Monday, August 29, 2011

CAS Board Abandons Proposed Revision to CAS 403

Last Friday, we discussed the CAS Board's (Cost Accounting Standards Board) announcement that it will no longer pursue proposed changes in CAS 416, Accounting for Insurance Costs.  We have also learned that the CAS Board is discontinuing its rulemaking efforts in reviewing the CAS 403 thresholds that require the use of a three-factor formula for allocating residual home office expenses.

Residual expenses are those home office expenses that cannot be identified specifically to a particular segment or do not have a clear relationship (measurable with reasonable objectivity) to two or more segments. Under CAS 403, contractors first have to determine if residual expenses are material. Materiality is determined by taking the residual pool and comparing it to the aggregate operating revenue of all segments, factored as follows; 3.35 percent of the first $100 million, 0.95 percent of the next $200 million, 0.30 percent of the next $2.7 billion, and 0.2 percent of anything over $3 billion. If residual expenses exceed this amount, contractors must allocate the expenses over a three-factor formula consisting of payroll dollars, operating revenue, and average net book values of tangible capital assets.

These thresholds have not changed since CAS 403 became effective 38 years ago while the CPI (Consumer Price Indes) has increased 400 percent. The CAS Board was thinking that it needed to update the thresholds to reflect the changed economic and business environment since 1973.

In the end, no one was able to provide any evidence that the current thresholds are creating an inequity, or that adjusting the thresholds would substantialy change the outcome. That is, the pool of contractors required to use the three-factor formula to allocate residual home office expenses to the segments would not change significantly. Therefore, the Board decided to abandon any further effort on revising the thresholds.

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