[Federal Register Volume 68, Number 161 (Wednesday, August 20, 2003)]
[Proposed Rules]
[Pages 50111-50120]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-21074]


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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9904


Cost Accounting Standards Board; Accounting for the Costs of 
Employee Stock Ownership Plans (ESOPs) Sponsored by Government 
Contractors

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

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Cost Accounting Standards Board (CASB), Office of Federal 
Procurement Policy, invites public comments on proposed amendments to 
the Cost Accounting Standards (CAS), ``Cost accounting standard for 
composition and measurement of pension cost'', and ``Accounting for the 
cost of deferred compensation''. These proposed amendments address 
issues concerning the recognition of the costs of Employee Stock 
Ownership Plans (ESOPs) under Government cost-based contracts and 
subcontracts. These proposed amendments provide criteria for measuring 
the costs of ESOPs and their assignment to cost accounting periods. The 
allocation of a contractor's assigned ESOP costs to contracts and 
subcontracts is addressed in other Standards. The proposed amendments 
also clarify that accounting for the costs of ESOPs will be covered by 
the provisions of ``Accounting for the cost of deferred compensation'' 
and not by any other Standard.

DATES: Comments must be in writing and must be received by November 18, 
2003.

ADDRESSES: Due to delays in OMB's receipt and processing of mail, 
respondents are strongly encouraged to submit comments electronically 
to ensure timely receipt. Electronic comments may be submitted to:

[[Page 50112]]

[email protected]. Please put the full body of your comments in the text 
of the electronic message and also as an attachment readable in either 
MS Word or Corel WordPerfect. Please include your name, title, 
organization, postal address, telephone number, and e-mail address in 
the text of the message. Comments may also be submitted via facsimile 
to (202) 395-5105. Please cite CASB Docket No. 00-03A in your comment.

FOR FURTHER INFORMATION CONTACT: Robert A. Burton, Associate 
Administrator, Office of Federal Procurement Policy (telephone: (202) 
395-3302).

SUPPLEMENTARY INFORMATION: 

A. Regulatory Process

    The Cost Accounting Standards Board's rules, regulations and 
Standards are codified at 48 CFR chapter 99. The Office of Federal 
Procurement Policy Act, 41 U.S.C. 422(g)(1), requires the Board, prior 
to the establishment of any new or revised Cost Accounting Standard, to 
complete a prescribed rulemaking process. The process generally 
consists of the following four steps:
    1. Consult with interested persons concerning the advantages, 
disadvantages and improvements anticipated in the pricing and 
administration of government contracts as a result of the adoption of a 
proposed Standard (e.g., promulgation of a Staff Discussion Paper.)
    2. Promulgate an Advance Notice of Proposed Rulemaking (ANPRM).
    3. Promulgate a Notice of Proposed Rulemaking (NPRM).
    4. Promulgate a Final Rule.
    This ANPRM is issued by the Board in accordance with the 
requirements of 41 U.S.C. 422(g)(1)(B) and (C), and, is step two of the 
four-step process.

B. Background and Summary

Prior Promulgations

    The CAS and Federal Acquisition Regulation (FAR) have dealt with 
issues associated with ESOPs ever since ESOPs became popular in the 
late 1970s as a vehicle for providing incentive compensation to 
employees, as well as a means for corporations to finance their capital 
requirements. The popularity of ESOPs was greatly enhanced by their 
inclusion in the Employee Retirement Income Security Act of 1974 
(ERISA) and by several beneficial changes to the Federal Income Tax 
Code in that same time period.
    At first, the issues that arose were regarded as allowability 
matters that were to be treated in the FAR (or one of its predecessors, 
the Defense Acquisition Regulations or Armed Services Procurement 
Regulations). The views of the CASB were sought primarily on an 
advisory basis. However, after issuance of the decision of the Armed 
Services Board of Contract Appeals (ASBCA) in the ``Parsons case,'' 
Ralph Parsons Co., ASBCA Nos. 37391, 37946, and 37947, December 20, 
1990, 91-1 BCA 23648, reconsideration denied 91-2 BCA 23751, various 
government commenters suggested to the CASB that ESOP cost measurement 
and period assignment matters warranted placement on the CASB's agenda. 
These suggestions were amplified in light of the decision of the ASBCA 
in Ball Corp., ASBCA No. 49118, April 3, 2000, 00-1 BCA 30864. This 
position has been reiterated both by the Department of Defense and by 
some contractors.
    The Board first considered issuing an Interpretation of its 
existing Standards, but then decided that additional research was 
needed. Various approaches for dealing with ESOP accounting issues were 
considered by the CASB and other interested parties in the late 1990s. 
On September 15, 2000, the Board issued a Staff Discussion Paper (SDP) 
on this topic (65 FR 56008, Sept. 15, 2000).
    After the Board reviewed and discussed the public comments received 
in response to the Staff Discussion Paper, the staff was asked to 
perform additional research. The staff explored three different 
options: (a) Modify CAS 9904.415 so that the contribution to the ESOP 
could be treated as deferred compensation for government contract 
costing purposes; (b) Develop a separate Standard based on the 
``contribution approach;'' and, (c) Develop a separate Standard based 
on Generally Accepted Accounting Principles (GAAP). The Board has 
tentatively decided to proceed with option (a).

Public Comments

    The Board received sixteen (16) sets of public comments in response 
to the Staff Discussion Paper.
    These comments came from contractors, government agencies, 
professional associations, industry associations, and individuals.
    The majority of respondents agreed on several issues related to 
ESOPs for government contract costing purposes:
    1. Generally Accepted Accounting Principles (GAAP), in particular 
SOP 93-6, do not provide adequate guidance for measuring ESOP costs.
    2. There should be no distinction between ``pension'' and 
``deferred compensation'' ESOPs in the measurement of ESOP costs.
    3. The fair value of the stock should be established when title to 
the stock is transferred to the ESOP.
    4. ESOP costs should be measured by the cost incurred by the 
contractor rather than the value of compensation received by employees.
    5. The form of payment used to make distribution of ESOP benefits 
to employees is not relevant to the measurement of a contractor's ESOP 
costs.
    There was, however, no strong consensus as to whether CAS 9904.412 
or 9904.415 (or both) should be amended, or whether a new Standard 
should be adopted regarding ESOP costs.
    This proposal is based upon continuing research performed by the 
staff of the Cost Accounting Standards Board, public comments received 
in response to the SDP, and deliberations of the Board. The various 
comments and proposals are discussed in greater detail under Section E, 
Public Comments. The Board would like to thank all the organizations 
and individuals who provided comments and information in response to 
the Staff Discussion Paper.

Conclusions

    While there have been distinctions drawn in the past between 
``pension'' and ``deferred compensation'' ESOPs, the Board has 
concluded that all ESOP costs should be treated consistently as 
deferred compensation.
    Based on the comments received in response to the Staff Discussion 
Paper, the Board has also determined that specific guidance is required 
regarding the measurement of ESOP contributions and the assignment of 
ESOP costs to cost accounting periods. Specifically, the Board believes 
that the contractor's ESOP cost should be measured by the contribution 
made to the ESOP, not by the value of compensation received by the 
employee. In addition, the Board believes that these costs should be 
systematically assigned to the cost accounting periods in which ESOP 
awards are made to employees.

Benefits

    CAS has never explicitly dealt with the cost of ESOPs. These costs 
can be significant. However, there have been numerous efforts by 
contracting parties to apply the provisions of existing CAS, 
principally CAS 9904.412 and 9904.415, to the ESOP cost determination 
process. These efforts have resulted in a distinction between ``pension 
ESOPs'' and ``deferred compensation ESOPs'' in Government contract cost 
accounting.

[[Page 50113]]

This distinction is not recognized in other fields of accounting.
    Historically, many controversies regarding accounting for ESOP 
costs have been resolved at the local level by entering into an advance 
agreement between the contracting parties. Nevertheless, this is a cost 
accounting issue that has not been adequately dealt with within the 
framework of existing CAS. The Board recognizes that the diversity of 
current practices is not conducive to uniformity and consistency in 
cost measurement, assignment, or allocation of costs--the stated 
objectives of CAS.
    The Board believes that these amendments will lead to a significant 
increase in uniformity and consistency in this important area of 
contract cost measurement. The Board also believes that the benefits of 
such improvements in contractor cost accounting practices should be 
substantial, and should greatly outweigh any added costs.

Summary Description of Proposed Amendments

    The proposed amendments make clear that all ESOP cost 
determinations will become subject to CAS 9904.415. In addition, CAS 
9904.412 is proposed to be amended to exclude the coverage of the costs 
of ESOPs that meet the definition of a pension plan.
    The proposed amendments adopt the ``contribution'' approach for 
ESOP cost measurement. Using this approach, contractors' contributions 
to ESOPs for a cost accounting period become the basis for ESOP cost 
determination. That part of the contribution that is assignable to the 
cost accounting period would be recognized as deferred compensation 
cost for the period. This recognition as an assignable cost is, in 
turn, based on the identification of ESOP awards that have been made to 
employees during the period that qualify as deferred compensation in 
accordance with the corresponding definition incorporated in the 
Standard. In essence, the ESOP costs assignable to a cost accounting 
period are that part of the annual contribution that is attributable to 
the awards made to employees during the period.
    The proposed transition method is designed to ensure that the 
adoption of this proposal will not cause changes to existing 
arrangements that contracting parties may have developed to deal with 
their existing ESOP cost determinations. In particular, the intent is 
that contractor/government advance agreements for existing ESOPs should 
not be disturbed. The emphasis is on making sure the procedures 
incorporated in this proposal are applied only to the measurement, 
assignment and allocation of costs of new ESOPs that are established 
after this proposal becomes effective, if ultimately adopted by the 
CASB.

C. Paperwork Reduction Act

    The Paperwork Reduction Act, Public Law 96-511, does not apply to 
this proposal, because these amendments impose no paperwork burden on 
offerors, affected contractors and subcontractors, or members of the 
public which requires the approval of OMB under 44 U.S.C. 3501, et seq. 
The records required by this proposed rule are normally maintained by 
contractors that claim reimbursement of ESOP costs under government 
contracts.

D. Executive Order 12866 and the Regulatory Flexibility Act

    Because the transition provision incorporated into this proposal 
ensures that arrangements for determining costs for existing ESOPs are 
not changed, the economic impact of these amendments, if any, on 
contractors is expected to be minor.
    As a result, the Board has determined that this rule will not 
result in the promulgation of a ``major rule'' under the provisions of 
Executive Order 12866, and that a regulatory impact analysis will not 
be required. Furthermore, this proposal does not have a significant 
effect on a substantial number of small entities because small 
businesses are exempt from the application of the Cost Accounting 
Standards. Therefore, this rule does not require a regulatory 
flexibility analysis in accordance with the Regulatory Flexibility Act 
of 1980.

E. Public Comments

    This proposal is based upon responses to the CASB SDP entitled 
``Accounting for the Cost of Employee Stock Ownership Plans'' that was 
published in the Federal Register on September 15, 2000 (65 FR 56008). 
Altogether, 16 responses were received, classified as follows:

Industry.........................................................      7
Professional associations and others.............................      4
Industry associations............................................      3
Government Agencies..............................................      2
                                                                  ------
    Total:.......................................................     16
 

    The SDP asked six specific questions and the responses to these 
questions are discussed below. In addition to these responses, several 
commenters submitted additional comments on topics not covered directly 
by the six questions; others summarized in general terms the more 
significant features of their detailed responses. The comments received 
and the Board's actions are summarized below.

Question 1

    Does GAAP (SOP 93-6) provide sufficient guidance for accounting for 
the costs of ESOPs for Government contract costing purposes? Please 
discuss the rationale of your answer to this question.
    Comments: Thirteen commenters acknowledged that SOP 93-6 does not 
provide adequate guidance for accounting for ESOPs for Government 
contracting purposes. Most of these commenters recognized that GAAP is 
not intended to address Government contracting issues.
    Nevertheless, three of these commenters, the National Defense 
Industrial Association (NDIA), Boeing and Darrell J. Oyer & Co., 
recognized that GAAP contains some useful guidance. One of these 
commenters, Darrell J. Oyer & Company, explains this as follows:

    GAAP is not intended to address government contracting issues 
and does not do so in SOP 93-6. GAAP does provide some useful 
concepts concerning ESOPs; however, SOP 93-6 cannot blindly be 
applied to government contracting. Each aspect of SOP 93-6 must be 
considered on a case-by-case basis consistent with the principles of 
government contract costing.* * *

    Two commenters, McDermott, Will & Emery and the Project on 
Government Oversight (POGO), thought that GAAP may provide adequate 
guidance for Government contract costing purposes. McDermott, Will & 
Emery commented favorably on the comprehensive treatment of the topic 
in SOP 93-6 and then stated that if ``* * * the cost accounting 
standards for government contracts purposes were to differ materially 
from the requirements of SOP 93-6, contractors could be placed in an 
extremely awkward, illogical, and perhaps untenable position.'' This 
commenter also pointed out that any deviation from GAAP would require 
companies to keep two sets of books.
    POGO expressed concerns about differing treatments for pension and 
deferred compensation ESOPs, valuation of shares acquired by ESOPs, and 
interest expense incurred by leveraged ESOPs as areas of potential 
abuse. POGO was principally concerned with the apparent current 
practice in Government contract cost accounting where ``* * * interest 
expense may be passed on to contractors (and ultimately taxpayers) as a 
form of ``employee compensation.'' POGO contrasted this practice with 
SOP 93-6 requirements that stipulate that ``* * * interest expense 
incurred in financing leveraged

[[Page 50114]]

ESOPs is clearly reflected on financial statements as such.''
    However, POGO characterized its opinion that contractors should be 
required to account for ESOP costs using SOP 93-6, as ``tentative.'' 
POGO stated:

    POGO is pleased to see that the Board is addressing an important 
Government contract accounting topic. This may be an area where the 
use of GAAP is appropriate; something we understand that some 
Government contractors have urged upon the Board for some time 
(although apparently not with respect to ESOPs). We would strongly 
recommend that the CAS Board, whatever its ultimate decision, 
consider the need to promote greater uniformity among Government 
contractors in this area, and to place greater importance on the 
financial implications for taxpayers, rather than those of 
contractors.

    Response: The CAS Board recognizes that there are instances when 
GAAP is not appropriate for measuring costs on Government contracts. 
This is due, in part, to significant differences between the objectives 
of CAS and those of GAAP. CAS seeks to promote consistency and 
uniformity in the measurement, assignment and allocation of costs on 
Government contracts, while the broad objectives of GAAP relate to the 
fair presentation of income, cash flows, assets, liabilities and 
stockholders' equity in financial statements. GAAP does not embrace the 
CAS concern for appropriate accumulation and estimating of costs to 
specific cost objectives. The CAS Board believes that ESOPs are an 
instance where GAAP would be inappropriate for determining costs on 
Government contracts for the following reasons:
    1. For contract costing purposes, the Government recognizes and 
reimburses a contractor's actual costs, as defined at 48 CFR 9904.401-
30(a)(2). As stated in the May 1992 CASB ``Restatement of Objectives, 
Policies and Concepts'' (57 FR 31036), the Standards are intended to 
``provide criteria for the allocation to cost objectives of the costs 
of resources used.'' In the case of ESOPs, the costs of resources used 
are the amount of the company's contribution to the ESOP. The 
contribution represents the contractor's actual total costs to acquire 
shares that are awarded to employees; that is, the amount of contractor 
resources used to provide the deferred compensation to the employee. 
The value of the stock at distribution to employee accounts generally 
does not reflect a contractor's actual costs.
    2. The cost for a leveraged ESOP measured using GAAP changes from 
period to period based on fluctuations in stock prices. The Government 
should not share in fluctuations of stock prices, whether up or down, 
that occur during the period between the time when an ESOP trust 
originally acquires shares and when those shares are distributed to 
employee accounts. The policy that the Government should not 
participate in the fluctuation of stock prices is already embodied in 
CAS 9904.415 related to stock options. The Preamble to CAS 9904.415, 
states:

    If the market price of the stock on the date of distribution is 
used, the Government, in effect, would be sharing in financial risk 
taking with the contractor. Subsequent fluctuations of the price of 
the stock should not influence the measurement of the award.

    3. Congressional intent is to encourage the use of ESOPs. However, 
if the measurement date prescribed by GAAP were used for Government 
contracting purposes, it would significantly limit the use of leveraged 
ESOPs by Government contractors, particularly contractors whose stock 
is not widely traded. Government contractors could still use ESOPs, but 
would potentially suffer from financial disadvantages if leveraging 
caused a material effect on a company's debt to equity ratio. Often the 
establishment of a leveraged ESOP adversely affects a company's debt to 
equity ratio since the value of the company's stock may drop 
significantly after the leveraged ESOP is established due to the ESOP 
debt recognized on a contractor's books. Over a period of time, as the 
debt is paid off, the value of the stock can be expected to return to 
pre-ESOP levels. In the commercial marketplace, where the price a 
company receives for its product is not totally based on actual costs 
incurred, the company does not necessarily have to reduce the price of 
its products to reflect smaller deferred compensation awards resulting 
from the drop in stock value. This is not the case with Government 
cost-based contracting, since the contractor is only reimbursed for its 
actual costs incurred.
    If GAAP were to be adopted for measuring the cost of a leveraged 
ESOP, the fair value of stock would become the basis for reimbursement 
of ESOP costs under Government contracts. Since the fair value of stock 
of Government contractors, whose stock is not widely traded, is lower 
after the initiation of a leveraged ESOP, the use of GAAP measurement 
requirements would impair those Government contractors' ability to 
recover sufficient monies to cover the debt payment of the leveraged 
ESOP.
    The CAS Board notes there was consensus among the respondents to 
its SDP that the cost of ESOPs should be measured as the amount of the 
contractor's total contribution.

Question 2

    Do you believe that distinguishing between ``pension'' and 
``deferred compensation'' ESOP type is useful in the Government 
contract costing environment and that this feature should be included 
in any future CAS promulgation on this topic? Please include the 
rationale for your answer to this question.
    Comments: With one exception (the DOD Inspector General), all 
commenters agreed that the distinction between ``pension'' and 
``deferred compensation'' ESOPs serves no useful purpose. They 
described such distinction as either irrelevant, confusing, 
meaningless, artificial, specious or not useful. McDermott, Will & 
Emery described the relevance of the distinction as follows:

    ESOP companies are currently able to pick and choose whether 
they are better off being pension ESOPs or deferred compensation 
ESOPs by merely including or not including a meaningless provision 
in their plan documents offering participants distribution in the 
form of a life annuity. In practice, virtually no participants ever 
want a distribution in this form; and if they do, they are better 
off taking a lump sum distribution and purchasing their own annuity 
to fit their own needs than accepting the ``one size fits all'' 
annuity that the plan would provide. Whether this distribution form 
is present in the plan document has no logical connection whatsoever 
with the determination of the amount and timing of costs for 
government contracts purposes.

    The Section of Public Contract Law of the American Bar Association 
(ABA) and Abt Associates Inc. attributed the concept of different types 
of ESOPs to a Government attempt to disallow interest costs related to 
ESOP financing. This view was expressed by the Public Contract Law 
Section of the ABA:

    Disputes have arisen over whether an ESOP is more appropriately 
accounted for under CAS 412 or under CAS 415. The primary driver in 
these disputes is the so-called ``interest component'' of the 
employer's contribution. In other words, should a portion of the 
employer's contribution be disallowed because the trust uses it to 
repay interest on borrowings? Under CAS 412, pension cost is 
measured by the entirety of an employer's contribution to the 
pension trust, even though the trustee may use it to repay 
borrowings. Under CAS 415, governing the costs of deferred 
compensation, the Government can argue that the portion of the 
employer's contribution that the trust uses to pay interest should 
not be included in measuring the employer's cost.

    The DOD Inspector General (DOD IG) provided the following comments 
in

[[Page 50115]]

support of its argument that there should be a distinction in the 
treatment of ``pension'' and ``deferred compensation'' ESOPs for 
Government contract costing purposes:

    ESOPs that meet the requirements of a qualified pension plan are 
subject to laws and regulations governing pension costs that should 
be considered in the cost accounting standards. ESOPs that do not 
meet the requirements of a qualified retirement plan should be 
addressed in CAS 9904.415 as deferred compensation subject to the 
individual contracts between the employer and the employee.

    The Board notes that Boeing recognized that a uniform approach is 
needed for all ESOPs for cost measurement purposes, but was not 
specific as to the section of CAS that should be amended for that 
purpose. Although, the DOD IG stated that a distinction should be made 
between ``pension'' and ``deferred compensation'' ESOPs for Government 
contract costing purposes, several other commenters, including DynCorp 
and AIA, indicated that the ``status quo'' is acceptable and no further 
action by the Board is needed. Since the current practice recognizes, 
in effect, a distinction between these two types of ESOPs, then 
acceptance of the ``status quo'' would also imply that these commenters 
believe that distinguishing between the two types of ESOPs would be 
useful in the government contract costing environment. Therefore, the 
notion that there are two different types of ESOPs, ``pension'' and 
``deferred compensation'' ESOPs, may have more support than indicated 
by the sole affirmative response received to this question.
    Response: It is widely recognized that the two different types of 
ESOPs, ``pension'' and ``deferred compensation'' ESOPs, are recognized 
only in the Government contract costing environment. The Government was 
compelled to make this distinction as the result of the ASBCA's 
decision in Ralph Parsons Co., supra. The ASBCA held that since FAR 
31.205-6(j)(8) (ESOPs) is included in the pension section of the cost 
principle, it does not apply to ESOPs that do not meet the definition 
of a pension. Therefore, those ESOPs that do not meet the definition of 
a pension are considered to be deferred compensation covered by FAR 
31.205-6(k), which incorporates CAS 9904.415 in its entirety.
    The DOD IG's comments about qualified pensions refer to ERISA, not 
to CAS. The only distinction between pensions and deferred compensation 
in the CAS is the requirement that pension benefits be payable for 
life. This distinction is not found in ERISA. The Board does not agree 
that ERISA qualification for pension plans should be the sole 
determining factor for which CAS should be applied in the measurement 
and assignment of ESOP costs for Government contracting purposes.
    The Board agrees with the majority of commenters that no 
distinction should be made between ``pension'' and ``deferred 
compensation'' ESOPs in measurement and assignment of cost. Therefore, 
the proposed amendments would eliminate this distinction in the 
measurement and assignment of ESOP costs. As a consequence, a 
significant step will be taken to improve uniformity and consistency in 
the cost accounting practices among Government contractors in like 
circumstances--a primary objective of the Board. Furthermore, the 
current differences in the recognition and measurement of the interest 
element in the ESOP cost calculations among the two different types of 
ESOPs will be eliminated.
    In summary, the Board proposes that CAS 9904.412 be amended to 
ensure that no ESOP is subject to the provisions of that Standard. At 
the same time, it is proposed that CAS 9904.415 be amended so that all 
the ESOPs become subject to that Standard.

Question 3

    If you believe that a distinction between ESOP types is useful and 
should be included in any future CAS promulgations, do you also believe 
that amendments, or an interpretation, to CAS 9904.412 and/or CAS 
9904.415 is the appropriate action for the Board to take?
    Comments: Since in response to Question 2, only one commenter 
indicated that a distinction between ESOP types is useful, it might 
have been expected that a single response would be obtained to this 
question. However, a total of nine commenters provided their opinion as 
to which Standard should be changed. Of the remaining seven commenters, 
five responded that no amendments or clarifications to either CAS 
9904.412 or 9904.415 are required, and the other two (ESOP Association 
and Abt Associates Inc.) provided no specific response to this 
question.
    Of the nine commenters who recommended that changes are required, 
three stated that CAS 9904.415 should be amended (DOD, ABA and POGO); 
two believe that CAS 9904.412 should be amended (Parsons, Brinkerhoff 
and United Technologies), three expressed no preference as to which 
standard should be amended (NDIA, Darrell J. Oyer & Co., and McDermott, 
Will & Emery); and one (the DOD IG) recommended that both CAS 9904.412 
and 9904.415 be amended.
    In addition, two commenters (United Technologies and DynCorp), who 
consider ESOPs defined contribution plans, believe that, given the Ball 
decision, CAS 9904.412 and 9904.415 would produce the same results.
    The Boeing response reflects the view of the five commenters who 
thought that no amendments to existing Standards are required (Boeing, 
Lockheed Martin, AIA, ALCOA, DynCorp):
    We believe the current provisions of CAS 9904.412 and 9904.415 are 
adequate if properly interpreted. If clarification is desired to avoid 
interpretive disputes, amendments or interpretations to existing 
standards could be useful * * *.
    Response: The purpose of this question was to solicit opinions as 
to what format any Board action in this area should take. However, the 
responses that were obtained varied greatly and did not clearly point 
to any specific course of action.
    Regarding the main thrust of the question, whether it would be more 
appropriate to deal with ESOPs under CAS 9904.412 or 9904.415, the 
Board believes that ESOPs have more in common with deferred 
compensation plans than with pension plans. Therefore, the Board 
proposes amendments to CAS 9904.415 to provide for the measurement and 
assignment of ESOP costs, and to CAS 9904.412 to clearly state that it 
is not applicable to ESOPs, including those plans which provide 
benefits that are ``payable for life.''

Question 4

    Do you believe that the fair value of the shares released by an 
ESOP to individual employee accounts should be established at the date 
when the title to these shares is transferred to the ESOP or should it 
be the date when the shares are committed to be released to employee 
accounts? If you would like to propose a different date or a modified 
version of the two dates referred to above, please explain.
    Comments: The majority of commenters (13 of 16) indicated that for 
shares transferred to an ESOP trust, the fair value should be 
established at the date when the title to these shares is transferred 
to the trust. Several commenters expanded on this basic response. It 
was frequently stressed that the contribution to the trust could be in 
the form of cash as well as shares, and thus, the critical date should 
be the date when an irrevocable transfer is made to

[[Page 50116]]

the trust either in cash or in stock. These commenters, including two 
Government agencies, probably would agree with the following, rather 
general, statement made by Parsons Brinkerhoff:

    If the company's contribution is made in stock, we believe the 
fair value of shares should be as of the date the shares are 
transferred, or committed to be transferred, to the ESOP. The fair 
value of shares at any later time, e.g., at the time committed to be 
released to employee accounts, would not be relevant in determining 
allocability as a contract cost. If the company's contribution is 
made in cash, excluding payments made to the Trust to re-purchase 
shares from the Trust, then the entire amount of the payment, 
regardless of how characterized, e.g., contribution, loan principal, 
interest, or dividends on a qualified security, is allocable to the 
government.

    McDermott, Will & Emery, however, does not agree with this type of 
response and indicated that the CAS Board should strive for conformance 
with GAAP and, in particular, with SOP 93-6. McDermott, Will & Emery 
believes that the proper valuation date should be the date when the 
shares are committed to be released to employee accounts. McDermott, 
Will & Emery stated:

    The fair value of shares should be established in accordance 
with the GAAP rule of SOP 93-6, i.e., at the time the shares are 
committed to be released to employee accounts.
    Establishing it at any other time would put the CAS out of synch 
with GAAP, creating a highly undesirable and unnecessary ``two sets 
of books'' environment for government contractors.

    Response: The Board agrees with the majority of commenters and is 
proposing to adopt the ``contribution'' approach to ESOP cost 
accounting as the best measure of a contractor's cost to provide the 
ESOP benefit awarded to employees. Therefore, the value of shares 
transferred to an ESOP should be established as of the date when the 
title to the shares is transferred to the trust.
    The Board also notes that in adopting this approach, risks 
associated with changes in the market value of stock or property 
subsequent to the date the title to such stock or property is 
transferred to the ESOP, either up or down, are borne by the ESOP 
trust. From this perspective, the government does not bear any risk or 
perceived conflict of interest associated with share price fluctuations 
after the contribution has been made as pointed out by Lockheed Martin. 
This is consistent with the current CAS 9904.415 provision regarding 
stock options.
    The Board believes that any other measurement date, such as that 
suggested by McDermott, Will & Emery, would not reflect the 
contractor's cost in providing the ESOP benefit and would, therefore, 
be inappropriate for the measurement of costs for government 
contracting purposes. McDermott, Will & Emery's rationale is based on 
its desire to avoid differences between financial accounting and 
contract cost accounting. As discussed in the Board's response to 
Question 1, GAAP are not appropriate for determining ESOP costs on 
Government contracts.

Question 5

    For contract costing purposes, should a distinction be made between 
measurement of the ``cost to the company'' or measurement of 
compensation ``received by the employee?'' Please explain. If a 
distinction should be made, please also comment on the method that 
should be used to measure this amount.
    Comments: All the commenters who responded to this question either 
stated directly or implied that a distinction should be made between 
measurement of ``cost to the company'' and the measurement of 
``compensation received by the employee.'' With one exception 
(McDermott, Will & Emery), they also all stated that the proper 
measurement should be the ``cost to the company.'' The line of thought 
of this majority is exemplified by the following two quotes. First, 
NDIA stated:

    We firmly believe that the only relevant date is the measurement 
date of the cost to the company. ESOPs are essentially a defined 
contribution plan. Thus when the company incurs the cost that is the 
measurement date. The measurement date based on ``received by the 
employee'' is irrelevant.
    As a basic principle, no further contract cost or costing 
consideration exists after the date for the cost to the company. 
This approach accurately measures the cost to the company. Any 
attempt to impact contract costs after these events is 
inappropriate.

    The same point of view, in different words, was also expressed by 
the Public Contract Law section of the ABA:

    The purpose of the proposal is to measure the contractor's cost, 
not the amount of compensation received by the employee. In a 
leveraged ESOP, these two will hardly ever be the same. If the 
contractor contributes $100, and by the time the shares are released 
the stock has doubled in value, should the contractor's ``cost'' be 
$200? We think not.

    McDermott, Will & Emery disagreed with the majority response 
stating that GAAP should prevail for the purpose of Government contract 
cost accounting in order to maintain consistency between financial and 
Government contract reporting and to increase contractors' 
profitability. At the same time, their comments cited a potential 
weakness in the GAAP methodology for financial reporting purposes. The 
commenter's justification for this position is stated as follows:

    * * * the GAAP rule, which measures compensation ``received by 
the employee,'' should govern, so that there is no inconsistency 
between the GAAP reporting and the government contract cost 
reporting that is required of these companies. Arguably, the GAAP 
rule should be reformed, as users of corporate financial statements 
probably have more interest in what the corporation spent than in 
what the employees received.
    However, so long as government contractors must use the GAAP 
rule in their audited statements and SEC reports, it is unfair and 
problematic to require them to use a completely different rule for 
contract costing purposes which could negatively impact their 
profitability and their access to working capital.

    The scenario that could prove to be detrimental to a contractor 
under such circumstances is further described by the commenter in 
response to another question:

    For example, in a leveraged ESOP where the price of a company's 
stock has increased since the time the shares were acquired, if the 
ESOP company reflects the cost of the shares at the time they were 
originally acquired in their indirect rates, then that company will 
have lower revenue from cost based government contracts, but higher 
pension expense under GAAP. This will both distort and negatively 
impact the company's profitability and, especially for a smaller 
business, its ability to obtain funding to support its business with 
the government.

    Response: The Board agrees with the majority of commenters that a 
distinction exists between measurement of the ``cost to the company'' 
and the measurement of ``compensation received by the employee.'' The 
Board has determined that the relevant concept in the measurement of 
ESOP costs for Government contracts is the ``cost to the company.'' 
Therefore, the Board proposes adoption of the ``contribution''pproach 
to ESOP cost measurement.
    Regarding the comments of McDermott, Wills & Emery, the Board notes 
that the use of the ``compensation received by the employee'' as the 
measurement of ESOP costs could result in the reimbursements to 
contractors in excess of their actual costs as defined at CAS 9904.401-
30(a)(2). The commenter would have the Board believe that failure to 
adopt GAAP will unfairly penalize contractors by reducing their 
revenues. However, under cost-type Government contracts it is intended 
that the contractor be reimbursed actual costs and, in addition, be 
paid a negotiated profit. In the commenter's example, the costs 
submitted by the

[[Page 50117]]

contractor for reimbursement would not constitute actual costs 
incurred, but could include amounts in excess of actual costs. Such 
inflated amounts would represent additional profit to the contractor, 
not reimbursement of a contractor's costs. In the subject example, 
total profit would be enlarged beyond that contemplated in contract 
negotiations. This enlargement would be contrary to the intent of the 
contracting parties and would result in increased costs to the 
Government in the form of a ``windfall'' profit to the contractor. 
Conversely, if McDermott, Will & Emery's example is changed to reflect 
a decrease in the price of a company's stock since the shares were 
acquired by the ESOP, in accordance with GAAP, the company would be 
reimbursed only for the decreased value of the shares under Government 
contracts and would likely not recover its actual costs incurred. In 
such a situation the contractor would be unfairly penalized by reduced 
profitability and decreased working capital.

Question 6

    Should the form of payment of ESOP benefits to the employee make a 
difference in measuring the cost allocable to Government contracts? If 
so, how should the cost be determined?
    Comments: All of the fourteen commenters who responded to this 
question were unanimous in their conclusion that the form of payment of 
ESOP benefits should make no difference in measuring the cost allocable 
to Government contracts. This response from DOD is fairly typical:

    The form of payment of ESOP benefits to the employee should not 
make a difference in measuring the cost allocable to Government 
contracts. The measured cost should be the same whether the benefit 
is paid in cash, other assets or stock. It should also be the same 
whether the benefit is paid as a lump sum or over an employee's 
life. The cost allocable to Government contracts should be based on 
the cost to the contractor and not on the compensation received by 
the employee.

    Response: The Board agrees with the commenters that the form of 
payment to employees should not make any difference to the ESOP cost 
measurement process for government contract costing purposes. The Board 
notes that neither the value nor form of distribution of ESOP awards to 
employees determines the contractor's cost of providing the ESOP 
benefit.
Additional Comments
1. Public Policy Issues
    Comments: Several commenters stressed the public policy aspect of 
ESOPs and, in particular, Congressional support for these plans. These 
commenters seem to suggest that any Standard on this topic should not 
interfere with the original Congressional intent of encouraging 
employee ownership through ESOPs.
    Response: The Board believes that the proposed amendments to CAS 
9904.415 would not interfere with the intent of Congress.
2. Applicability of the Ball Corporation Decision
    Comments: Another theme included in the comments was that whatever 
problems there might have been a few years ago with ESOP cost 
measurement, these issues have been, in effect, clarified and resolved 
by the ASBCA in its decision in Ball Corporation, supra.
    Lockheed Martin Corporation summarized this point of view as 
follows:

    Court actions resulted in decisions such as the Ball Corporation 
ASBCA case which affirmed that the broad conceptual guidance found 
in CAS Standards were adequate for the measurement and allocation of 
ESOP costs. The controversies are basically settled and the courts 
have established that there is adequate guidance on how to account 
for ESOP costs.

    Response: The Board believes that clarification of the measurement 
and assignment of ESOP costs is needed to promote uniformity and 
consistency in accounting for ESOP costs, despite the decision in Ball 
Corporation, supra. That decision did not address the contribution 
method of measuring ESOP costs incorporated into these proposed 
amendments. The ASBCA's decision in that case was limited to a 
determination that the fundamental requirements of the measurement 
criteria in CAS 9904.415-40(b) had been met by the contractor, that 
neither CAS 9904.415-50(d) or (e) was applicable in that instance, and 
that the Government had not demonstrated that the contractor's ESOP 
contributions failed to represent the present value of the future 
benefits.

F. Additional Public Comments

    Interested persons are invited to participate by submitting data, 
views, or arguments with respect to this ANPRM. All comments must be in 
writing and submitted in accordance with the instructions indicated in 
the ADDRESSES section.

List of Subjects in 48 CFR 9904

    Government procurement, Cost Accounting Standards.

Angela B. Styles,
Chair, Cost Accounting Standards Board.

    Accordingly, for the reasons set forth in the preamble, it is 
proposed to amend part 9904 as follows:

PART 9904--COST ACCOUNTING STANDARDS

    1. The authority citation for part 9904 continues to read as 
follows:

    Authority: Public Law 100-679, 102 Stat 4056, 41 U.S.C. 422

    2. Section 9904.412-20 is revised to read as follows:


9904.412-20  Purpose.

    (a) The purpose of this Standard 9904.412 is to provide guidance 
for determining and measuring the components of pension cost. The 
Standard establishes the basis on which pension costs shall be assigned 
to cost accounting periods. The provisions of this Cost Accounting 
Standard should enhance uniformity and consistency in accounting for 
pension costs and thereby increase the probability that those costs are 
properly allocated to cost objectives.
    (b) This Standard does not cover the cost of Employee Stock 
Ownership Plan (ESOPs). that meet the definition of a pension plan. 
Such plans are considered a form of deferred compensation and covered 
under 9904.415.
    3. Section 9904.415-20 is revised to read as follows:


9904.415-20  Purpose.

    (a) The purpose of this Standard 9904.415 is to provide criteria 
for the measurement of the cost of deferred compensation and the 
assignment of such cost to cost accounting periods. The application of 
these criteria should increase the probability that the cost of 
deferred compensation is allocated to cost objectives in a uniform and 
consistent manner.
    (b) This Standard is applicable to the cost of all deferred 
compensation except the following which are covered in other Cost 
Accounting Standards:
    (1) The cost for compensated personal absence, and
    (2) The cost for pension plans that do not meet the definition of 
an Employee Stock Ownership Plan (ESOP).
    4. Section 9904.415-30 is revised to read as follows:


9904.415-30  Definitions.

    (a) The following are definitions of terms which are prominent in 
this

[[Page 50118]]

Standard 9904.415. Other terms defined elsewhere in this Chapter 99 
shall have the meanings ascribed to them in those definitions unless 
paragraph (b) of this subsection, requires otherwise.
    (1) Contribution means the amount paid by a contractor to satisfy 
the contractor's obligation under a deferred compensation plan. The 
contribution may be made in cash, stock, or other property, or any 
combination thereof. Contribution does not include the sale of stock or 
property by a contractor to a trust.
    (2) Deferred compensation means an award made by a contractor to 
compensate an employee in a future cost accounting period or periods 
for services rendered in one or more cost accounting periods prior to 
the date of the receipt of compensation by the employee. This 
definition shall not include the amount of year end accruals for 
salaries, wages, or bonuses that are to be paid within a reasonable 
period of time after the end of a cost accounting period.
    (3) Employee Stock Ownership Plan (ESOP) means any deferred 
compensation plan designed to invest primarily in the stock of the 
contractor's corporation including, but not limited to, plans covered 
by the Employee Retirement Income Security Act (ERISA).
    (4) Fair value means the amount that a seller would reasonably 
expect to receive in a current sale between a willing buyer and a 
willing seller, that is, other than a forced or liquidation sale.
    (b) The following modifications of terms defined elsewhere in this 
Chapter 99 are applicable to this Standard:
    (1) Market value means the current or prevailing price of a stock 
or other property as indicated by market quotations.
    (2) [Reserved].
    5. Section 9904.415-40 is revised to read as follows:


9904.415-40  Fundamental requirement.

    (a) The cost of deferred compensation shall be assigned to the cost 
accounting period in which the contractor incurs an obligation to 
compensate the employee. In the event no obligation is incurred prior 
to payment, the cost of deferred compensation shall be the amount paid 
and shall be assigned to the cost accounting period in which the 
payment is made.
    (b) Measurement of deferred compensation costs.
    (1) For deferred compensation other than ESOPs, the deferred 
compensation cost shall be the present value of the future benefits to 
be paid by the contractor.
    (2) For an ESOP, the deferred compensation cost shall be the amount 
contributed to the ESOP by the contractor.
    (c) The cost of each award of deferred compensation shall be 
considered separately for purposes of measurement and assignment of 
such costs to cost accounting periods. However, if the cost of deferred 
compensation for the employees covered by a deferred compensation plan 
can be measured and assigned with reasonable accuracy on a group basis, 
separate computations for each employee are not required.
    6. Section 9904.415-50 is revised to read as follows:


9904.415-50  Techniques for application.

    (a) The contractor shall be deemed to have incurred an obligation 
for the cost of deferred compensation when all of the following 
conditions have been met. However, for awards which require that the 
employee perform future service in order to receive the benefits, the 
obligation is deemed to have been incurred as the future service is 
performed for that part of the award attributable to such future 
service:
    (1) There is a requirement to make the future payment(s) which the 
contractor cannot unilaterally avoid.
    (2) The deferred compensation award is to be satisfied by a future 
payment of money, other assets, or shares of stock of the contractor.
    (3) The amount of the future payment can be measured with 
reasonable accuracy.
    (4) The recipient of the award is known.
    (5) If the terms of the award require that certain events must 
occur before an employee is entitled to receive the benefits, there is 
a reasonable probability that such events will occur.
    (6) For stock options, there must be a reasonable probability that 
the options ultimately will be exercised.
    (b) If any of the conditions in 9904.415-50(a) is not met, the cost 
of deferred compensation shall be assignable only to the cost 
accounting period or periods in which the compensation is paid to the 
employee.
    (c) If the cost of deferred compensation can be estimated with 
reasonable accuracy on a group basis, including consideration of 
probable forfeitures, such estimate may be used as the basis for 
measuring and assigning the present value of future benefits.
    (d) The following provisions are applicable for plans that meet the 
conditions of 9904.415-50(a) and the compensation is to be paid in 
money.
    (1) If the deferred compensation award provides that the amount to 
be paid shall include the principal of the award plus interest at a 
rate fixed at the date of award, such interest shall be included in the 
computation of the amount of the future benefit. If no interest is 
included in the award, the amount of the future benefit is the amount 
of the award.
    (2) If the deferred compensation award provides for payment of 
principal plus interest at a rate not fixed at the time of award but 
based on a specified index which is determinable in each applicable 
cost accounting period; e.g., a published corporate bond rate, such 
interest shall be included in the computation of the amount of future 
benefit. The interest rate to be used shall be the rate in effect at 
the close of the period in which the cost of deferred compensation is 
assignable. Since that interest rate is likely to vary from the actual 
rates in future periods, adjustments shall be made in any such future 
period in which the variation in rates materially affects the cost of 
deferred compensation.
    (3) If the deferred compensation award provides for payment of 
principal plus interest at a rate not based on a specified index, or 
not determinable in each applicable year, the
    (i) Cost of deferred compensation for the principal of the award 
shall be measured by the present value of the future benefits of the 
principal, and shall be assigned to the cost accounting period in which 
the employer incurs an obligation to compensate the employee; and
    (ii) Interest on such awards shall be assigned to the cost 
accounting period(s) in which the payment of the deferred compensation 
is made.
    (4) If the terms of the award require that the employee perform 
future service in order to receive benefits, the cost of the deferred 
compensation shall be appropriately assigned to the periods of current 
and future service based on the facts and circumstances of the award. 
The cost of deferred compensation for each cost accounting period shall 
be the present value of the future benefits of the deferred 
compensation calculated as of the end of each such period to which such 
cost is assigned.
    (5) In computing the present value of the future benefits, the 
discount rate shall be equal to the interest rate as determined by the 
Secretary of the Treasury pursuant to Public Law 92-41, 85 Stat. 97, at 
the time the cost is assignable.
    (6) If the award is made under a plan which requires irrevocable 
funding for

[[Page 50119]]

payment to the employee in a future cost accounting period together 
with all interest earned thereon, the amount assignable to the period 
of award shall be the amount irrevocably funded.
    (7) In computing the assignable cost for a cost accounting period, 
any forfeitures which reduce the employer's obligation for payment of 
deferred compensation shall be a reduction of contract costs in the 
period in which the forfeiture occurred. The amount of the reduction 
for a forfeiture shall be the amount of the award that was assigned to 
a prior period, plus interest compounded annually, using the same 
Treasury rate that was used as the discount rate at the time the cost 
was assigned. For irrevocably funded plans, pursuant to 9904.415-
50(d)(6), the amount of the reduction for a forfeiture shall be the 
amount initially funded plus or minus a pro-rata share of the gains and 
losses of the fund.
    (8) If the cost of deferred compensation for group plans measured 
in accordance with 9904.415-50(c) is determined to be greater than the 
amounts initially assigned because the forfeiture was overestimated, 
the additional cost shall be assignable to the cost accounting period 
in which such cost is ascertainable.
    (e) The following provisions are applicable for plans that meet the 
conditions of 9904.415-50(a) and the compensation is received by the 
employee in other than money. The measurements set forth in this 
paragraph constitute the present value of future benefits for awards 
made in other than money and, therefore, shall be deemed to be a 
reasonable measure of the amount of the future payment:
    (1) If the award is made in the stock of the contractor, the cost 
of deferred compensation for such awards shall be based on the market 
value of the stock on the measurement date; i.e., the first date the 
number of shares awarded is known. If such values are unavailable or 
not appropriate (thin market, volatile price movements, etc.) an 
acceptable alternative is the fair value of the stock.
    (2) If an award is made in the form of options to employees to 
purchase stock of the contractor, the cost of deferred compensation of 
such award shall be the amount by which the market value of the stock 
exceeds the option price multiplied by the number of shares awarded on 
the measurement date; i.e., the first date on which both the option 
price and the number of shares is known. If the option price on the 
measurement date is equal to or greater than the market value of the 
stock, no cost shall be deemed to have been incurred for contract 
costing purposes.
    (3) If the terms of an award of stock or stock option require that 
the employee perform future service in order to receive the stock or to 
exercise the option, the cost of the deferred compensation shall be 
appropriately assigned to the periods of current and future service 
based on the facts and circumstances of the award. The cost to be 
assigned shall be the value of the stock or stock option at the 
measurement date as prescribed in 9904.415-50(e)(1) or (e)(2).
    (4) If an award is made in the form of an asset other than cash, 
the cost of deferred compensation for such award shall be based on the 
market value of the asset at the time the award is made. If a market 
value is not available, the fair value of the asset shall be used.
    (5) If the terms of an award, made in the form of an asset other 
than cash, require that the employee perform future service in order to 
receive the asset, the cost of the deferred compensation shall be 
appropriately assigned to the periods of current and future service 
based on the facts and circumstances of the award. The cost to be 
assigned shall be the value of the asset at the time of award as 
prescribed in 9904.415-50(e)(4).
    (6) In computing the assignable cost for a cost accounting period, 
any forfeitures which reduce the employer's obligation for payment of 
deferred compensation shall be a reduction of contract costs in the 
period in which the forfeiture occurred. The amount of the reduction 
shall be equal to the amount of the award that was assigned to a prior 
period, plus interest compounded annually, using the Treasury rate (see 
9904.415-50(d)(5)) that was in effect at the time the cost was 
assigned. If the recipient of the award of stock options voluntarily 
fails to exercise such options, such failure shall not constitute a 
forfeiture under provisions of this Standard.
    (7) Stock option awards or any other form of stock purchase plans 
containing all of the following characteristics shall be considered 
noncompensatory and not covered by this Standard 9904.415:
    (i) Substantially all full-time employees meeting limited 
employment qualifications may participate.
    (ii) Stock is offered equally to eligible employees or based on a 
uniform percentage of salary or wages.
    (iii) An option or a purchase right must be exercisable within a 
reasonable period.
    (iv) The discount from the market price of the stock is no greater 
than would be reasonable in an offer of stock to stockholders or 
others.
    (f)(1) The provisions of 9904.415(d) and (e) shall not apply to 
ESOPs. The contractor's cost for an ESOP shall be measured by the 
contractor's contribution, including interest and dividends if 
applicable, to the ESOP. The measurement of contributions made in stock 
of the corporation or property, shall be based on the market value of 
the stock or property at the time the contributions are made. If the 
market value is not available, then fair value of the stock or property 
shall be used.
    (2) A contractor's contribution to an ESOP shall be assignable to 
the cost accounting period only to the extent that the number of 
shares, cash, or any combination thereof resulting from the 
contribution are awarded to individual employees in the accounting 
period. Any portion of the shares or cash resulting from the 
contractor's contribution that is not awarded to individual employees 
during the cost accounting period when the contribution is made to the 
ESOP shall be assigned to a future cost accounting period or periods 
when the remaining portion of stock or cash is awarded to individual 
employees. This stock shall retain the value established in the year of 
the contribution which resulted in its purchase or availability to the 
ESOP.
    7. Section 9904.415-60 is amended by adding paragraphs (f), (g), 
and (h) to read as follows:


9904.415-60  Illustrations.

* * * * *
    (f) Contractor F has a non-leveraged ESOP. Under the contractor's 
plan, employees were awarded 5,000 shares of stock for the year ended 
December 31, 2004. On the date the 5,000 shares were contributed to the 
ESOP, the shares had a market value of $10.00 each. The total measured 
and assigned deferred compensation cost for FY 2004 is $50,000 (5,000 x 
$10 = $50,000). The market value of the contractor's stock when earned 
by the employees, whether higher or lower than the $10.00 per share 
market value when the contractor's contribution was made to the ESOP, 
is irrelevant to the measurement of the contractor's ESOP costs.
    (g) Contractor G has a leveraged ESOP. Under the contractor's plan, 
employees were awarded 10,000 shares of stock for the year ended 
December 31, 2004. The contractor contributes $780,000 in cash to the 
ESOP trust (ESOT) to satisfy the principal and interest payment on the 
ESOT loan for FY 2004, resulting in the bank releasing 9,000 shares of 
stock. The contractor contributes 1,000 shares of stock valued at 
$60,000 to the ESOT, representing the

[[Page 50120]]

balance of the 10,000 shares. The total measured and assigned deferred 
compensation cost for FY 2004 is $840,000--the contractor's total 
contribution to satisfy the deferred compensation obligation totaling 
10,000 shares.
    (h)(1) Contractor H has a leveraged ESOP. Under the contractor's 
plan, employees were awarded 8,000 shares of stock for the year ended 
December 31, 2004. The contractor contributes $500,000 in cash to the 
ESOT to satisfy the principal and interest payment on the ESOT loan for 
2004, resulting in the bank releasing 10,000 shares of stock. The total 
measured deferred compensation cost for 2004 is $500,000--the 
contractor's contribution for the cost accounting period. The total 
assignable deferred compensation cost for 2004 is $400,000--the portion 
of the contribution that satisfies the 8,000 shares of deferred 
compensation awarded to the employees in the year [(8,000 shares / 
10,000 shares) x $500,000 = $400,000]. The remaining $100,000 of the 
contribution made in 2004 is assignable to future periods in which the 
remaining 2,000 shares of stock are awarded to the employees.
    (2) At December 31, 2005, the employees were awarded 12,000 shares 
of stock. The contractor again contributed $500,000 in cash to the ESOT 
to satisfy the principal and interest payment on the ESOT loan for 
2005, resulting in the bank releasing 10,000 shares of stock. However, 
the total deferred compensation assignable to 2005 is $600,000, the 
cost of the 12,000 shares awarded to employees. The cost of the award 
is comprised of the contractor's contribution for the current cost 
accounting period (10,000 shares at $500,000) and the 2004 contribution 
carryover (2,000 shares at $100,000).
    8. Section 9904.415-63 is revised to read as follows:


9904.415-63  Effective date.

    (a) This Standard 9904.415 is effective as of [effective date of 
final rule].
    (b) This Standard shall be followed by each contractor on or after 
the start of its next cost accounting period beginning after the 
receipt of a contract or subcontract to which this Standard is 
applicable.
    (c) Contractors with prior CAS-covered contracts with full coverage 
shall continue to follow Standard 9904.415 in effect prior to 
[effective date] until this Standard, effective [effective date], 
becomes applicable following receipt of a contract or subcontract to 
which this revised Standard applies.
    9. Section 9904.415-64 is added to read as follows:


9904.415-64  Transition method.

    (a) For contractors and subcontractors that were subject to 
Standard 9904.415 in effect prior to [effective date of final rule], 
the requirements of this Standard, as amended, shall apply to the cost 
of new ESOPs that are established after this Standard, as amended, 
becomes applicable to the contractor or subcontractor. Any ESOP in 
existence prior to the applicability date of this amended Standard, 
shall remain subject to the Cost Accounting Standard(s) that were 
applicable to such plans prior to the applicability date of this 
amended Standard.
    (b) For contractors and subcontractors that have established 
advance agreements regarding the recognition of the costs of ESOPs that 
were established prior to the applicability date of this amended 
Standard, the awarding agency and contractor shall comply with the 
provisions of such advance agreement(s) for existing ESOPs. All ESOPs 
established on or after [effective date] shall be subject to the 
requirements of this Standard.

[FR Doc. 03-21074 Filed 8-19-03; 8:45 am]
BILLING CODE 3110-01-P