Wednesday, November 28, 2018

Does CAS Compliance Require Companies to Depart from Generally Accepted Auditing Standards (GAAP)?

Last week, the CAS Board (Cost Accounting Standards Board) published an agenda for its November and January meetings. There are four topics on the agenda (see CAS Board Meeting) including a couple that we have decided to cover in more detail for its potential impact on small businesses. Even though small business contractors are exempt from CAS, most of the 19 existing standards have been folded in part or in whole into the FAR (Federal Acquisition Regulations) over the years. Yesterday we covered Agenda Topic #4 which consists of a discussion on the Section 809 Panel's recommendation to eliminate the Defense CAS Board, a Board that was created by the 2017 NDAA but has yet to organize (see Will the Newly Created Defense CAS Board Survive?). Today we will cover Agenda Topic #2, Conforming CAS to GAAP (Generally Accepted Accounting Principles).

Agenda topic #3 reads as follows:
Conformance of CAS to Generally Accepted Accounting Principles (GAAP). Section 820 requires the CAS Board to review and conform CAS, where practicable, to GAAP. The Board intends to discuss development of an SDP (Staff Discussion Paper) addressing conformance of CAS 404, Capitalization of Tangible Assets, and CAS 411, Accounting for Acquisition Costs of Material, to GAAP. This is the second SDP addressing CAS-GAAP conformance and will build on the first SDP (under final review for publication and public comment) that (i) lays out a proposed conceptual framework and guiding principles to prioritize the evaluation of whether and to what extent CAS may be conformed to GAAP and (ii) presents an initial comparison of CAS 408, Accounting for Costs of Compensated Personal Absence, and CAS 409, Cost Accounting Standard Depreciation of Tangible Capital Assets, for public comment. The Board intends to receive and review public comment on the first SDP before publishing the second SDP.
The Board has already identified four CAS standards that may or may not require deviation from GAAP. Two of them, the capitalization and depreciation standards (CAS 404 and 409), are not inconsistent with GAAP. It just that GAAP allows companies to be more flexible than CAS in their capitalization and depreciation practices. Whatever issues there are involving capitalization and depreciation however have very little impact on Government contracts. Its a "pay me now or pay me later" situation. If a contractor expenses something, it is reimbursed in the year of expenditure. If a contractor capitalizes an asset, it is reimbursed for the cost over a period of years through depreciation. But what about the time value of money, you ask? In theory, the Government benefits from capitalization because it defers the cost to future years. However, whatever imputed time value of money may accrue to the Government, is offset by FCCM (Facilities Capital Cost of Money) where Contractors earn interest on the undepreciated value of assets. So its a wash. One just doesn't see any capitalization/depreciation disputes brought to the Boards of Contract Appeals for that reason - there is no significant cost impact.

The Board identified two other CAS standards for discussion on aligning them with GAAP - material costs and employees absences - without any explanation as to how compliance might require deviation from GAAP.  We were unaware that these standards (409 and 411) involved departures from GAAP. Guess we'll have to wait for the SDP to learn the Board's concerns.

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