Wednesday, March 9, 2011

CAS 416 - Accounting for Insurance Costs

CAS 416 - Accounting for Insurance Costs. CAS 416 provides criteria for the measurement of insurance costs, the assignment of such costs to cost accounting periods, and their allocation to cost objectives. The Standard covers all kinds of insurances including purchased insurance, self-insurance, and payments to a trustee of an insurance fund.

Self-insurance, probably the most complex part of this standard, is defined as the assumption or retention of the risk of loss by a contractor, either voluntarily or involuntarily. The absence of insurance is typically regarded as one form of self-insurance. Charges for self-insurance for each period for each type of self-insured risk should be based on an estimate of the projected average loss for that period. That's where things get complicated and disputes between contractors and the Government arise. Insurance administration expenses which are material in relation to total insurance costs should be allocated on the same basis as the related costs. Contractors with self-insurance programs must abide by CAS 416 whether CAS covered or not. FAR 31.205-19 makes it so. The same FAR section also requires contracting officer approval of a self-insurance program before the related costs are allowable.

Record keeping is a major piece of this standard. Contractors must maintain records to substantiate the amounts of premiums, refunds, dividends, losses, and self-insurance charges. Records should also show the frequency, amount and location of actual losses by major type of risk.

Exposure to the risk of loss may differ significantly between government and commercial operations and products. When risks differ significantly, government and commercial insurance costs should be accumulated and allocated separately.

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