Cost Accounting Standards Board proposes changes to CAS

In an advanced notice of proposed rulemaking (ANPRM), the Cost Accounting Standards Board (CASB) solicited public comments on proposed changes to eliminate CAS 404, “Capitalization of Tangible Assets,” and CAS 411, “Accounting for Acquisition Costs of Material.”

The proposed changes are part of the CASB’s broader effort to align the government’s cost accounting standards (CAS) with generally accepted accounting principles (GAAP) to the maximum extent practicable as required under section 820 of the National Defense Authorization Act for Fiscal Year 2017. The CASB acknowledges that GAAP has undergone significant revisions since CAS 404 and CAS 411 were released, resulting in minimal differences remaining between GAAP and these two standards. The CASB proposes eliminating both standards, with the exception of the provisions in CAS 404-50(d)(1) addressing requirements for assets acquired through a business combination, which the CASB proposes be relocated to CAS 418-50.

Here a few considerations for contractors with CAS-covered contracts:

• CAS 404—Capitalization of assets acquired through business combination: Tangible capital assets of an acquired company would still be required to be capitalized by the buyer at the seller’s net book value if the assets generated costs on government contracts in the most recent cost accounting period prior to the business combination. (CAS 404-50(d)(1) is to be relocated to CAS 418-50.)
• CAS 404—Capitalization threshold: The minimum acquisition cost threshold would no longer be capped at $5,000 as prescribed in CAS 404. (GAAP does not establish a specific dollar threshold.)
• CAS 411—Average costing method: CAS 411 specifies two acceptable types of average costing methods for measuring inventory: “weighted average cost” and “moving average.” While GAAP refers broadly to average costing methods, the CASB concluded that contractors will likely continue using one of the two CAS methods because it did not identify a widely established third method in its assessment.
• CAS 404 and CAS 411—Written policies and practices: GAAP does not require written statements of accounting policies and practices, in contrast with CAS 404 and CAS 411. However, the CASB anticipates that contractors will continue to develop and maintain written accounting policies to meet other requirements (e.g., CAS disclosure statement requirements).

CASB reform signals: CAS-GAAP conformance and CAS applicability

The latest notice follows several actions the CASB took in June 2024. These notices and related public comments provide insight into CASB and industry priorities for CAS reform and improvement.

Operating revenue and lease accounting. This notice of proposed rulemaking (NPRM) proposes revisions to CAS 403, CAS 414 and CAS 417, addressing conflicts between CAS and GAAP.

• CAS 403—Operating revenue: The CASB proposes removing the definition of operating revenue from CAS 403, “Allocation of Home Office Expenses to Segments,” and relying on the GAAP definition. The CASB agreed with comments on the preceding ANPRM that GAAP standards are sufficient to address government contract revenue recognition scenarios, including those for government-owned, contractor-operated (GOCO) facilities contracts. The CASB sought additional comments in response to this NPRM on the GOCO revenue recognition topic, so changes are still possible before a final rule is issued.
• CAS 414 and CAS 417—Lease accounting: The CASB proposes a rule that would clarify CAS addressing which assets should be included in the calculations of facilities capital cost of money. The clarifications are necessary due to changes in GAAP requirements for lease accounting, specifically related to treatment of “right of use” assets, formerly known as operating leases. The NPRM updates the definitions of “tangible capital asset” and “intangible capital asset” throughout various standards and seeks additional comments on the proposed changes.

Compensated personal absence and depreciation of capital assets. In this ANRPM, the CASB proposes eliminating the requirements of CAS 408 and CAS 409 that duplicate GAAP requirements. It follows an earlier ANPRM released on these standards in 2020 and incorporates industry feedback that generally favored eliminating CAS 408. Opinions were mixed on whether to eliminate CAS 409 in its entirety or retain certain requirements.

• CAS 408—Personal absence: The CASB proposes eliminating CAS 408, “Accounting for Compensated Personal Absence,” in its entirety, as revised GAAP standards can be relied upon to protect the government’s interests.
• CAS 409—Depreciation: The CASB proposes eliminating most of CAS 409, “Depreciation of Tangible Capital Assets,” with the exception of requirements at 409-50(e)(5), 409-50(j)(1) and 409-50(j)(4). Specifically, requirements addressing special circumstance asset lives (currently 409-50(e)(5)) and measurement of gains and losses on disposition of tangible capital assets (currently 409-50(j)(1)) would be retained and relocated to CAS 406. Requirements addressing gains and losses on disposition of assets within 12 months of a less-than-arm’s-length transaction (currently 409-50(j)(4)) would be retained and relocated to CAS 418.

Application of cost accounting standards to indefinite delivery vehicles. The CASB issued a request for comments from the public addressing the applicability of CAS to indefinite delivery vehicles (IDVs).

Currently, the applicability of CAS to these types of vehicles is unclear, and the CASB proposes six potential options for determining when and how CAS would apply to IDV contracts.

Comments received from the industry overwhelmingly favored the “order-by-order” approach in which each task or delivery order would be treated as an individual contract for purposes of CAS applicability. A similar recommendation was provided by the Section 809 Panel tasked with the mandate of the National Defense Authorization Act for Fiscal Year 2016 to identify acquisition reforms.

What’s next?

Agendas for CASB meetings in 2024 included topics related to CAS 412, “Composition and Measurement of Pension Cost,” and CAS 413, “Adjustment and Allocation of Pension Cost,” to further reconcile the CAS adjustment of pension costs for extraordinary events with the Pension Protection Act of 2006 after a 2011 revision. Also, we anticipate the CASB will continue its CAS-GAAP conformance efforts, prioritizing additional standards on cost measurement and assignment of costs as outlined in related staff discussion papers focusing on CAS 407 “Use of Standard Costs for Direct Material and Direct Labor”; CAS 415, “Accounting for the Cost of Deferred Compensation”; and CAS 416, “Accounting for Insurance Costs.”

Although the CASB has made initial strides toward addressing CAS applicability to IDV contracts, we hope to see the CASB take on additional punch-list items from the Section 809 Panel report addressing increased CAS applicability thresholds and CAS applicability to hybrid contracts.

We also hope the CASB will consider addressing the issue of measuring the cost impact of unilateral cost accounting practice changes in response to the Defense Contract Audit Agency Memorandum for Regional Directors issued in 2023. The memorandum provides guidance to auditors for measuring cost impact amounts under various scenarios, some of which appear to be inequitable and in conflict with CAS requirements. A CASB decision on this matter is necessary to align industry and government on this administrative process and ensure an equitable resolution of unilateral changes.