On January 17th, 2024, the Cost Accounting Standards Board (CASB) issued an advanced notice of proposed rulemaking (ANPRM) regarding proposed changes to the Cost Accounting Standards (CAS). These proposed changes relate to CAS 404: Capitalization of Tangible Assets and CAS 411: Accounting for Acquisition Costs of Material. The Board is proposing to eliminate all requirements under CAS 404 and 411 apart from 404-50(d)(1), which addresses the value assigned to assets resulting from a business combination.
The Board notes that GAAP has been significantly revised over the years leading to overlap and “nearly completely equivalent requirements” to CAS 404 and 411. If the proposed changes are enacted, the retained requirements from 404-50(d)(1) will be relocated to CAS 418-50, and contractors will still need to disclose their accounting policies related to CAS 404 and 411 in their disclosure statement.
In a staff discussion paper from 2020, the Board identified three potential differences when comparing GAAP to CAS 404 and two differences for CAS 411. On paper, GAAP differs from CAS 404 in the following ways: GAAP does not require a minimum capitalization threshold, it does not have standards regarding written statements of accounting policies, and there are different practices related to the treatment of assets acquired through a business combination. In regard to thresholds and written policies, the differences between GAAP and CAS 404 are minimal in practice as contractors commonly have written policies/documentation/and thresholds in place for financial reporting purposes, and with contractors continuing to be required to complete disclosure statements describing their CAS 404 practices, it seems there will likely be minimal to no impact in these areas.
Regarding the third difference, as it is currently written, CAS 404 allows for the use of the “purchase method” under 404-50(d) and the “pooling of interest method” which is found within 404-50(e). Upon the adoption of the proposed changes, CAS 404-50(d)(2) and 404-50(e) will be removed. However, with 404-50(d)(1) remaining there will continue to be a difference between CAS and GAAP. CAS 404-50(d)(1) allows contractors to book the acquired assets at net book value. Under GAAP, companies must apply the acquisition method which only allows for the fair value of the assets to be used during valuation. Contractors that have incurred costs or depreciation expenses associated with acquired assets will continue to have a difference in their CAS versus GAAP treatment (i.e., net book value versus fair value).When examining CAS 411, the Board found two major differences between CAS and GAAP. The first relates to requirements for written statements of accounting policies, which are not expected to have a substantive impact with its removal for the same reasons described above for CAS 404. The second difference, as the standards are currently written, relates to the average method for inventory costing. The Cost Accounting Standards allow for the use of the moving average cost or the weighted average cost methods. GAAP states that an average method must be used but does not define a particular method, in practice, however, the moving and weighted average cost methods are commonly used by Contractors under GAAP. In the latest ANPRM, it is noted that every surveyed member of the Association of International Accountants (AIA) and Financial Executives International (FEI) is already using the weighted average cost method, the average cost method, or standard cost method. With this in mind, it seems there will likely be minimal impact to contractors resulting from the removal of CAS 411.
Industry Comments
In comment letters submitted to the Board, the National Defense Industrial Association (NDIA) and the Aerospace Industries Association (AIA) expressed their agreement that both CAS 404 and CAS 411 are unnecessary, and agreed that retaining CAS 404-50(d)(1) would continue to result in conflict with GAAP regulations under ASC 805-20-30-1. They also stated that CAS 404-50(d)(1) should not be relocated to CAS 418 as this standard addresses the allocation of direct and indirect costs while CAS 404-50(d)(1) pertains to the measurement of costs. The NDIA and AIA disagree on placement of the clause if it were to be relocated. Regardless of the ultimate placement of the clause, if retained, a difference in GAAP and CAS will remain (i.e., acquired asset at net book value vs fair value). In this regard, the NDIA makes note that this would result in the exclusion of otherwise allowable depreciation costs. They also recommend that if CAS 404 is deleted, CAS 405 should be updated to, “exclude any depreciation costs made unallowable because of an allowability cost principle from inclusion in allocation bases.”
Chess Consulting can assist with any CAS compliance issues as you navigate the complexities of government contracting. Our professionals work closely with our clients to establish an understanding of their specific CAS-related needs – be it the award of a full CAS-covered contract; preparing the initial CASB Disclosure Statement; making assessments of internal business practices to ensure compliance with the standards; strategizing the optimum indirect cost structure based on the current and expected future work environment; or assisting management with response to an alleged audit finding of an “inadequate” disclosure statement or noncompliance with one of the CAS.