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Application of Cost Accounting Standards Today Government Contract Accounting

Application of Cost Accounting Standards Today€¦ · Application of Cost Accounting Standards Today ... Branch Administrator OFPP Comptroller ... CAS 403 — Allocation of home

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Application of Cost Accounting Standards Today

Government Contract Accounting

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 2

Cost Accounting Standards – History

► 1968 Admiral Rickover Congressional Testimony

► 1970 GAO Feasibility Study

► 1970 CAS Board Established – PL 91-379

► 1972 – 1980 Rules, Regulations and Standards:

► CAS Applicability and Exemption Requirements

► CAS Disclosure Statement

► Promulgated 19 Cost Accounting Standards

► 1980 Board Congress curtailed Funding for FY 1981

► Requirements remained Applicable

► 1984 DoD “Assumed Responsibility” for CAS

► 1988 CAS Board re-established by OFPP

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 3

Cost Accounting Standards – History

► Originally established to address concerns involving defense

contractor cost estimating, accumulating and reporting under

negotiated government contracts (and subcontracts), the Cost

Accounting Standards (CAS) can now apply to civilian agency

contracts and also extend to certain colleges and universities

► The most recent update to CAS requirements went into effect as of

December 22, 2011

► There are two levels of CAS coverage: full coverage and modified

coverage

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 4

CURRENT

(1988 – Present)

OLD

(1970 – 1980)

Structure of CAS Board

Congress Executive

Branch

Administrator

OFPP

Comptroller

General

CAS Board CAS Board

National Defense Contracts

All Contracts

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 5

Joseph G. Jordan,

Administrator, Office of Federal Procurement Policy

Richard J. Wall,

Former Partner and National Director, Ernst

& Young Government Contract Services,

retired

Patrick J. Fitzgerald,

Director

Defense Contract Audit Agency

Laurie L. Schmidgall

Director of Cost Policy, Corporate,

The Boeing Company

Kathleen M. Turco,

Associate Administrator for Government-

wide Policy,

General Services Administration

CAS Board Members

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 6

Cost Accounting Standards

Basic CAS concepts:

► CAS 401 — Consistency in estimating, accumulating & reporting

► CAS 402 — Consistency in allocating costs for same purpose

► CAS 405 — Accounting for unallowable costs

► CAS 406 — Cost accounting period

Allocation of costs:

► CAS 403 — Allocation of home office expenses to segments

► CAS 410 — Allocation of business unit G&A to final cost objectives

► CAS 418 — Allocation of direct and indirect costs

► CAS 420 — Accounting for IR&D/B&P costs

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 7

Cost Accounting Standards

Compensation:

► CAS 408 — Compensated personal absence

► CAS 412 — Composition and measurement of pension costs

► CAS 413 — Adjustment and allocation of pension costs

► CAS 415 — Deferred compensation

Assets:

► CAS 404 — Capitalization of tangible capital assets

► CAS 409 — Depreciation of tangible capital assets

► CAS 414 — Cost of money as an element of the cost of facilities

capital

► CAS 417 — Cost of money as an element of the cost of capital under

construction

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 8

Cost Accounting Standards

Other standards:

► CAS 407 — Use of standard costs

► CAS 411 — Accounting for material costs

► CAS 416 — Accounting for insurance costs

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 9

CAS Clause Requirements

► Disclose Cost Accounting Practices (CAP) – Full coverage

► Follow Disclosed CAP Consistently

► Comply with Current & Future Cost Accounting Standards

► Agree to Equitable Adjustment for Required Changes and for Other

Changes When Parties Agree

► Negotiate Terms & Conditions for Proposed Changes But No

Increased Costs

► Agree to Adjustment to Recover Increased Costs for Failure to

Comply with Standards or Consistently Follow CAP

► Subcontract Flowdown

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 10

CAS Exemptions

► Sealed bids

► Negotiated contracts not in excess of the Truth in Negotiations Act

(TINA) threshold - $700,000

► Small business concerns

► Foreign governments

► Foreign concerns (CAS 401 & 402 only)

► Prices set by law or regulation

► FFP Commercial Item acquisitions

► Subcontracts under the NATO PHM Ship program to be performed

outside the United States by a foreign concern

► FFP adequate price competition without cost or pricing data

► No CAS-covered awards $7.5M or more (Trigger Contract)

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 11

CAS Coverage — Business Units

► Full Coverage - ► Single award of $50 million or more

► Total CAS-covered awards of $50 million or more in preceding cost

accounting period

► Requires a business unit to comply with all 19 cost accounting standards

► Modified Coverage -

► Single award of $7.5 million or more

► Trigger contract - A contractor who has not previously been CAS covered,

is awarded a CAS covered contract over $7.5 million which then "triggers"

CAS coverage for any award over the CAS threshold of $700k

► Requires compliance with the following cost accounting standards:

► CAS 401 — Consistency in estimating, accumulating and reporting costs

► CAS 402 — Consistency in allocating costs incurred for the same purpose

► CAS 405 — Accounting for unallowable costs

► CAS 406 — Cost accounting period

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 12

Modified CAS Coverage — Business Units

► CAS 401 — Consistency in estimating, accumulating and

reporting costs

► CAS 402 — Consistency in allocating costs incurred for

the same purpose

► CAS 405 — Accounting for unallowable costs

► CAS 406 — Cost accounting period

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 13

CAS Disclosure Statement

Corporate-wide awards:

► Single award of $50 million or more

► Total CAS-covered awards of $50 million or more in preceding cost

accounting period

Business unit exemption:

► Business unit CAS-covered awards were less than 30 percent of total

sales for the most recently completed cost accounting period and less

than $10 million

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 14

CAS Disclosure Statement (continued)

Timing of submission:

► Based on awards in prior year: - First CAS-covered contract (or within 90 days) of the start of the next

fiscal year

► Based on single award: - Prior to Award

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 15

CAS Disclosure Statement Format

► Part 1 General information

► Part 2 Direct Costs

► Part 3 Direct vs. Indirect Costs

► Part 4 Indirect Costs

► Part 5 Depreciation & Capitalization Practices

► Part 6 Other Costs and Credits

► Part 7 Deferred Compensation & Insurance Costs

► Part 8 Corporate or Group Expenses

► Continuation Sheets

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 16

Cost Accounting Practice

► Measurement method or technique, e.g., ► Historical costs, market value or present value

► Standard cost or actual cost

► Designation of costs included/excluded from capital assets

► Assignment to cost accounting periods ► Accrual basis or cash basis accounting

► Allocation method or technique ► Criteria for classifying direct/indirect costs

► Composition of pooled indirect costs

► Composition of allocation base for indirect costs

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 17

Current CAS Hot Topics – CAS Board Harmonization Rule, Effective February 27, 2012

► Harmonization required by Pension Protection Act

► Rule issued December 27, 2011

► Contracts prior to the effective date will require Equitable

Adjustment claim to be submitted, if impacted

► Forward Pricing Rates need to be adjusted for Contracts

issued after February 27, 2012 or risk loss of recovery

because Equitable Adjustment may not be appropriate

► Impact starts 1st fiscal year after receipt of CAS covered

contract after 6-30-12 which will mean 1-1-13 for most

calendar year contractors

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 18

Current CAS Hot Topics – CAS Board Harmonization Rule, Effective February 27, 2012

► Impact is phased in over four years ► 25% in 2014

► 50% in 2015

► 75% in 2016

► 100% in 2017 and later

► Harmonization shortens amortization period for

Gains/Losses from 15 years to 10 years

► Results of PPA/Harmonization: ► More cost on programs

► More complex auditing required

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 19

Current CAS Hot Topics – Raytheon Case

► Statute of Limitations – 6 years – differing interpretations of when

the statute tolls

► On December 17, 2012, Judge Delman ruled on Raytheon’s

Motions for Declaratory Judgment, in ASBCA Nos. 57576 and

57679

► Raytheon’s Motion that was predicated on an assertion that the

Government’s claims “were asserted beyond the six-year

presentment period and are untimely”

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 20

Current CAS Hot Topics – Raytheon Case

Issue and ACO Determination:

► On 10 January 2011, the Contracting Officer issued a Final

Decision, demanding payment of $14.1 million

► The CO also issued a penalty against Raytheon due to its

inclusion of alleged expressly unallowable costs in its final

indirect cost rate proposals for CYs 2002-2009, in the amount

of $5,946,762, including interest, pursuant to the contract

clause FAR 52.242-3, Penalties for Unallowable Costs (May

2001)

► In total, the Government demanded that Raytheon pay $20

million

► Raytheon appealed the COFD

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 21

Current CAS Hot Topics – Raytheon Case

Statute of Limitations – “Accrual of a Claim”:

► FAR Part 33.201 defines “claim accrual” for purposes of establishing

the SOL

► “Accrual of a Claim” means the date when all events, that fix the

alleged liability of either the Government or the contractor and permit

assertion of the claim, were known or should have been known. For

liability to be fixed, some injury must have occurred. However,

monetary damages need not have been incurred

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 22

Current CAS Hot Topics – Raytheon Case

Statute of Limitations – “Initiation of a Claim”:

► 33.206 Initiation of a claim.

► (a) Contractor claims shall be submitted, in writing, to the contracting

officer for a decision within 6 years after accrual of a claim, unless

the contracting parties agreed to a shorter time period. This 6-year

time period does not apply to contracts awarded prior to

October 1, 1995. The contracting officer shall document the contract

file with evidence of the date of receipt of any submission from the

contractor deemed to be a claim by the contracting officer.

► (b) The contracting officer shall issue a written decision on any

Government claim initiated against a contractor within 6 years after

accrual of the claim, unless the contracting parties agreed to a

shorter time period. The 6-year period shall not apply to contracts

awarded prior to October 1, 1995, or to a Government claim based on

a contractor claim involving fraud.

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 23

Current CAS Hot Topics – Raytheon Case

DCAA action and reporting:

► With respect to CY 2002, the record shows that on 29 September

2003, DCAA issued a memorandum regarding its audit of appellant's

bonus and incentive compensation costs for CY 2002, concluding that

these costs were fully allowable

► However roughly four years later, by audit report dated 24 September

2007, DCAA determined that portions of these same costs were not

allowable for reasons stated herein. It was this audit report that

ultimately led to the government's present claims under this appeal

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 24

Current CAS Hot Topics – Raytheon Case

ASBCA Decision:

► Based upon the date of the DCAA memorandum, we believe the

government should have known - by 29 September 2003 - that the

incentive compensation costs in question for CY 2002 were

unallowable and should also have known that the government had

paid increased costs under government contracts in CY 2002

► The government's claim letter is dated 10 January 2011, and the

government's claims must have accrued no earlier than 10 January

2005 to be timely

► We have concluded that the government's claim to recover increased

costs paid under government contracts in CY 2002 and the related

penalty claim for CY 2002 accrued no later than 29 September 2003.

► Accordingly, we must conclude that the government's claims for CY

2002 are untimely

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 25

Current CAS Hot Topics – Raytheon Case

Other Years – ASBCA:

► CY 2003 Costs - Raytheon's overhead cost submission for CY 2003

was submitted to the government in or around June 2004

► CY 2004- Raytheon's Corporate Home Office Allocations proposal for

forward pricing rates was submitted to the government in September

2004

► We believe the government should have known - prior to 10 January

2005 - of the subject CAS noncompliance and that the government

paid increased costs under government contracts as a result in CY

2003 and CY 2004. We are persuaded that the government's claims

of 10 January 2011 for these increased costs in CY 2003 and CY

2004 are untimely

► CY 2005-2009 were considered to be timely

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 26

CAS Board Current Issues – Potential Changes

► Commercial Contracts – Published in Federal Register

► Exemption from Cost Accounting Standards for Contracts

and Subcontracts for the Acquisition of Commercial Items

(i.e., (b)(6) commercial item exemption)

► Comments to the Proposed Rule (due January 18, 2013)

► Exemption from Cost Accounting Standards for Firm-

Fixed-Price Contracts and Subcontracts Awarded Without

Submission of Certified Cost or Pricing Data (i.e., (b)(15)

FFP exemption)

► Comments to the Proposed Rule (due December 5,

2011)

Questions

Thank You

Follow-up Contact Information –

Steven Tremblay

617.375.2420

[email protected]

Frank Summers

617.375.1285

[email protected]

Jack Gay

617.375.3725

[email protected]

Application of Cost Accounting Standards Today

Government Contract Accounting

Page 29

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