[Federal Register Volume 62, Number 109 (Friday, June 6, 1997)]
[Rules and Regulations]
[Pages 31308-31309]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14773]




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Part VI





Office of Management and Budget





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48 CFR Part 9904



Cost Accounting Standards Board; Allocation of Contractor Restructuring 
Costs; Final Rule

  Federal Register / Vol. 62, No. 109 / Friday, June 6, 1997 / Rules 
and Regulations  

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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9904


Cost Accounting Standards Board; Allocation of Contractor 
Restructuring Costs

AGENCY: Cost Accounting Standards Board, Office of Federal Procurement 
Policy, OMB.

ACTION: Final rule; interpretation.

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SUMMARY: The Cost Accounting Standards (CAS) Board is issuing an 
interpretation designed to address period cost assignment and 
allocability criteria for restructuring costs incurred under certain 
national defense contracts.

DATES: Effective Date: August 15, 1994.

FOR FURTHER INFORMATION CONTACT: Richard C. Loeb, Executive Secretary, 
Cost Accounting Standards Board (telephone: 202-395-3254).

SUPPLEMENTARY INFORMATION:

A. Background

    Section 818 of the National Defense Authorization Act for Fiscal 
Year 1995, Pub. L. 103-337, restricts the Department of Defense from 
reimbursing a contractor or subcontractor that decides to avail itself 
of incurring restructuring costs associated with a business combination 
unless certain ``net savings'' provisions are met. Questions have 
arisen as to the methods to be used in measuring, assigning and 
allocating such restructuring costs. This interpretation is designed to 
address these questions, as well as the cost of restructuring 
activities, in general.
    This interpretation is based upon the interim interpretation (with 
request for comment) issued by the CAS Board on March 8, 1995, 60 FR 
12711. Ten sets of public comments were received in response to the 
interim interpretation. None of the commenters identified any 
substantive issues, although several requested more specificity with 
respect to the relationship of the interim interpretation to the 
provisions of CAS 9904.406--Cost Accounting Period. Accordingly, the 
interim interpretation is being revised to clarify that it serves 
principally as an interpretation of the provisions of CAS 9904.406 as 
related to restructuring costs.

B. Authority To Issue an Interpretation

    Authority for issuance of this interpretation is provided by 41 
U.S.C. 422(f)(1) and 48 CFR 9901.302(b).
Richard C. Loeb,
Executive Secretary, Cost Accounting Standards Board.

List of Subjects in 48 CFR part 9904

    Accounting, Government procurement.

    Accordingly, 48 CFR part 9904 is amended as follows:

Part 9904--COST ACCOUNTING STANDARDS

Subpart 9904.406--Cost Accounting Standard--Cost Accounting Period

    1. The authority citation for part 9904 of chapter 99 of title 48 
continues to read as follows:

    Authority: Pub. L. 100-679, 102 Stat. 4056, 41 U.S.C. 422.

    2. Section 9904.406-61 is amended by adding text to read as 
follows:


Sec. 9904.406-61  Interpretation.

    (a) Questions have arisen as to the allocation and period cost 
assignment of certain contract costs (primarily under defense contracts 
and subcontracts). This section deals primarily with the assignment of 
restructuring costs to cost accounting periods. In essence, it 
clarifies whether restructuring costs are to be treated as an expense 
of the current period or as a deferred charge that is subsequently 
amortized over future periods.
    (b) ``Restructuring costs'' as used in this Interpretation means 
costs that are incurred after an entity decides to make a significant 
nonrecurring change in its business operations or structure in order to 
reduce overall cost levels in future periods through work force 
reductions, the elimination of selected operations, functions or 
activities, and/or the combination of ongoing operations, including 
plant relocations. Restructuring activities do not include ongoing 
routine changes an entity makes in its business operations or 
organizational structure. Restructuring costs are comprised both of 
direct and indirect costs associated with contractor restructuring 
activities taken after a business combination is effected or after a 
decision is made to execute a significant restructuring event not 
related to a business combination. Typical categories of costs that 
have been included in the past and may be considered in the future as 
restructuring charges include severance pay, early retirement 
incentives, retraining, employee relocation, lease cancellation, asset 
disposition and write-offs, and relocation and rearrangement of plant 
and equipment. Restructuring costs do not include the cost of such 
activities when they do not relate either to business combinations or 
to other significant nonrecurring restructuring decisions.
    (c) The costs of betterments or improvements of capital assets that 
result from restructuring activities shall be capitalized and 
depreciated in accordance with the provisions of 9904.404 and 9904.409.
    (d) When a procuring agency imposes a net savings requirement for 
the payment of restructuring costs, the contractor shall submit data 
specifying
    (1) the estimated restructuring costs by period,
    (2) the estimated restructuring savings by period (if applicable), 
and
    (3) the cost accounting practices by which such costs shall be 
allocated to cost objectives.
    (e) Contractor restructuring costs defined pursuant to this section 
may be accumulated as deferred cost, and subsequently amortized, over a 
period during which the benefits of restructuring are expected to 
accrue. However, a contractor proposal to expense restructuring costs 
for a specific event in a current period is also acceptable when the 
Contracting Officer agrees that such treatment will result in a more 
equitable assignment of costs in the circumstances.
    (f) If a contractor incurs restructuring costs but does not have an 
established or disclosed cost accounting practice covering such costs, 
the deferral of such restructuring costs may be treated as the initial 
adoption of a cost accounting practice (see 9903.302-2(a)). If a 
contractor incurs restructuring costs but does have an existing 
established or disclosed cost accounting practice that does not provide 
for deferring such costs, any resulting change in cost accounting 
practice to defer such costs may be presumed to be desirable and not 
detrimental to the interests of the Government (see 9903.201-6). 
Changes in cost accounting practices for restructuring costs shall be 
subject to disclosure statement revision requirements (see 9903.202-3), 
if applicable.
    (g) Business changes giving rise to restructuring costs may result 
in changes in cost accounting practice (see 9903.302). If a contract 
price or cost allowance is affected by such changes in cost accounting 
practice, adjustments shall be made in accordance with subparagraph 
(a)(4) of the CAS clause

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(see 9903.201-4(a)(2), 9903.201-4(c)(2) and 9903.201-4(e)(2)).
    (h) The amortization period for deferred restructuring costs shall 
not exceed five years. The straight-line method of amortization should 
normally be used, unless another method results in a more appropriate 
matching of cost to expected benefits.
    (i) Restructuring costs that are deferred shall not be included in 
the computation to determine facilities capital cost of money (see 
9904.414). Specifically, deferred charges are not tangible or 
intangible capital assets and therefore are excluded from the 
facilities capital values for the computation of facilities capital 
cost of money.
    (j) Restructuring costs incurred at a home office level shall be 
treated in accordance with the provisions of 9904.403. Restructuring 
costs incurred at the segment level that benefit more than one segment 
should be allocated to the home office and treated as home office 
expense pursuant to 9904.403. Restructuring costs incurred at the 
segment level that benefit only that segment shall be treated in 
accordance with the provisions of 9904.418. If one or more indirect 
cost pools do not comply with the homogeneity requirements of 9904.418 
due to the inclusion of the costs of restructuring activities, then the 
restructuring costs shall be accumulated in indirect cost pools that 
are distinct from the contractor's ongoing indirect cost pools.
    (k) This section is applicable to contractor ``restructuring 
costs'' paid or approved on or after August 15, 1994.

[FR Doc. 97-14773 Filed 6-5-97; 8:45 am]
BILLING CODE 3110-01-P