application of cost accounting standards today€¦ · application of cost accounting standards...
TRANSCRIPT
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 2
Cost Accounting Standards – History
► 1968 Admiral Rickover Congressional Testimony
► 1970 GAO Feasibility Study
► 1970 CAS Board Established – PL 91-379
► 1972 – 1980 Rules, Regulations and Standards:
► CAS Applicability and Exemption Requirements
► CAS Disclosure Statement
► Promulgated 19 Cost Accounting Standards
► 1980 Board Congress curtailed Funding for FY 1981
► Requirements remained Applicable
► 1984 DoD “Assumed Responsibility” for CAS
► 1988 CAS Board re-established by OFPP
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 3
Cost Accounting Standards – History
► Originally established to address concerns involving defense
contractor cost estimating, accumulating and reporting under
negotiated government contracts (and subcontracts), the Cost
Accounting Standards (CAS) can now apply to civilian agency
contracts and also extend to certain colleges and universities
► The most recent update to CAS requirements went into effect as of
December 22, 2011
► There are two levels of CAS coverage: full coverage and modified
coverage
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 4
CURRENT
(1988 – Present)
OLD
(1970 – 1980)
Structure of CAS Board
Congress Executive
Branch
Administrator
OFPP
Comptroller
General
CAS Board CAS Board
National Defense Contracts
All Contracts
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 5
Joseph G. Jordan,
Administrator, Office of Federal Procurement Policy
Richard J. Wall,
Former Partner and National Director, Ernst
& Young Government Contract Services,
retired
Patrick J. Fitzgerald,
Director
Defense Contract Audit Agency
Laurie L. Schmidgall
Director of Cost Policy, Corporate,
The Boeing Company
Kathleen M. Turco,
Associate Administrator for Government-
wide Policy,
General Services Administration
CAS Board Members
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 6
Cost Accounting Standards
Basic CAS concepts:
► CAS 401 — Consistency in estimating, accumulating & reporting
► CAS 402 — Consistency in allocating costs for same purpose
► CAS 405 — Accounting for unallowable costs
► CAS 406 — Cost accounting period
Allocation of costs:
► CAS 403 — Allocation of home office expenses to segments
► CAS 410 — Allocation of business unit G&A to final cost objectives
► CAS 418 — Allocation of direct and indirect costs
► CAS 420 — Accounting for IR&D/B&P costs
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 7
Cost Accounting Standards
Compensation:
► CAS 408 — Compensated personal absence
► CAS 412 — Composition and measurement of pension costs
► CAS 413 — Adjustment and allocation of pension costs
► CAS 415 — Deferred compensation
Assets:
► CAS 404 — Capitalization of tangible capital assets
► CAS 409 — Depreciation of tangible capital assets
► CAS 414 — Cost of money as an element of the cost of facilities
capital
► CAS 417 — Cost of money as an element of the cost of capital under
construction
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 8
Cost Accounting Standards
Other standards:
► CAS 407 — Use of standard costs
► CAS 411 — Accounting for material costs
► CAS 416 — Accounting for insurance costs
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 9
CAS Clause Requirements
► Disclose Cost Accounting Practices (CAP) – Full coverage
► Follow Disclosed CAP Consistently
► Comply with Current & Future Cost Accounting Standards
► Agree to Equitable Adjustment for Required Changes and for Other
Changes When Parties Agree
► Negotiate Terms & Conditions for Proposed Changes But No
Increased Costs
► Agree to Adjustment to Recover Increased Costs for Failure to
Comply with Standards or Consistently Follow CAP
► Subcontract Flowdown
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 10
CAS Exemptions
► Sealed bids
► Negotiated contracts not in excess of the Truth in Negotiations Act
(TINA) threshold - $700,000
► Small business concerns
► Foreign governments
► Foreign concerns (CAS 401 & 402 only)
► Prices set by law or regulation
► FFP Commercial Item acquisitions
► Subcontracts under the NATO PHM Ship program to be performed
outside the United States by a foreign concern
► FFP adequate price competition without cost or pricing data
► No CAS-covered awards $7.5M or more (Trigger Contract)
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 11
CAS Coverage — Business Units
► Full Coverage - ► Single award of $50 million or more
► Total CAS-covered awards of $50 million or more in preceding cost
accounting period
► Requires a business unit to comply with all 19 cost accounting standards
► Modified Coverage -
► Single award of $7.5 million or more
► Trigger contract - A contractor who has not previously been CAS covered,
is awarded a CAS covered contract over $7.5 million which then "triggers"
CAS coverage for any award over the CAS threshold of $700k
► Requires compliance with the following cost accounting standards:
► CAS 401 — Consistency in estimating, accumulating and reporting costs
► CAS 402 — Consistency in allocating costs incurred for the same purpose
► CAS 405 — Accounting for unallowable costs
► CAS 406 — Cost accounting period
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 12
Modified CAS Coverage — Business Units
► CAS 401 — Consistency in estimating, accumulating and
reporting costs
► CAS 402 — Consistency in allocating costs incurred for
the same purpose
► CAS 405 — Accounting for unallowable costs
► CAS 406 — Cost accounting period
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 13
CAS Disclosure Statement
Corporate-wide awards:
► Single award of $50 million or more
► Total CAS-covered awards of $50 million or more in preceding cost
accounting period
Business unit exemption:
► Business unit CAS-covered awards were less than 30 percent of total
sales for the most recently completed cost accounting period and less
than $10 million
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 14
CAS Disclosure Statement (continued)
Timing of submission:
► Based on awards in prior year: - First CAS-covered contract (or within 90 days) of the start of the next
fiscal year
► Based on single award: - Prior to Award
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 15
CAS Disclosure Statement Format
► Part 1 General information
► Part 2 Direct Costs
► Part 3 Direct vs. Indirect Costs
► Part 4 Indirect Costs
► Part 5 Depreciation & Capitalization Practices
► Part 6 Other Costs and Credits
► Part 7 Deferred Compensation & Insurance Costs
► Part 8 Corporate or Group Expenses
► Continuation Sheets
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 16
Cost Accounting Practice
► Measurement method or technique, e.g., ► Historical costs, market value or present value
► Standard cost or actual cost
► Designation of costs included/excluded from capital assets
► Assignment to cost accounting periods ► Accrual basis or cash basis accounting
► Allocation method or technique ► Criteria for classifying direct/indirect costs
► Composition of pooled indirect costs
► Composition of allocation base for indirect costs
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 17
Current CAS Hot Topics – CAS Board Harmonization Rule, Effective February 27, 2012
► Harmonization required by Pension Protection Act
► Rule issued December 27, 2011
► Contracts prior to the effective date will require Equitable
Adjustment claim to be submitted, if impacted
► Forward Pricing Rates need to be adjusted for Contracts
issued after February 27, 2012 or risk loss of recovery
because Equitable Adjustment may not be appropriate
► Impact starts 1st fiscal year after receipt of CAS covered
contract after 6-30-12 which will mean 1-1-13 for most
calendar year contractors
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 18
Current CAS Hot Topics – CAS Board Harmonization Rule, Effective February 27, 2012
► Impact is phased in over four years ► 25% in 2014
► 50% in 2015
► 75% in 2016
► 100% in 2017 and later
► Harmonization shortens amortization period for
Gains/Losses from 15 years to 10 years
► Results of PPA/Harmonization: ► More cost on programs
► More complex auditing required
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 19
Current CAS Hot Topics – Raytheon Case
► Statute of Limitations – 6 years – differing interpretations of when
the statute tolls
► On December 17, 2012, Judge Delman ruled on Raytheon’s
Motions for Declaratory Judgment, in ASBCA Nos. 57576 and
57679
► Raytheon’s Motion that was predicated on an assertion that the
Government’s claims “were asserted beyond the six-year
presentment period and are untimely”
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 20
Current CAS Hot Topics – Raytheon Case
Issue and ACO Determination:
► On 10 January 2011, the Contracting Officer issued a Final
Decision, demanding payment of $14.1 million
► The CO also issued a penalty against Raytheon due to its
inclusion of alleged expressly unallowable costs in its final
indirect cost rate proposals for CYs 2002-2009, in the amount
of $5,946,762, including interest, pursuant to the contract
clause FAR 52.242-3, Penalties for Unallowable Costs (May
2001)
► In total, the Government demanded that Raytheon pay $20
million
► Raytheon appealed the COFD
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 21
Current CAS Hot Topics – Raytheon Case
Statute of Limitations – “Accrual of a Claim”:
► FAR Part 33.201 defines “claim accrual” for purposes of establishing
the SOL
► “Accrual of a Claim” means the date when all events, that fix the
alleged liability of either the Government or the contractor and permit
assertion of the claim, were known or should have been known. For
liability to be fixed, some injury must have occurred. However,
monetary damages need not have been incurred
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 22
Current CAS Hot Topics – Raytheon Case
Statute of Limitations – “Initiation of a Claim”:
► 33.206 Initiation of a claim.
► (a) Contractor claims shall be submitted, in writing, to the contracting
officer for a decision within 6 years after accrual of a claim, unless
the contracting parties agreed to a shorter time period. This 6-year
time period does not apply to contracts awarded prior to
October 1, 1995. The contracting officer shall document the contract
file with evidence of the date of receipt of any submission from the
contractor deemed to be a claim by the contracting officer.
► (b) The contracting officer shall issue a written decision on any
Government claim initiated against a contractor within 6 years after
accrual of the claim, unless the contracting parties agreed to a
shorter time period. The 6-year period shall not apply to contracts
awarded prior to October 1, 1995, or to a Government claim based on
a contractor claim involving fraud.
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 23
Current CAS Hot Topics – Raytheon Case
DCAA action and reporting:
► With respect to CY 2002, the record shows that on 29 September
2003, DCAA issued a memorandum regarding its audit of appellant's
bonus and incentive compensation costs for CY 2002, concluding that
these costs were fully allowable
► However roughly four years later, by audit report dated 24 September
2007, DCAA determined that portions of these same costs were not
allowable for reasons stated herein. It was this audit report that
ultimately led to the government's present claims under this appeal
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 24
Current CAS Hot Topics – Raytheon Case
ASBCA Decision:
► Based upon the date of the DCAA memorandum, we believe the
government should have known - by 29 September 2003 - that the
incentive compensation costs in question for CY 2002 were
unallowable and should also have known that the government had
paid increased costs under government contracts in CY 2002
► The government's claim letter is dated 10 January 2011, and the
government's claims must have accrued no earlier than 10 January
2005 to be timely
► We have concluded that the government's claim to recover increased
costs paid under government contracts in CY 2002 and the related
penalty claim for CY 2002 accrued no later than 29 September 2003.
► Accordingly, we must conclude that the government's claims for CY
2002 are untimely
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 25
Current CAS Hot Topics – Raytheon Case
Other Years – ASBCA:
► CY 2003 Costs - Raytheon's overhead cost submission for CY 2003
was submitted to the government in or around June 2004
► CY 2004- Raytheon's Corporate Home Office Allocations proposal for
forward pricing rates was submitted to the government in September
2004
► We believe the government should have known - prior to 10 January
2005 - of the subject CAS noncompliance and that the government
paid increased costs under government contracts as a result in CY
2003 and CY 2004. We are persuaded that the government's claims
of 10 January 2011 for these increased costs in CY 2003 and CY
2004 are untimely
► CY 2005-2009 were considered to be timely
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 26
CAS Board Current Issues – Potential Changes
► Commercial Contracts – Published in Federal Register
► Exemption from Cost Accounting Standards for Contracts
and Subcontracts for the Acquisition of Commercial Items
(i.e., (b)(6) commercial item exemption)
► Comments to the Proposed Rule (due January 18, 2013)
► Exemption from Cost Accounting Standards for Firm-
Fixed-Price Contracts and Subcontracts Awarded Without
Submission of Certified Cost or Pricing Data (i.e., (b)(15)
FFP exemption)
► Comments to the Proposed Rule (due December 5,
2011)
Thank You
Follow-up Contact Information –
Steven Tremblay
617.375.2420
Frank Summers
617.375.1285
Jack Gay
617.375.3725
Application of Cost Accounting Standards Today
Government Contract Accounting
Page 29
Ernst & Young
Assurance | Tax | Transactions | Advisory
About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. © 2012 Ernst & Young LLP. All Rights Reserved.
This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.