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Cost Accounting Standards Board
ATTN: Mr. Raymond Wong
Office of Federal Procurement Policy
725 17th Street NW
Washington, DC 20503
Subject: Financial Executives International Committee on Government Business Comments on CASB Staff Discussion Paper on Conformance of the Cost Accounting Standards (“CAS”) to Generally Accepted Accounting Principles (“GAAP”)
Reference: CASB Case Number 2019-01
Dear Mr. Wong:
I am pleased to offer the following comments on the Cost Accounting Standards Board (“CASB”) Staff Discussion Paper (“SDP”) on conformance of CAS to GAAP (Federal Register notice dated March 13, 2019) on behalf of the Financial Executives International – Committee on Government Business (“FEI-CGB”). FEI is a professional association representing the interests of more than 10,000 chief financial officers, treasurers, controllers, tax directors and other senior financial executives from major companies throughout the United States. FEI represents both the providers and users of financial information. CGB formulates policy opinions on government contracting issues for FEI in line with the views of the membership.
FEI-CGB reviewed the CASB SDP prepared in response to the National Defense Authorization Act of FY2017 (Pub. L. 114–328, 130 Stat. 2273) which amended 41 U.S.C. 1501(c)(2) to require the Board to review CAS and conform them, to the extent practicable, to GAAP. As the SDP points out, CAS was designed to achieve uniformity and consistency in determining costs on US Government contracts. CAS focuses on the measurement, assignment and allocation of cost at the contract level. GAAP is a common set of accounting pronouncements that prescribe how financial statements are prepared, including recognition, measurement, presentation and disclosure. The purpose of GAAP is to provide a conceptual framework and acceptable accounting methods and practices for financial reporting.
Given that there is some overlap in membership between FEI-CGB and the Aerospace Industries Association (“AIA”) Cost Principles Committee, FEI-CGB is aware of, and generally endorses, the technical content of AIA’s comments on CASB Case Number 2019-01. Specifically, FEI-CGB agrees with AIA’s responses to the queries on the comparisons to the GAAP and CAS requirements presented in the appendices to the AIA letter, and thus incorporates those appendices to this response. FEI-CGB’s comments concerning other aspects of the SDP are presented below.
Comments on the Guiding Principles for Evaluating Benefits and Drawbacks:
On the surface, the initiative to streamline the US Government procurement process by shifting reliance for government cost accounting from CAS to GAAP makes sense. Specifically, all public companies and nonprofit organizations are already required to prepare financial statements based on GAAP. Accordingly, using GAAP to govern government contract cost accounting would seem to eliminate the administrative effort needed to maintain an additional “set of CAS books” (i.e., the CAS specific entries) to meet CAS requirements. For example, the SDP considers using GAAP accounting for personal absences and depreciation on property, plant and equipment (“PP&E”). GAAP would be used not only for financial reporting, but also for estimating, reporting, and accumulating costs for Government contracting purposes. However, FEI-CGB strongly believes that any significant potential benefit from the conformance of CAS to GAAP will be achieved only if (i) compliance is based solely upon GAAP requirements and (ii) compliance determinations reflect the results of reviews performed by the individual company’s outside audit firms who have both the proficiency and practical experience to determine compliance with GAAP.
Any incorporation of GAAP into CAS that results in multiple parties determining GAAP compliance stands to prevent this conformance initiative from achieving any significant success. Actually, conformance by incorporation of all or part of GAAP into CAS could lead to lengthening, rather than shortening, the procurement process by creating uncertainty concerning compliance and CAS administrative requirements (e.g., how are GAAP materiality considerations applied for CAS?), as well as increased administration effort or disputes where there are differences of opinion between outside audit firms and US Government oversight agencies on GAAP compliance.
Furthermore, elimination of a requirement in one CAS standard that leads to an additional requirement in another CAS standard or Federal Acquisition Regulation (FAR) will reduce or eliminate the benefit of conformance to GAAP and is contrary to the stated purpose of streamlining the acquisition process. We understand that some have considered incorporating certain CAS into FAR if they are eliminated in favor of GAAP. Such an action would take away any benefit sought by conformance, create unnecessary complexity for the Government and contractors, and could also lead to situations that would infringe on the CASB’s exclusive authority over the measurement, assignment, and allocation of costs for Government contracts.
Comments on CAS-GAAP Conformance Roadmap:
The SDP’s grouping of the standards relative to the anticipated opportunity for conformance with GAAP appears reasonable. However, the underlying theory of the CAS-GAAP conformance initiative appears to be that a combination of CAS 401, CAS 402, and CAS 406 (i.e., the Principal Three CAS) combined with increases in the scope of GAAP requirements since the earlier establishment of the individual Standards potentially renders CAS coverage in some areas as more or less redundant and unnecessary.
A careful study of the chronology of the CAS promulgation history indicates otherwise. Specifically, CAS 408 and CAS 409 were published even though the Principal Three CAS were already in effect. At that time, the CASB concluded the Principal Three CAS did not adequately address the practices for the cost accounting treatment of personal absences or depreciation. The CASB found that more specific requirements than those in GAAP were warranted when those Standards were promulgated.
GAAP coverage in these areas has increased significantly over the years to the point where the CAS and GAAP concepts are much the same in many respects. A survey of FEI-CGB’s membership shows virtually no history of contractor noncompliance with CAS 408 and 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). This minimal history of noncompliance indicates an understanding and consistent application of the CAS requirements by contractors. Thus, CAS 408 and CAS 409 appear to be good candidates for conforming CAS and GAAP. However, there are requirements in the Standards that are not present in GAAP. These requirements, such as the 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.
Removal of a Standard has the potential to eliminate time and expense for the US Government (i.e., the CASB, Government audit agencies, and Government contracting officers) and contractor support for CAS audits (e.g., Government requested briefings and data for reviews and testing). However, as cautioned in our comments above on the Guiding Principles, for any meaningful benefits to be realized the Government must avoid incorporation of GAAP requirements into CAS or FAR and rely on the compliance reviews of the individual company’s outside audit firms. This is equally true for CAS 408 and CAS 409 as it is for the other Standards that were mentioned in the SDP as potential candidates for conformance. The reason for the promulgation of those CAS was the need to cover substantial elements of costs, notwithstanding the general coverage of the Principal Three CAS. This need continues and should not be undermined by changes that eliminate important provisions of the Standards.
FEI-CGB is concerned that the SDP appears to indicate that the CASB believes that the interests of the US Government can only be protected by:
- Having multiple organizations review a company’s GAAP compliance,
- Adopting a “GAAP Plus” approach by incorporating key aspects of GAAP into CAS, and/or
- Revising the CAS contract clause found at 9903.201-4 to presumably provide an avenue by which a noncompliance with GAAP in an area where a Standard is eliminated can require contract adjustments, with interest.
As discussed, FEI-CGB sees no benefit from the first two options which are likely to lengthen and add uncertainty to the procurement process. Additionally, if the CASB revises CAS to incorporate all or part of the GAAP requirements, not only is it committing itself to monitor and make timely adjustments for any future changes to GAAP, such changes would be viewed as a required change subject to equitable adjustment under the requirements of CAS 9903.201-4. Lastly, if the intent of the SDP query related to the necessity of a revision to CAS 9903.201-4 refers to a situation where there is an elimination of CAS requirements with reliance on GAAP; such a revision would only apply prospectively from the date of applicability for purposes of noncompliance determinations. As long as CAS revisions follow the prescribed rulemaking process, the interests of both the Government and contractors will continue to be protected. However, FEI-CGB contends that the pertinent question is whether such a revision will provide any streamlining and cost savings for the procurement process, which is the ultimate goal of CAS-GAAP conformance.
Considering the SDP and our experience with the Standards, FEI-CGB recommends that this project be curtailed and suggests that CASB’s limited resources be better directed towards the emerging issues that were discussed in the SDP, such as the impact of Financial Accounting Standards Board (“FASB”) changes on leases and revenue recognition. These changes to GAAP require immediate, yet relatively simple, revisions to CAS. The needed actions would include:
- Clarifying that contractors may use financial statement PP&E balances, excluding operating leases, in the CAS 403 three factor formula allocation base, and other PP&E allocation bases; and
- Updating the definition of revenue in CAS 403-30(a)(3) to conform to Accounting Standards Codification (“ASC”) 606-10-20.
FEI-CGB also believes that the CASB should focus its attention on the Section 809 Panel’s CAS subcommittee recommended revisions to CAS applicability/thresholds, as well as its completed projects on disclosure statement update and streamlining of the cost impact process. Additionally, the CASB should concentrate on timely issuance of the Advance Notice of Proposed Rulemaking (“ANPRM”) for CAS 413.
If you wish to engage with the FEI-CGB on this matter, we would be amenable to meeting with you at your convenience. Please contact Ms. Marisa Peacock at the FEI office in Morristown, NJ at phone number (973) 765-1007or email at [email protected] for arrangements.
Thank you for your consideration in this matter.
Sincerely,
Ms. Barbara F. Michael
Chairman, Financial Executives International – Committee on Government Business
Distribution:
Andrej Suskavcevic – President & CEO, FEI
Marisa Peacock – Manager, Technical Activities, FEI
Mark Smith – Vice Chair, FEI-CGB