Wednesday, September 18, 2013

CAS Working Group Guidance - Part XVIII

We are in the final week of our series on the CAS Working Group Guidance Papers. Between 1975 and 1981, DoD convened a group of so-called CAS "experts" to come up with practical solutions to issues that contracting officers were facing in trying to interpret and apply the (then) new rules and regulations being promulgated by the Cost Accounting Standards Board (CASB). During that time, the Working Group published a total of 25 "interim" guidance papers. According to DoD, twenty of the 25 interim papers are still current. The complete working group guidance papers can be downloaded here. Today we will discuss accounting changes and the need for equitable adjustments.

WG 79-23 - Administration of Equitable Adjustments for Accounting Changes not Required by New Cost Accounting Standards

CAS 331.50(a)(4)(C) permits the use of equitable adjustment procedures in connection with the cost impact of any accounting change which the contracting officer determines to be desirable and not detrimental to the interest of the Government.

This guidance addresses a number of questions concerning that provision. The most significant question is that of what criteria should be used in determining whether an accounting change is desirable and not detrimental to the interest of the Government? This is an important question as contracting officers must deal with it all of the time when contractors make voluntary accounting changes. Some contractors make accounting changes an annual event.

According to the guidance, the "desirable" encompasses the tests of being appropriate, warranted, equitable, fair or reasonable. The contracting officer's finding shall not be made solely because of the financial impact of the proposed change on the contractor's current CAS-covered contracts. A change may be desirable and not detrimental to the interest of the Government even though costs increase.

Remember, the overriding criteria for allocating indirect costs to intermediate and final cost objectives (as well as shared services that might be direct) is that it result in a fair and reasonable, causal/beneficial allocation. Changes that increase costs to the Government are not necessarily bad. It could be that the previous allocation methodology did not result in an equitable allocation of costs to Government contracts.

Notwithstanding the logic or reasoning behind accounting changes, contractors can expect a high level of Government scrutiny whenever accounting changes are proposed.

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