definition for ``Actual cost'';
[[Page 56063]]
0
b. Remove the definitions for ``Labor cost at standard'', ``Labor-rate
standard'', ``Labor-time standard'', ``Material cost at standard'',
``Material-price standard'' and ``Material-quantity standard'';
0
c. Revise the definition for ``Production unit''; and
0
d. Remove the definitions for ``Standard cost'' and ``Variance''.
The revisions read as follows:
9903.301 Definitions.
(a) * * *
* * * * *
Actual cost. See 9904.401-30.
* * * * *
Production unit. See 9904-418-30.
* * * * *
PART 9904--COST ACCOUNTING STANDARDS
0
3. The authority citation for part 9904 continues to read as follows:
Authority: Pub. L. 100-679, 102 Stat. 4056, 41 U.S.C. 422.
Subpart 9904.407 [Removed and Reserved]
0
4. Remove and reserve subpart 9904.407.
Subpart 9904.418--Allocation of direct and indirect costs
0
5. In Sec. 9904.418-30, add paragraph (a)(5) to read as follows:
Sec. 9904.418-30 Definitions.
(a) * * *
(5) Production unit means a grouping of activities which either
uses homogeneous inputs of direct material and direct labor or yields
homogeneous outputs such that the costs or statistics related to these
homogeneous inputs or outputs are appropriate as bases for allocating
variances.
* * * * *
0
6. In Sec. 9904.418-50:
0
a. Revise paragraph (a)(2)(i); and
0
b. Add paragraph (h).
The revision and addition read as follows:
Sec. 9904.418-50 Techniques for application.
(a) * * *
(2) * * *
(i) Standard costs may be used for estimating, accumulating, and
reporting costs of direct material and direct labor only when standard
costs and related variances are appropriately accounted for at the
level of the production unit and paragraph (h) of this section; or
* * * * *
(h) Standard costing. (1) A labor-rate standard may be set to cover
a group of direct labor workers who perform disparate functions only
under the conditions in either paragraph (h)(1)(i) or (ii) of this
section:
(i) Where that group of workers all work in a single production
unit yielding homogeneous outputs (in this case, the same labor-rate
standard shall be applied to each worker in that group).
(ii) Where that group of workers, in the performance of their
respective functions, forms an integral team (in this case, a labor-
rate standard shall be set for each integral team).
(2) A contractor's established practice with respect to the
disposition of variances accumulated by production unit shall be in
accordance with paragraph (h)(2)(i) or (ii) of this section:
(i) Variances are allocated to cost objectives (including ending
in-process inventory) at least annually. Where a variance related to
material is allocated, the allocation shall be on the basis of the
material cost at standard, or, where outputs are homogeneous, on the
basis of units of output. Similarly, where a variance related to labor
is allocated, the allocation shall be on the basis of the labor cost at
standard or labor hours at standard or, where outputs are homogeneous,
on the basis of units of output; or
(ii) Variances which are immaterial may be included in appropriate
indirect cost pools for allocation to applicable cost objectives.
(3) Where variances applicable to covered contracts are allocated
by memorandum worksheet adjustments rather than in the books of
account, the bases used for adjustment shall be in accordance with
those stated in this paragraph (h).
0
7. In Sec. 9904.418-60, add paragraph (j) to read as follows:
Sec. 9904.418-60 Illustrations.
* * * * *
(j) Contractor J accumulates, in one account, labor cost at
standard for a department in which several categories of direct labor
of disparate functions, in different combinations, are used in the
manufacture of various dissimilar outputs of the department. Contractor
J's department is not a production unit as defined in 9904.418-30(a)(5)
of this Cost Accounting Standard. Modifying its practice so as to
comply with the definition of production unit in 9904.418-30(a)(5), it
could accumulate the standard costs and variances separately,
(1) For each of the several categories of direct labor; or
(2) For each of several subdepartments, with homogeneous output for
each of the subdepartments.
[FR Doc. 2026-17903 Filed 8-31-26; 8:45 am]
BILLING CODE 3110-01-P
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