Technically, contracts or subcontracts, not contractors, are covered by CAS though in practice,if a contract becomes CAS covered then the contractor needs to implement accounting practices that are compliant with the standards. So you will usually hear that contractors are or are not CAS covered where we will use that shorthand designation.
There are two steps in determining whether you are CAS covered: does one of the exemptions apply and if not, what is the level of coverage.
Exemptions
The CAS covers all contracts and subcontracts unless a specific exemption applies. Contract modifications are exempt or nonexempt from CAS coverage based on whether the contract under which it was issued is exempt or not. (Unless we specify it, whenever we mention contracts or contractors it will also apply to subcontracts and subcontractors.) There are 10 exemptions, the principle ones being (1) sealed bid contracts (2) negotiated contracts not in excess of $750,000 (3) contracts with small businesses (4) contracts where prices are set by law or regulations (5) contracts for commercial items and (6) firm-fixed price contracts awarded without submission of any cost data. In addition, one of the exemptions, contracts performed overseas, has recently been eliminated. A contract may very well be subject to CAS coverage even though the procurement was exempt from the Truth in Negotiations Act covering certified cost or pricing data because CAS coverage occurs when cost data is submitted whether or not it is “certified”.
Level of Coverage
There are two types of coverage: “full” coverage by all 19 standards or “modified” coverage by four standards.
Full coverage. Full CAS coverage applies to a contractor’s business unit that (a) receives a single CAS-covered contract of $50 million or more (the threshold mentioned in this article will likely change more often than in the past since the CAS Board has expressed the desire to keep up with inflation) or (b)received $50 million or more in “net CAS covered awards” (which includes the potential value of contract options) during the preceding cost accounting period provided that a “trigger” contract exceeding $7.5 million was first let.
Modified coverage. If a nonexempt contract is for less than $50 million but more than $7.5 million and the business unit received less than $50 million in net awards the previous cost accounting period, four of the standards apply: CAS 401, CAS 402, CAS 405 and CAS 406. Once a contract with modified coverage is awarded to a business segment in a cost accounting period, all that business unit’s non exempt contracts for the period are also modified covered unless a fully CAS covered award is made. A subsequent contract award over $850K (this changes frequently) will be either fully or modified CAS covered depending on the coverage of its prior contracts.
In this age of new contract vehicles where an “umbrella” contract (e.g. ID/IQ) forms the basis to provide numerous orders it is confusing whether the thresholds apply at the contract level or individual task or delivery order level. Basically unless the umbrella contract clearly identifies a dollar level(unusual these days) the threshold applies at the task/delivery order level.
Disclosure Statement
The CAS Disclosure statement is an 8 section form that asks the contractor to describe their accounting practices is some detail. The CAS Board occasionally issues revised forms so make sure you have the latest.
The threshold for the responsibility of issuing a disclosure statement is similar for full coverage –either before a $50 million dollar contract is awarded or if $50 million in CAS-covered contracts were awarded in the preceding cost accounting period(provided the $7.5 million trigger contract isexceeded). The $50 million dollar threshold for the second condition is measured by the aggregate of all contracts awarded to all segments of a company in the preceding cost accounting period. A contractor that meets these thresholds must submit a disclosure statement either before the $50 million threshold is met or before award of its first CAS covered contract in the immediately following accounting period. If one of the business units of a corporate family receives a CAS covered contract then any other business unit that receives a $850,000 contract to which modified CAS coverage applies must also file a disclosure statement (whether that contract is astand-alone or is an intercompany transfer of costs to another contract.)
Administrative Considerations
Various contract clauses impose a variety of requirements. In addition to imposing requirements to disclose practices and comply with all standards, the clauses applicable to either full or modified coverage address adjustments to contract prices if a change to an accounting practice occurs, requiring cost impact analyses which are the most onerous aspects of being CAS covered.
Individual Standards
There are 19 individual standards – CAS 401 through CAS 418 and CAS 420, no CAS 419. They are codified in the CFR at 9904.
CAS 401, Consistency in Estimating, Accumulating and Reporting Costs. This standard is the first that embodies a theme of consistency. Here, CAS 401 requires a contractor’s practices used in estimating costs for a proposal be consistent with its practice used to accumulate and report costs. Conversely, the contractor’s cost accounting practices to accumulate and report its costs must be consistent with practices used to estimate costs.
CAS 402, Consistency in Allocating Costs Incurred for the Same Purpose. This is another consistency standard where CAS 402 provides that all costs incurred for the same purpose “under like circumstances” are “either direct only or indirect costs only.” A direct cost is identified specifically with a final cost objective (e.g. contract, task or delivery order, grant) while an indirect costs is a cost identified with two or more final cost objectives. So, if a type of cost is a direct cost on a contract the same type of costs cannot be treated indirectly on another contract if the costs are incurred “in like circumstances.” As an illustration, the CAS Board stated that bid and proposal costs that are treated as indirect costs maybe charged direct if the proposal was required by contract because the circumstances in the latter case were unlike submission of proposals under other cases. Contractors should explain in the proposal the manner in which costs are treated in “unlike circumstances” or if the circumstances are not “unlike” then why the apparently similar costs are not similar.
CAS 403, Allocation of Home Office Overhead to Segments. CAS governs the allocation of home office and intermediate home office expenses to contractor segments. A “segment” generally means a division, plant or department with separate reporting and usually profit center status where it need not necessarily be a separate “legal” entity. The home office or intermediate home office may be responsible for managing two or more segments but not necessarily all segments. CAS 403 provides a hierarchy of three ways to allocate home office costs to segments: (1) directly to a particular segment (2) indirectly to two or more but not necessarily all segments where the manner of allocation must reflect a “logical relationship” between the cost and benefit
received (e.g. personnel management allocated over a labor related base) and (3) remaining costs, called residual costs, to all segments. The residual pool maybe allocated to segments based on a measurement of total activity where if it exceeds $3.35 million, the base of allocation must be the three factor formula (average percentage of segments’ payroll, operation revenue and net book values of assets).
CAS 404, Capitalization of Tangible Assets. CAS 404 requires contractors to (a) capitalize all assets with both a useful life of two years or more and a cost of more than $5,000 and (b) develop criteria for determining the life of an asset. When an asset is capitalized, its costs are depreciated and only the depreciation for that year may be charged in that year. Costs that extend the life of an asset must be capitalized with the asset but if it restores or maintains the life of an asset it is to be expensed to the current period. In recent times the CAS (and FAR) have been amended to reflect asset values during a business combination where the asset cannot be valued at greater amounts that those recorded by the seller, regardless of what the purchase price was.
CAS 405, Accounting for Unallowable Costs. CAS 405 provides that expressly unallowable costs and those agreed by the government and contractor to be unallowable must be identified and excluded from any billings, claims or proposals applicable to government contracts. Such unallowable costs must also bear their fair share of applicable general and administrative costs (must be included in the G&A base). The same rules apply to “directly associated costs” – they would not have been incurred had not the unallowable costs been incurred.
CAS 406, Cost Accounting Period. CAS 406 generally requires contractors to use their fiscal year as their accounting period but permits use of other annual periods if they are more representative of costs and the government agrees. There is also a consistency provision that except for narrow exceptions requires use of the same accounting period for accumulating costs, establishing allocation base and allocating costs.
CAS 407, Standard Costs for Direct Material and Direct Labor. CAS 407 applies only to standard costs which is a cost computed by using one or more pre established measures. It is not an actual cost so amounts that are later incurred that are not projected in the standard cost is a variance. If a contractor wants to use standard costs, it must establish, in writing, how standards are set, revised, used and how variances are treated. Standard costs are normally booked where they and variances are accounted for at the level where they were consumed (called the “production unit”)and variances must be disposed of at least annually.
CAS 408, Accounting for Costs of Compensated Personal Absence. The standard defines compensated personal absence as “any absence from work due to reasons such as illness, vacation, holidays, jury duty, military training or personal activities for which an employer pays compensation in accordance with its plan or custom.” CAS 408 requires these costs be assigned to the period they were “earned” (i.e. when the contractor becomes liable for it) and a prorate share be allocated to cost objectives. If compensation is payable only under certain occurrences (e.g. sick leave earned but not if terminated) then it must be assigned only to the period in which it was paid.
CAS 409, Depreciation of Tangible Capital Assets. This sister provision to CAS 404 requires the capitalized cost of the asset, minus residual value, be amortized over the service life of the asset. CAS 409 generally likes the allocation of depreciation be through indirect cost pools. A gain or loss on the disposition of an asset must be assigned to the periodof the disposition and allocated in the same manner the depreciation costs were made.
CAS 410, Allocation of Business Unit’s General and Administrative Expenses to Final Cost Objectives. G&A costs are those expenses incurred for the management of the business as a whole. CAS 410 requires them to be accumulated in a separate pool and allocated to final cost objectives by means of cost input bases representing total business activity. CAS 410 recognizes three acceptable allocation bases:
(1) total cost input (TCI), which is generally accepted, consisting of all costs except for G&A expenses (2)value added which is TCI minus material and subcontract costs or (3) single element base (most commonly direct labor dollar base), which is rare. G&A expenses are allocated during the year by means of a predictive rate established at the beginning of the year with adjustments for actuals at the end of the period. Also, CAS 410 provides for special allocations which entails a different G&A expense allocation to cost objectives that receive significantly more or less benefit from the G&A expenses.
CAS 411, Accounting for Acquisition Costs of Material. The acquisition costs generally include itsprice adjusted for rebates or discounts. The standard contains detailed rules for costing material incompany-owned inventory and for allocating those costs through methods (e.g. FIFO, LIFO).
CAS 412, Composition and Measurement of Pension Cost. CAS 412 governs the determination and measurement of pension costs and recognizes three basic types, each of which are treated differently
– defined benefit, defined contribution or pay-as-you go. Pension costs for defined benefit basically consists of (a) normal cost (present value of future benefits)
(b) a portion of unfunded actuarial liability (where value of assets are lower than actuarial liability and interest) and (c) adjustments for actuarial gains and losses (where actuarial assumptions differ from experience). Pension costs for defined contribution plans represent costs an employer is required to make to the plan for the period while costs for defined pay as-you go plans are amounts paid to retirees (and their beneficiaries) for benefits in the period plus amortization installments on amount paid to settle future benefits. Generally, only pension costs that are funded by the date for filing corporate taxes can be recovered where if not funded, cannot be recovered currently or in the future.
CAS 413, Adjustment and Allocation of Pension Cost. This sister standard to CAS 412 covers adjustment of pension cost for actuarial gains and losses and allocation of pensions to segments. It requires that actuarial gains and losses be calculated annually, amortized and assigned to the current and future period in installments. As for allocation to segments, a composite rate is normally permissible but a segment’s pension costs must be separately calculated where (a) there is a material termination of employment in the segment (b) the segment’s benefit level or eligibility differs significantly from other segments or (c) the segments actuarial assumptions differ from other segments. In addition, the standard requires adjustments when either plan benefits or the contractor’s business with the government changed. If a segment is closed, which can occur also when a segment no longer seeks government business, a plan is terminated or benefits are changed the difference between market value of the assets and actuarial liability represents an adjustment to prior pension costs where the adjustment can favor either the government or contractor.
CAS 414, Cost of Money as an Element of the Cost of Facilities Capital. The facilities capital cost of money (FCCM) is a rate, based on interest rates set every six months by the Dept. of Treasury, multiplied by the net book value of tangible capital assets and intangible amortized capital assets(including land). The resulting amount is allocated to cost pools where a separate FCCM factor is determined for each indirect cost pool to which a significant amount of facilities capital has been allocated. CAS 414 provides a form and example(CASB-CMF) for calculating these amounts.
CAS 415, Accounting for the Cost of Deferred Compensation. Deferred compensation is defined asan award made by an employer to compensate an employee in a future accounting period for services rendered in a period prior to the payout. The cost of the deferred compensation is the present value of the future payment. CAS 415 requires contractors to assign the compensation to the period in which the obligation to pay compensation becomes fixed, not in the future period it is paid. The standard prescribes a six part test for determining whether an obligation is established where basically the test is (a) if a payment (which must be made in cash, assets or stock to a known individual) cannot be voided by the employer (b) the future award is reasonably measurable and (c) occurrence of a precondition for payment is reasonably probable.
CAS 416, Accounting for Insurance Costs. This standard governs the measurement, assignment and allocation of insurance costs. The standard’s concept of insurance costs is “projected average loss” – the estimated long term average loss per period. If insurance is purchased, the projected average loss ispresumed to be equal to the amount of insurance premiums. For self-insurance, projected average loss(plus administrative expenses) is the amount to be charged to a period, not the actual loss for that period.
CAS 417, Cost of Money as an Element of the Cost of Capital Assets Under Construction. Unlike its FCCM sister in CAS 414, the cost of money is recovered by being part of the capitalized cost of the asset. COM is a rate, based on Treasury interest rates set every six months, multiplied by the “representative investment amount” of assets under construction. The standard is rather vague on how to compute this amount but generally GAAP accounting is acceptable.
CAS 418, Allocation of Direct and Indirect Costs. This standard addresses how to determine if a cost is direct or indirect, the coherent pooling of indirect costs and the allocation of indirect costs to cost objectives. CAS 418 requires business units to establish and consistently apply policies for classifying costs as direct or indirect. It also requires indirect costs be accumulated in “homogeneous” cost pools(where cost elements are similar and their relationship to direct costs are similar). Pooled costs must be allocated to cost objectives based on “beneficial or causal relationships.” General guidelines and numerous examples of appropriate activity bases are provided but they are only suggestive, not required, so in practice there is a great deal of flexibility here. Also, a special allocation is permitted unlike a mandatory special allocation provision in CAS 410.
CAS 420, Accounting for Independent Research and Development (IR&D) Costs and Bid and Proposal (B&P) Costs. This standard governs the determination and allocation of IR&D/B&P costs where basically if IR&D costs are not sponsored by a grant nor required in the performance of a contract it can be considered indirect IR&D while if sponsored or required, it must be considered direct. IR&D/B&P costs of a business unit are allocated over the same base used for allocating G&A costs (usually included in the G&A pool). IR&D/B&P costs accumulated at the home office must be distributed directly to its benefiting segments where after the direct allocation, all remaining IR&D/B&P costs remaining at the home office may be included in the residual cost pool. Like CAS 418, special allocations of IR&D/B&P costs are permitted.
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