[Federal Register Volume 89, Number 124 (Thursday, June 27, 2024)]
[Proposed Rules]
[Pages 53575-53584]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-13805]


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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9904


Conformance of Cost Accounting Standards to Generally Accepted 
Accounting Principles for Compensated Personal Absence and Depreciation 
of Tangible Capital Assets

AGENCY: Cost Accounting Standards Board, Office of Federal Procurement 
Policy, Office of Management and Budget.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of Federal Procurement Policy (OFPP), Cost 
Accounting Standards Board (CAS Board or the Board), is releasing this 
advanced notice of proposed rulemaking (ANPRM) to elicit public 
comments on proposed changes to the Cost Accounting Standards (CAS) on 
conformance to Generally Accepted Accounting Principles (GAAP) related 
to CAS 408, Accounting for costs of compensated personal absence, and 
CAS 409, Cost accounting standard depreciation of tangible capital 
assets, to GAAP. This ANPRM follows issuance of an SDP 84 FR 9143 
(March 13, 2019).

DATES: Comments must be in writing and must be received by August 26, 
2024.

ADDRESSES: Respondents are strongly encouraged to submit comments 
electronically to ensure timely receipt. Electronic comments may be 
submitted to [email protected]. Be sure to include your name, title, 
organization, and reference case 2021-02. If you must submit by regular 
mail, please do so at Office of Federal Procurement Policy, 725 17th 
Street NW, Washington, DC 20503, ATTN: John L. McClung.
    Privacy Act Statement: The CAS Board proposes the rule to elicit 
public views pursuant to 41 U.S.C. 1502. Submission of comments is 
voluntary. The information will be used to inform sound decision-
making. Please note that all comments received in response to this 
document may be posted or released in their entirety, including any 
personal and business confidential information provided. Do not include 
any information you would not like to be made publicly available. 
Additionally, the OMB System of Records Notice, OMB Public Input System 
of Records, OMB/INPUT/01, 88 FR 20913 (available at 
www.federalregister.gov/documents/2023/04/07/2023-07452/privacy-act-of-1974-system-of-records), includes a list of routine uses associated 
with the collection of this information.

FOR FURTHER INFORMATION CONTACT: John L. McClung, Manager, Cost 
Accounting Standards Board (telephone: 202-881-9758; email: 
[email protected]).

SUPPLEMENTARY INFORMATION:

I. Background

    On March 13, 2019, the Board published a Staff Discussion Paper (84 
FR 9143) to solicit views with respect to the Board's initial 
assessment of CAS 408 and CAS 409 to conform them, where practicable, 
to GAAP. Respondents were invited to comment, among other things, on 
the differences identified between CAS and GAAP, the frequency and 
magnitude of issues identified with CAS non-compliances, and 
recommendations of any changes to the Standards to conform them to 
GAAP.

II. CAS 408 Overview and Conclusion

    CAS 408 was initially published September 19, 1974, at 39 FR 33681. 
The preamble for the original publication of CAS 408 states, ``This 
Standard deals primarily with the

[[Page 53576]]

amount and time of recognition of costs of compensated personal 
absence.'' and'' Detailed criteria for the allocation of costs of 
compensated personal absence are not included in this Standard.'' \1\
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    \1\ 39 FR 33681.
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    The preamble explained the need for the Standard as follows: ``The 
most significant problems and issues relate to the amount and timing of 
recognition of costs of compensated personal absence appear to stem 
from the reliance of existing procurement regulations on the Internal 
Revenue Code [IRC] and income tax regulations to govern accounting for 
these costs.'' The primary disadvantage identified in the initial 
promulgation was in reliance on the IRC accrual accounting for vacation 
pay that permitted, but did not require, the accrual of costs and the 
lack of rules identifying the amount to be accrued. The preamble makes 
no mention of GAAP rules related to compensated personal absences.
    The principal need for the promulgation of the initial CAS 408, 
which remains nearly unchanged, no longer exists. GAAP has been revised 
significantly with additional content, since the original promulgation 
of CAS 408 in 1974.
    Furthermore, as explained in greater detail in the response to 
public comments in Section III, below, a comparison of CAS 408 with 
pertinent GAAP content revealed significant overlap and nearly 
completely equivalent requirements. For each requirement in CAS 408, 
the Board identified that a comparable requirement existed in GAAP, 
FAR, or other CAS Standard that would protect the Government's 
interests and promote uniformity and consistency. The alignment is so 
close as to make CAS 408 nearly duplicative of GAAP. The Board reasoned 
that where such comparable requirements exist between CAS and GAAP, the 
CAS 408 requirement could be eliminated. Furthermore, the content 
related to allocation in CAS 408 for which there is not equivalent 
content in GAAP, the Board concluded that content in other CAS 
Standards, such as CAS 418, is adequate to protect the Government's 
interests.
    The Board identified only one potential difference between CAS and 
GAAP that required further consideration. This difference is the GAAP 
requirement to accrue accumulated rights in addition to vested rights 
in the year earned, unlike CAS which only requires the accrual of 
entitled (i.e., vested) rights. As described below in Section III., the 
Board has provisionally concluded that reliance on GAAP would 
materially achieve the uniformity and consistency necessary for 
Government contracting.
    For the reasons stated above, the Board has provisionally concluded 
that CAS 408 has become unnecessary to protect the Government's 
interests which may be achieved through reliance on GAAP and other CAS 
Standards. Therefore, the Board is considering a proposed rule that 
would eliminate CAS 408 and seeks comment on such action in this ANPRM. 
This action would be consistent with the Board's guiding principles for 
conforming CAS to GAAP because it would eliminate CAS content to 
minimize the burden on contractors while protecting the interests of 
the Federal Government. Furthermore, the Board's provisional conclusion 
on CAS 408 would align with the guiding principles to rely on coverage 
in GAAP when it would materially achieve uniformity and consistency in 
cost accounting without bias or prejudice to either party, rely on 
other CAS Standards which may protect the Government's interests, and 
eliminate CAS coverage no longer necessary.
    The Board solicits public comments regarding the treatment of 
changes to cost accounting practices to conform to GAAP that would be 
made by this ANPRM, such as assigning the costs to earlier cost 
accounting periods than CAS 408 permits. Specifically, should these 
changes be treated as a required change, a unilateral change, or a 
desirable change in accordance with 48 CFR 9903.201-4(a)(4)(i), (ii), 
or (iii), respectively. In addition, the Board is interested in views 
on the anticipated impact, if any, of these changes and whether these 
changes should be exempted from the required cost impact process.

III. Summary of Public Comments for CAS 408

    The Board received seven public comments to the SDP. These comments 
came from companies, industry associations, professional associations, 
and individuals. The Board appreciates the efforts of all parties that 
submitted comments and found the depth and breadth of the comments to 
be informative.
    In addition to the public comments, this ANPRM reflects research 
accomplished by the Board in the respective subject areas. The Board 
used the side-by-side comparison of CAS and GAAP requirements to 
identify any material differences. Unique CAS requirements were 
assessed for their necessity in protecting the interests of the 
Government. The Board also examined if the existing requirements in 
other CAS standards or in other relevant rules may protect the 
interests of the Government. This ANPRM is issued by the Board in 
accordance with the requirements of 41 U.S.C. 1502(c).
    Responses to specific comments for CAS 408:
    Potential CAS-GAAP difference: Accumulated rights. The SDP 
identified and described one potential difference between CAS and GAAP. 
The Board observed that CAS limits recording cost in the year earned to 
employees' who are entitled to payment if terminated, where entitlement 
is considered earned when an employer would be required to pay the 
employee for the benefit, in the event of employee termination on a 
basis other than disciplinary action. The corresponding concept to 
``entitlement'' in GAAP is ``vested.'' The Board observed that in 
addition to vested rights, GAAP provides for cost recognition in the 
year earned of ``accumulated rights.'' Accumulated rights are those 
benefits earned during the period that may be carried forward to future 
periods, although not paid if an employee is terminated. The Board made 
various queries, among them whether the CAS and GAAP requirements are 
equivalent.
    Comment: Three respondents provided comments to this potential 
difference identified by the Board. All three stated that the 
requirements of CAS and GAAP are materially equivalent. Two respondents 
observed that ``GAAP requires accrual if certain conditions are met, 
which closely mirror the definition of entitlement. In close alignment 
with CAS, there is a requirement that if a liability (obligation to pay 
the employee) exists, then the costs are to be accrued; otherwise, as 
with CAS, the cost of the benefits would be recognized in the year 
taken on a cash basis.'' The respondents further observed that, ``GAAP 
requires accrual of employee's compensation for future absences if all 
of these criteria are met: (1) The employer's obligation is 
attributable to employee's services already rendered; (2) The 
obligation relates to rights that either: vest-those rights for which 
the employer has an obligation to make payment even if an employee 
terminates; thus, they are not contingent on an employee's future 
service; or accumulate--those rights that are earned and when unused 
may be carried forward to one or more periods subsequent to that in 
which they are earned (although the amount an employee can carry 
forward may be limited); (3) Payment of the

[[Page 53577]]

compensation is probable; and (4) The amount can be reasonably 
estimated.''
    Response: Both CAS and GAAP require the costs of compensated 
personal absences to be assigned in the year in which the employee 
right to payment is earned. GAAP permits, in certain circumstances, the 
cost of non-vested personal absence costs, where the employee has no 
right to payment, to be assigned in the year earned but not necessarily 
paid. In contrast, CAS 408 requires the cost of non-vested personal 
absences to be assigned in the period in which payment is made. 
Recording costs in the period earned achieves uniformity and 
consistency, as well as predictability and stability, because employee 
rights to payment are generally earned evenly over accounting periods. 
By comparison, the use of the rights by employees, for example taking 
vacation time, is generally not even over accounting periods, so if the 
cost was recorded when used, uniformity and consistency would be 
compromised.
    CAS limits the costs assigned to the period earned to those for 
which entitlement exists. The term ``vested rights'' in GAAP are those 
for which the employer has an obligation to make payment even if the 
employee terminates; thus, they are not contingent on an employee's 
future service. GAAP, however, also requires that the cost for which 
employees have accumulated rights be assigned in the year earned. 
``Accumulated'' means that earned but unused rights to compensated 
absences may be carried forward to one or more periods subsequent to 
the extent that it is probable that employees will be paid in 
subsequent years for the accumulated rights. The Board notes that, like 
CAS, GAAP specifically requires anticipated forfeitures to be 
considered in determining the accruals for personal absence costs. 
Therefore, if accumulated rights have a high forfeiture rate, there 
would be little net cost accrued in accordance with GAAP. Conversely, 
if accumulated rights have a low forfeiture rate, by accruing their 
cost in the year earned in accordance with GAAP requirements, this 
would achieve a higher degree of uniformity and consistency than CAS 
with regard to the recognition of costs for compensated personal 
absences. In either case, whether forfeiture rates are high or low, 
conformance to GAAP rules from CAS 408 may result in the cost of some 
non-vested personal absences to be assigned to earlier cost accounting 
periods than CAS 408 permits. Therefore, the rules for transitioning to 
a revised cost accounting practice in 48 CFR 9903.201-4 would be 
applicable. The Board is considering a proposed rule that would 
eliminate the CAS requirements to record costs when entitlement is 
earned and rely on GAAP to achieve the uniformity and consistency 
required for Government contracting. This action would be consistent 
with the Board's guiding principle to eliminate content from CAS where 
reliance on coverage in GAAP would materially achieve uniformity and 
consistency in cost accounting, without bias or prejudice to either 
party.
    Allocation of the cost of compensated personal absence. The side-
by-side analysis in the SDP identified two areas with allocation 
requirements in CAS (CAS 408-40(b), CAS 408-50(e)) with no 
corresponding content in GAAP. The Board asked if requirements in other 
CAS addressed this difference.
    Comment: Two respondents provided comments to the Board's query. 
Both respondents believe that other CAS requirements address this 
difference.
    Response: The Board has provisionally concluded that although GAAP 
does not have requirements for the allocation of the costs to cost 
objectives, as a practical matter the allocation of these costs to 
final cost objectives (i.e., contracts) would be required by Government 
contractors to achieve recovery through contract billings. Most often, 
the allocation of these costs would be through fringe benefit cost 
pools whose allocation methods used by contractors would be covered by 
other Standards, such as CAS 418. The Board is considering a proposed 
rule that would eliminate the CAS 408 requirements related to 
allocation. The other CAS requirements, such as those in CAS 418, would 
be relied on to achieve the uniformity and consistency required for 
Government contracting. This action would be consistent with the 
Board's guiding principle to eliminate content from CAS where existing 
requirements in other CAS Standards may protect the Government's 
interests.
    Application of entitlement criteria. The side-by-side analysis in 
the SDP compared the requirements in CAS with GAAP for the application 
of the requirements for determining when entitlement is earned. The 
Board observed that in order to apply GAAP, each compensated absence 
plan (e.g., vacation time, sick time, military leave) would need to be 
evaluated separately. The Board queried whether the CAS and GAAP 
requirements are equivalent.
    Comment: Three respondents provided comments to the Board's query. 
All three respondents stated that the CAS and GAAP requirements are 
equivalent. Two respondents observed on this equivalency that, ``The 
rules are written to set out criteria that need to be applied 
separately to each type of compensated personal absence, as CAS 
requires.''
    Response: The Board has provisionally concluded that in order to 
determine if entitlement, vesting or accumulating rights exist, each 
plan would need to be assessed separately whether applying CAS or GAAP 
because the facts of each plan would be different. While CAS refers to 
the separate consideration of each plan, GAAP refers to ``individual 
facts and circumstances'' to reflect the need to assess the requirement 
to accrue a liability. When the facts of a plan are changed, an 
assessment regarding entitlement/vesting or accumulation would need to 
be made to comply with both CAS and GAAP. The Board is considering a 
proposed rule that would eliminate the CAS requirement to apply CAS by 
individual plan and rely on GAAP to achieve the uniformity and 
consistency required for Government contracting. This action would be 
consistent with the Board's guiding principle to eliminate content from 
CAS where reliance on GAAP would materially achieve uniformity and 
consistency in cost accounting, without bias or prejudice to either 
party.
    Calculating the accrual amount. The side-by-side analysis in the 
SDP compared the requirements in CAS with GAAP for the calculation of 
the accrued liability. The Board made various queries, among them 
whether the CAS and GAAP requirements are equivalent.
    Comment: Two respondents provided comments to the Board's queries. 
Both respondents commented that ``. . . liabilities under GAAP are 
recorded based on current wage rates.'' The respondents observed that 
like CAS, GAAP does allow for the accrual of personal absences based on 
salary rates expected to be in effect when the employee uses the 
vacation or sick days, but that this is a less common practice. The 
same two respondents commented on all of the Board's queries with 
regard to the CAS requirements for the determination of the employer's 
liability that CAS and GAAP are equivalent.
    Response: The Board has provisionally concluded that consistent 
with CAS, GAAP requires that the liability be accrued for all 
compensated personal absence plans when certain conditions are met 
(e.g., employee has rights to payment, payment is probable and the 
amount can be reasonably estimated). In addition, both CAS and GAAP 
require the estimated liability be reduced for the same concept, which 
is ``anticipated non-utilization'' or ``estimated forfeitures,'' 
respectively.

[[Page 53578]]

GAAP requires the accrual of the current liability in the period. This 
is commonly calculated using current wage rates. In contrast, CAS is 
permissive in allowing the liability to be measured consistently using 
current or anticipated wage rates. CAS provides for calculation of the 
liability by individual or group and use of sample or other appropriate 
means, with the critical point being that the liability is ``estimated 
with reasonable accuracy.'' GAAP requires that the liability be 
``reasonably estimated,'' which is consistent with the objective of the 
CAS language. Although CAS has more content than GAAP, the content 
provides options without prescribing exactly how the calculation must 
be done, best exemplified by the phrase ``or other appropriate means.'' 
Nevertheless, it is clear that the goal of both CAS and GAAP is a 
reasonably accurate estimate of the liability, which may be achieved 
through application of either requirements. The Board notes that none 
of the commenters raised concerns about the potential elimination of 
this content in CAS or reliance on the less detailed GAAP, relative to 
calculation of the liability.
    The Board is considering a proposed rule that would eliminate the 
CAS requirements for calculation of the employer's liability and 
instead rely on GAAP to achieve the uniformity and consistency required 
for Government contracting. This action would be consistent with the 
Board's guiding principle to eliminate content from CAS where reliance 
on GAAP would materially achieve uniformity and consistency in cost 
accounting, without bias or prejudice to either party.
    General recommendations and compliance history. The SDP asked for 
recommendations of any changes to CAS 408 to conform it to GAAP.
    Comment: Four of the seven respondents recommended that the Board 
eliminate the entire Standard. One respondent stated that ``The 
differences [between CAS and GAAP] are not material.'' Another 
respondent recommended removal of CAS 408 and allowing contractors to 
follow GAAP in its place, further observing that ``The standard is 
unnecessary . . .'' One of the large industry associations observed in 
their comments that, ``There is virtually no history of CAS 408 non-
compliance issues raised at AIA member companies.'' Another 
professional association similarly observed that ``A survey of FEI-
CGB's membership shows virtually no history of contractor non-
compliance with CAS 408 . . .''
    Response: The Board has provisionally concluded that CAS 408 and 
the corresponding requirements in GAAP are not materially different. 
Furthermore, the lack of material non-compliance provides evidence of 
little risk to the Government should CAS 408 be eliminated. The Board 
is considering a proposed rule that would eliminate CAS 408 and instead 
rely on GAAP to achieve the uniformity and consistency required for 
Government contracting. This action would be consistent with the 
Board's guiding principle to eliminate content from CAS where reliance 
on GAAP would materially achieve uniformity and consistency in cost 
accounting, without bias or prejudice to either party.

IV. CAS 409 Overview and Conclusion

    Based on the preamble for CAS 409 published in the Federal Register 
for its initial promulgation on January 29, 1975, depreciation cost was 
an issue since the 1960's. A number of Contractors at that time 
primarily relied on the Internal Revenue Code (IRC) to measure 
depreciation costs. The IRC contained accelerated depreciation methods 
for tax purposes, and the Board viewed this as inequitable and improper 
cost accounting because the methods did not match the depreciation 
expense over the useful life of the asset.
    GAAP now prohibits using the accelerated depreciation methods in 
the IRC for financial reporting purposes if the amounts do not fall 
within a reasonable range of the asset's useful life. Thus, the 
principal concern for the promulgation of CAS 409 may no longer exist. 
GAAP has added significant content since the initial promulgation of 
CAS 409, while CAS for the most part has not changed subsequent to the 
initial promulgation. A comparison of the current requirements in CAS 
409 with GAAP reveal nearly completely equivalent content. 
Additionally, FAR includes substantive content regarding the 
allowability of depreciation costs in certain circumstances that may 
further protect the interests of the Government.
    A comparison of CAS 409 with pertinent GAAP content revealed 
significant overlap and nearly completely equivalent requirements. For 
each requirement in CAS 409, the Board identified that a comparable 
requirement existed in GAAP, Federal Acquisition Regulation (FAR), or 
other CAS Standard that would protect the Government's interests, with 
the exception of the requirements at CAS 409-50(e)(5), CAS 409-
50(j)(1), and CAS 409-50(j)(4). The alignment is so close as to make 
CAS 409 nearly duplicative of GAAP. The Board reasoned that where such 
comparable requirements exist between CAS and GAAP, the CAS 409 
requirement could be eliminated. With respect to the three requirements 
in CAS 409 related to allocation cited above, for which there is no 
equivalent content in GAAP, the Board concluded that content in other 
CAS Standards is not adequate to protect the Government's interests.
    For the reasons stated above, the Board has provisionally concluded 
that most of CAS 409 has become unnecessary to protect the Government's 
interests which may be achieved through reliance on GAAP and existing 
requirements in other CAS Standards and the FAR. Therefore, the Board 
is considering a proposed rule that would eliminate CAS 409 with the 
exception of three requirements in CAS 409-50(e)(5), CAS 409-50(j)(1), 
and CAS 409-50(j)(4), which would be retained.
    Because of the limited amount of content that would be proposed for 
retention, the Board is considering a proposed rule that would relocate 
the three requirements to other Standards, specifically a new CAS 406-
50(g)(1) and (2) and a new CAS 418-50(h), instead of maintaining an 
entire Standard 409. This proposed action would be consistent with the 
Board's guiding principles to eliminate content from CAS where GAAP, 
other CAS Standards, or other relevant rules may protect the interests 
of the Government. In addition, the Board provisionally concluded that 
moving the retained requirement to another Standard, rather than 
maintain CAS 409 with minimal content, would best achieve the goal of 
streamlining CAS. The Board is seeking comments on such actions in this 
ANPRM.
    As detailed in the side-by-side analysis in the SDP, and discussed 
in the details below, so far, the Board has not identified any instance 
where the elimination of CAS 409, as contemplated, would result in a 
change to a contractor's disclosed cost accounting practices for 
government contracts. The Board is interested in comments on this 
provisional determination, and any instances that have not been 
considered.

V. Summary of Public Comments for CAS 409

    The Board received seven public comments to the SDP. These comments 
came from companies, industry associations, professional associations, 
and individuals. The Board appreciates the efforts of all parties that 
submitted comments and found the depth and

[[Page 53579]]

breadth of the comments to be informative.
    In addition to the public comments, this ANPRM reflects research 
accomplished by the Board in the respective subject areas. The Board 
used the side-by-side comparison of CAS and GAAP requirements to 
identify any material differences. Unique CAS requirements were 
assessed for their necessity in protecting the interests of the 
Government. The Board also examined if the existing requirements in 
other CAS standards or in other relevant rules may protect the 
interests of the Government. This ANPRM is issued by the Board in 
accordance with the requirements of 41 U.S.C. 1502(c).
    Responses to specific comments for CAS 409:
    Potential CAS-GAAP difference: Record keeping related to service 
lives. The SDP identified the record-keeping to support selection of 
service life as a potential difference between CAS and GAAP. CAS 409-
50(e) specifically requires record keeping adequate to show the age of 
assets at retirement to support the selection of service lives. GAAP 
has no explicit requirement for such record keeping. The Board was 
interested in whether the record keeping, as required by CAS, would be 
expected to continue for GAAP regardless of the elimination of 
requirements in CAS 409. In particular, the SDP asked which detailed 
records contractors would keep and for what purpose, if the requirement 
in CAS 409 to support service lives with actual historic records was 
eliminated. The Board made various queries, among them the detailed 
records contractors would keep and for what purpose if the requirement 
in CAS 409 to support service lives with actual historic records was 
eliminated.
    Comment: Three respondents responded to this query. All three of 
the respondents commented that asset records maintained during the 
ordinary course of business would be expected to remain the same 
without the CAS requirement. Two respondents provided similar detailed 
reasoning supporting this conclusion. One stated, ``AIA agrees that 
during the ordinary course of business most contractors maintain some 
records of assets through disposition that would include dates the 
assets were put in use and disposed. Notably, contractors that are not 
subject to CAS 409 are able to demonstrate allowability of their 
depreciation costs by keeping records that support allowability. Other 
factors that would encourage recordkeeping on asset acquisition and 
disposition include: Enterprise Resource Planning (ERP) system asset 
modules, tax record keeping requirements, the FAR record keeping clause 
and GAAP requirements to match expected expenses with period of 
benefit.''
    Response: The Board appreciates these comments and the reasoning 
provided by the respondents. Although GAAP does not have prescriptive 
language on record-keeping, contractors would still maintain records 
for assets, including ready for use and disposition dates, to support 
audits of financial reporting and tax filings, in particular. At large 
companies of the size to perform contracts subject to CAS 409, software 
applications would typically be used for asset accounting, which would 
standardly contain such information. The Board has provisionally 
concluded that the explicit CAS requirement for record keeping is 
unnecessary and is considering a proposed rule that would eliminate the 
requirement in CAS 409. This action would be consistent with the 
Board's guiding principle to eliminate content from CAS which is no 
longer necessary.
    Potential CAS-GAAP difference: Selection of service lives. The SDP 
identified the selection of service life as a potential difference 
between CAS and GAAP. CAS 409-50(e) requires that estimated service 
lives be based on supporting records of actual experienced lives of the 
contractor. GAAP uses the term ``useful life,'' while CAS uses the term 
``service life'' with the same meaning. GAAP requires that the cost of 
an asset be spread over the expected useful life of the asset, but does 
not require that the expected useful life of the asset be based solely 
on the contractor's asset experience history. Although actual asset 
experience history may be a consideration in the selection of service 
lives in accordance with GAAP, it would not be the only consideration. 
The Board made various queries, among them the impact to service lives 
used if the requirement to use estimated service lives based on 
contractor historical experience was eliminated.
    Comment: Three respondents provided comments to the SDP queries for 
the potential difference between CAS and GAAP in selecting service 
lives. One respondent observed that ``Under GAAP, the service life of 
the asset is to be the contractor's best estimate of the useful life 
and not expressly required (nor blindly constrained) to be based on the 
contractor's actual asset history. Neither is there a requirement that 
a contractor justify estimated service lives which are shorter than 
such experienced lives when the persuasive justification exists for the 
service life assigned.'' The respondent further observed, ``If a 
contractor uses arbitrary useful lives with no basis to support the 
useful life of the asset, they would violate GAAP.''
    One of the respondents offered reasoning regarding the use on 
historic experience in selecting service lives, ``Historic context is 
important, but its utility is diminished due to rapid advances in 
technology in modern day. Historically, automobile lives were often 
impaired by corrosion of ferrous metals, whereas today, more and more 
automobile parts are made of composites impervious to corrosion. On the 
other end of the spectrum, a personal computer may have historically 
had a certain useful life that coincided with its physical durability, 
over time the pace of technical obsolescence has reduced practical 
useful lives.'' Another respondent similarly observed, ``Experience may 
not be a good criterion for future performance. In the past, when most 
things were mechanical prior to 1970, mechanical items could have a 
predictable useful life. Now, when items are more digital and perhaps 
deemed expendable, these items will probably not last as before. 
Conditions have changed.''
    Response: Both CAS and GAAP require consideration of actual asset 
experience when selecting service lives and reviewing depreciation 
estimates and making changes to them, as necessary. The Board notes 
that the existing CAS language provides for some reliance on GAAP 
records for estimated service lives before actual experience exists, 
although CAS reverts solely to actual experience once it is available. 
The Board has provisionally concluded that conditions have changed, in 
particular with regard to technological advances in a variety of asset 
categories from automobiles to production equipment, and sole reliance 
on actual asset history may no longer reflect the best estimate of 
future service lives for assets.
    Both CAS and GAAP require selection of service life or useful life, 
respectively, which is a reasonable estimate of the accounting periods 
over which services are expected to be obtained from the use of the 
asset. CAS and GAAP share a common objective, which is uniformity and 
consistency. Because GAAP and CAS require adopting a depreciation 
practice for service lives, following it consistently, and making 
changes if reviews of actual experience are needed, it follows that 
compliance with either CAS or GAAP should achieve a materially similar 
result. The Board has

[[Page 53580]]

provisionally concluded that based on the changed conditions, 
development of service lives should include considerations in addition 
to a contractor's actual asset experience history to reflect a 
reasonable estimate of the service life. The Board is considering a 
proposed rule that would eliminate the CAS requirements for determining 
service lives and rely on GAAP to achieve the uniformity and 
consistency required for Government contracting. This action would be 
consistent with the Board's guiding principle to eliminate content from 
CAS where reliance on GAAP would materially achieve uniformity and 
consistency in cost accounting, without bias or prejudice to either 
party.
    Potential CAS-GAAP difference: Gains/losses on dispositions within 
12 months of transfer. The SDP identified as a potential CAS-GAAP 
difference the treatment of gains and losses for tangible capital 
assets dispositioned within twelve months of a less than arm's-length 
transaction. CAS 409-50(j)(4) requires that gains and losses on 
disposition of tangible capital assets transferred in other than an 
arm's-length transaction and subsequently disposed of within 12 months 
from the date of the transfer shall be assigned to the transferor. GAAP 
has no comparable requirement. The Board made various queries, among 
them: the frequency of such transfers; the magnitude of the gains/
losses experienced on the assets transferred; and how the selection of 
service life, depreciation method, and residual value mitigate the risk 
of a significant gain/loss at disposition.
    Comment: Two respondents provided comments to the SDP queries. One 
large industry association commented, ``This CAS 409 requirement 
seemingly intends to address a contractor seeking to thwart sharing a 
gain that offsets previous depreciation with the government by a non-
arm's-length transfer, such as through a related party at less than 
fair market value. This action would seem to run afoul of other 
prohibitions with more serious consequences than those resulting from 
violating CAS regulations. The U.S. Securities and Exchange Commission 
(SEC) would find such a practice fraudulent and manipulative. AIA 
believes that the elimination of CAS 409 and the requirement related to 
asset dispositions within 12 months of transfer will have no influence 
on the practices used by contractors that maintain fair and transparent 
financial reporting.'' The other respondent, a group of asset 
management experts, suggested eliminating the CAS requirement, 
observing that such transfers would be ``extremely rare,'' however 
acknowledging there ``can be reasonable situations where in a plant 
closing, one from another unit believes an available excess unit would 
be useful but upon receipt and closer evaluation by others, the item is 
determined not useful. Essentially a judgment error.'' This respondent 
similarly observed that ``Any abusive transactions are prohibited and 
would be unreasonable and unallowable'' and ``Normal internal controls 
will prevent and detect abusive actions.''
    Regarding the magnitude of the gains/losses experienced on such 
transfers, the large industry association commented, ``In general, 
selection of an appropriate service life, depreciation method, and 
residual value for a tangible capital asset would result in a net book 
value during the asset's lifetime that mitigates the risk of a 
significant gain/loss at disposition.''
    Response: The Board initially identified the treatment of these 
gains/losses as a potential difference between CAS and GAAP. The 
Board's concern was that a contractor would transfer an asset between 
segments just prior to disposition with no purpose other than to 
recover a loss or avoid sharing a gain. There are several mitigating 
factors to this concern.
    First, regarding the recovery of a loss on an asset transferred to 
a new segment, the asset may have no causal or beneficial relationship 
to the work of the new segment and therefore the depreciation cost and 
any gain/loss on disposition would be unallocable to contracts at the 
new segment receiving the asset. Thus, the risk of Government contracts 
being allocated a loss on the disposition of an asset which was never 
used to provide services for those contracts is mitigated.
    Second, most assets depreciate in value rather than appreciate, 
meaning the likelihood is greater of a loss on disposition than a gain, 
especially a sizable gain which is most likely to occur for land, which 
is not depreciable property subject to CAS 409. Thus, the risk of the 
Government contracts not sharing in a gain on disposition seems low.
    Third, for property, plant, and equipment (excluding buildings) if 
the service lives reasonably align with experience (as required by both 
CAS and GAAP) and the method of depreciation reasonably aligns with 
productivity of the asset (as required by both CAS and GAAP), then the 
net book value of the asset during its lifetime of use should be 
generally aligned with its fair value, meaning any gain or loss from 
disposition at fair value would be minimized.
    Finally, if an asset is near the end of its useful life and the net 
book value (remaining depreciable value) is approaching the residual 
value, the amount of any gain or loss may be immaterial.
    Although there are a variety of mitigating factors, the Board 
believes this difference between CAS and GAAP may create an exposure of 
unknown materiality. Furthermore, should the Board eliminate the CAS 
requirements for service life, residual value and depreciation method 
and instead rely on GAAP to achieve uniformity and consistency, it is 
unclear to the Board what impact, if any, this change to GAAP would 
have on the magnitude of these gains/losses on disposition. For these 
reasons, the Board is considering a proposed rule that would retain the 
requirement in CAS 409-50(j)(4) and move it to new CAS 418-50(h). This 
proposed action would be consistent with the Board's guiding principles 
to eliminate content from CAS where GAAP, other CAS Standards, or other 
relevant rules may protect the interests of the Government. In 
addition, the Board provisionally concluded that moving the retained 
requirement to another Standard, rather than maintain CAS 409 with 
minimal content, would best achieve the goal of streamlining CAS. The 
Board is seeking comments on such actions in this ANPRM.
    Potential CAS-GAAP difference: Residual values. The SDP identified 
as a potential CAS-GAAP difference the CAS requirement that no 
depreciation costs can be recognized, which would significantly reduce 
book value of a tangible capital asset below its residual value. The 
Board made various queries. Among them these queries, the Board asked 
how contractors set residual values. Additionally, the Board asked how 
often for a particular asset the residual value used for CAS and a 
salvage value used for GAAP are the same.
    Comment: Two respondents provided comments to the SDP queries. One 
large industry association commented, ``Residual value is determined by 
the value a contractor believes an asset will be worth after its period 
of use . . . Incorrect residual value would consistently lead to 
unexpected gains or losses during asset disposition that would indicate 
incorrect application (thus a violation) of the fundamental GAAP 
matching principle.''
    The same large industry association also observed, ``GAAP (see ASC 
360-10-35-4) includes a requirement to deduct the salvage value, which 
has the

[[Page 53581]]

same meaning as residual value in CAS, from the value of the tangible 
capital asset to be depreciated.'' The inference being that if residual 
value (CAS) and salvage value (GAAP) share the same definition, the 
amount estimated for each must also be the same.
    Response: The Board has provisionally concluded that residual value 
for CAS and salvage value for GAAP have the same meaning and, 
therefore, would be expected to be the same estimated amount. Both CAS 
and GAAP require the residual value or salvage value, respectively, be 
subtracted from the cost of the capital asset to establish the 
depreciable value. CAS sets a threshold of ten percent residual value 
for requiring an adjustment to calculate the depreciable value, while 
GAAP sets no threshold. In practice, the Board understands most assets 
are estimated to have a residual or salvage value of zero. Therefore, 
for most assets, the depreciable value for both CAS and GAAP is the 
same as the cost of the capital asset. For assets whose residual value 
is greater than zero, if the depreciable amount is calculated correctly 
(asset cost less residual cost), the net book value of the asset when 
fully depreciated would equal the residual value. When net book value 
of the asset is equal to the residual value no additional depreciation 
would be recognized, for CAS or GAAP, which would reduce the net book 
value below the residual value. In addition, should a contractor record 
any depreciation which would reduce the net book value of the asset 
below its residual value, FAR 31.205-11(a) would require treatment of 
that depreciation amount as unallowable.
    The Board is considering a proposed rule that would eliminate the 
requirements in CAS 409 related to residual value and rely on FAR to 
mitigate the risk of excessive depreciation as an unallowable cost to 
protect the Government's interests, and instead rely on GAAP to achieve 
the uniformity and consistency required for Government contracting. 
This proposed action is consistent with the Board's guiding principles 
to eliminate content from CAS, where reliance on GAAP would materially 
achieve uniformity and consistency and other relevant rules, such as 
the FAR, may protect the Government's interests.
    Assignment of costs to cost accounting periods. The side-by-side 
analysis in the SDP compared the requirements in CAS with GAAP for the 
assignment of the cost of tangible capital assets to cost accounting 
periods. The Board queried whether the CAS and GAAP requirements are 
equivalent.
    Comment: Three respondents provided comments to the side-by-side 
analysis. All three responded that the concepts between CAS and GAAP 
for assigning tangible capital assets to cost accounting periods are 
equivalent.
    Response: As with CAS, the purpose of corresponding GAAP 
requirements for depreciation accounting is to distribute the cost of 
an asset to accounting periods in a systematic and rational manner. In 
addition, CAS and GAAP share the concept that the depreciation costs be 
identified with the accounting periods over the expected life of the 
asset during which services are obtained from the use of the asset.
    The approach is the same for both CAS and GAAP, which is to 
distribute the cost of a tangible asset, less its estimated residual 
value (CAS) or salvage value (GAAP), over the estimated service life 
(CAS) or useful life (GAAP), using a method of depreciation that 
reflects the pattern of consumption (CAS) or productivity (GAAP) of the 
asset over its life. In addition, when a capital asset is 
dispositioned, a gain or loss is recognized for both CAS and GAAP.
    The Board has provisionally concluded that the fundamental 
requirements in CAS and GAAP for the concepts of depreciable cost, 
service lives, and depreciation methods are equivalent. Therefore, the 
Board is considering a proposed rule that would eliminate the CAS 
requirements for depreciable cost, service lives, and depreciation 
methods, and instead rely on GAAP to achieve the uniformity and 
consistency required for Government contracting. This action would be 
consistent with the Board's guiding principle to eliminate content from 
CAS where reliance on GAAP would materially achieve uniformity and 
consistency in cost accounting, without bias or prejudice to either 
party.
    Allocation of depreciation to cost objectives. The side-by-side 
analysis in the SDP identified two areas with allocation requirements 
in CAS (CAS 409-40(b), CAS 409-50(k)) with no corresponding content in 
GAAP. The Board asked if requirements in CAS 402 and CAS 418 addressed 
this difference.
    Comment: Two respondents provided comments to the Board's query. 
Both respondents believe that other CAS requirements address this 
difference. One respondent commented, ``While CAS 409-40(b) 
specifically addresses allocation, it seems CAS 418, that purports to 
address allocation of all costs, should not be wanting if it alone 
provided the requirements for allocation of depreciation costs assigned 
to a period.''
    Response: Although GAAP does not have requirements for the 
allocation of the costs to cost objectives, as a practical matter the 
allocation of these costs to final cost objectives (i.e., contracts) 
would be required by Government contractors to achieve recovery through 
contract billings. The allocation content in CAS 409 is generally 
covered by applicable CAS requirements in other Standards. CAS 402-30 
provides definitions of ``direct costs,'' which are any costs which are 
identified specifically with a particular final cost objective, and 
``indirect costs,'' which are costs not directly identified with a 
single final cost objective, but identified with two or more final cost 
objectives or with at least one intermediate cost objective. These 
definitions provide a framework for the treatment of depreciation costs 
as either direct or indirect, as with CAS 409-40(b)(1)-(3).
    Furthermore, CAS 402-40 requires that ``All costs incurred for the 
same purpose, in like circumstances, are either direct costs only or 
indirect costs only with respect to final cost objectives. No final 
cost objective shall have allocated to it as an indirect cost any cost, 
if other costs incurred for the same purpose, in like circumstances, 
have been included as a direct cost of that or any other final cost 
objective . . .'' Therefore, as required in CAS 409-40(b)(1) treating 
like assets used for similar purposes in the same manner, the 
application of CAS 402-40 would achieve the same result.
    Additionally, CAS 418 provides more detailed requirements for the 
allocation of direct and indirect costs than exist in CAS 409. For 
example, CAS 418-40(c)(2) requires the use of a resource consumption or 
output measure allocation base. The gain or loss on disposition of an 
asset would be allocated using the same practice for the asset 
depreciation, as the amounts would be subject to the same direct and 
indirect cost definitions and treatment under CAS 418, which is 
required to be followed consistently.
    The Board has provisionally concluded that other Standards address 
the allocation of the depreciation costs and would protect the 
Government's interests. Therefore, the Board is considering a proposed 
rule that would eliminate the CAS 409 requirements related to 
allocation, and instead the other CAS requirements (e.g., CAS 402, CAS 
418) would be relied on to achieve the uniformity and consistency 
required for Government contracting. This action would be consistent 
with the Board's guiding principle to eliminate content from CAS where 
existing requirements

[[Page 53582]]

in other CAS Standards may protect the Government's interests.
    Selection of depreciation method. The side-by-side analysis in the 
SDP compared the requirements in CAS with GAAP for the selection of the 
method of depreciation for tangible capital assets. The Board made 
various queries, among them whether the selection criteria in CAS and 
GAAP of matching the pattern of asset consumption to the method of 
depreciation are equivalent.
    Comment: Three respondents provided comments to these queries. All 
three commented that the selection criteria in CAS and GAAP of matching 
the pattern of asset consumption to the method of depreciation are 
equivalent. Both a large industry association and a professional 
association observed, ``CAS 409 provides criteria for assigning costs 
of tangible capital assets to cost accounting periods and for 
consistent allocation of those costs to benefitted cost objectives over 
the service lives of the assets. GAAP similarly require that the cost 
of an asset be spread over the expected useful life of the asset in 
such a way as to allocate it as equitably as possible to the periods 
during which services are obtained from the use of the asset.''
    Response: The Board has provisionally concluded that the 
requirements of CAS and GAAP are equivalent. CAS already relies on GAAP 
for selecting the method of depreciation unless the method does not 
reflect the consumption of services or is unacceptable for Federal 
income tax purposes. Because GAAP now requires that the method of 
depreciation satisfactorily reflects the expected productivity of the 
asset during its useful life, the condition in CAS 409-50(f)(1)(i) 
would not be met. Both CAS and GAAP generally reject the use of 
accelerated depreciation using the Internal Revenue Service rules, so 
the condition in CAS 409-50(f)(1)(ii) would not be met. Thus, any 
method selected for GAAP would now be acceptable for CAS 409.
    The Board is considering a proposed rule that would eliminate the 
CAS 409 requirements related to the selection of the depreciation 
method, and instead GAAP be relied on to achieve the uniformity and 
consistency required for Government contracting. This action would be 
consistent with the Board's guiding principle to eliminate content from 
CAS where reliance on GAAP would materially achieve uniformity and 
consistency in cost accounting, without bias or prejudice to either 
party.
    Changes in service life, residual value, or method of depreciation. 
The side-by-side analysis in the SDP compared the requirements of CAS 
with GAAP for reexamination and changes to the service life, residual 
value, or method of depreciation for tangible capital assets. The Board 
made various queries, among them whether CAS and GAAP are equivalent.
    Comment: Three respondents provided comments to the queries. Two 
respondents commented CAS and GAAP are equivalent. The third respondent 
commented CAS and GAAP are mostly equivalent and identified the 
difference as the impairment reviews that are required by GAAP. This 
respondent noted the related content in FAR 31.205-11(g)(2), which 
treats the costs of a write-down from carrying value to fair value as a 
result of impairment as an unallowable cost in the period recorded.
    Response: Both CAS and GAAP require that once adopted, an 
accounting practice is followed consistently from period to period. In 
addition, both CAS and GAAP require that service lives and useful 
lives, respectively, and residual values and salvage values, 
respectively, be reviewed and changed, as necessary. When a change is 
made, both CAS and GAAP apply it prospectively and do not require 
retroactive adjustment to prior accounting periods for existing assets. 
The Board is considering a proposed rule that would eliminate the CAS 
409 requirements for reexamination and changes to the service lives, 
residual value, or method of depreciation for tangible capital assets 
be eliminated and instead GAAP relied on to achieve the uniformity and 
consistency required for Government contracting.
    There is currently no content in CAS that addresses the treatment 
of the costs of a write-down from carrying value to fair value, as a 
result of impairment. Regarding this treatment of these costs for 
Government contracting, the Board proposes to continue relying on the 
existing requirement in FAR 31.205-11(g)(2).
    Recognition of gains or losses from disposition. The side-by-side 
analysis in the SDP compared the requirements in CAS with GAAP for the 
treatment of changes in service lives, residual value, or method of 
depreciation for tangible capital assets. The Board made various 
queries, among them whether the CAS and GAAP requirements for 
recognition of a gain or loss on disposition in the period in which it 
occurs are equivalent.
    Comment: Three respondents provided comments to these queries. All 
three commented that the CAS and GAAP requirements for recognition of a 
gain and loss on disposition in the period in which it occurs are 
equivalent.
    Response: The Board agrees that the measurement of gains and losses 
for CAS and GAAP are equivalent. Both CAS and GAAP require the 
recognition of gains and losses related to the disposition of tangible 
assets and measure the gain or loss as the difference between the 
carrying value of the asset, also referred to as the net book value or 
undepreciated balance, and the amount of consideration received, also 
referred to as proceeds or net amount realized. There are certain 
circumstances in which gains and losses on the disposition of tangible 
capital assets are not recognized for CAS, as described in CAS 409-
50(j)(2)(i) and (ii). The same language is also found in FAR 31.205-
16(f)(1) and (2).
    CAS 409-50(j)(2)(i) requires that gains and losses on dispositions 
in which assets are grouped and that such gains and losses are 
processed through the accumulated depreciation account. The Board is 
not aware of any use of this practice by contractors nor did any 
respondent raise concerns about this requirement. The Board proposes 
that this CAS 409 requirement be eliminated and GAAP be relied on to 
achieve the uniformity and consistency required for Government 
contracting.
    CAS 409-50(j)(2)(ii) addresses two circumstances, where an asset is 
given in exchange as part of the purchase price of a similar asset and 
where disposition of an asset results from an involuntary conversion. 
When an asset is given in an exchange, CAS includes the gain or loss in 
computing the depreciable cost of the new asset. Unlike CAS, GAAP 
requires recognition of gains and losses for asset exchanges 
(nonmonetary transactions) when it is clearly evident the fair value of 
the assets exchanged is not comparable. CAS does not specifically 
address exchanges of assets with different fair values. Most exchanges 
would presumably be arm's length transactions, so it seems unlikely 
that such exchanges would be of assets with considerably different fair 
values. Therefore, for both CAS and GAAP in most circumstances, the 
computation of the depreciable cost of the new asset would include the 
gain or loss. The Board proposes that this CAS 409 requirement be 
eliminated and GAAP be relied on to achieve the uniformity and 
consistency required for Government contracting.
    The second circumstance addressed in CAS 409-50(j)(2)(ii) is where 
disposition of an asset results from an involuntary conversion. CAS 
provides two options for the treatment of a gain or loss on assets 
replaced as a result of an involuntary conversion (e.g., asset is

[[Page 53583]]

destroyed by fire). The gain or loss may be recognized in the period of 
disposition or used to adjust the depreciable amount of the new asset. 
GAAP generally treats the involuntary conversion of an asset the same 
as the first CAS option to recognize a gain or loss on the disposition 
of the old asset in the period in which it occurs and separately 
treating the replacement as a new asset. Where the same practice can be 
used for both CAS and GAAP, contractors seem likely to follow the 
commonly accepted practice, so it seems unlikely that the elimination 
of the second option to adjust the replacement asset's depreciable 
value by the converted asset value would cause contractors concern. 
Notably, no comment letter raised this as a concern. The Board proposes 
that this CAS 409 requirement be eliminated and GAAP be relied on to 
achieve the uniformity and consistency required for Government 
contracting.
    Mass or extraordinary dispositions of assets are a rare occurrence. 
Although CAS acknowledges them, the language is limited to identifying 
that the contracting parties may negotiate special treatment of the 
gains and losses for an equitable outcome. GAAP does not include 
content for mass or extraordinary dispositions. Because these rarely 
occur and CAS doesn't include prescriptive rules for the treatment, 
elimination of the CAS language would not impact the treatment of such 
dispositions, nor inhibit the ability of the contracting parties to 
negotiate an agreement for government contracting. Furthermore, FAR 
31.205-16(g) also identifies that mass or extraordinary dispositions 
shall be considered on a case-by-case basis. The Board proposes that 
this CAS 409 requirement be eliminated.
    General recommendations. The SDP asked for recommendations of any 
changes to CAS 409 to conform it to GAAP.
    Comment: Four of the seven respondents provided a response to this 
query. Three respondents recommended that the Board eliminate the 
entire Standard. One other respondent stated that CAS 409 appears to be 
a good candidate for conformance, but cautioned that ``CAS 409 
provisions covering agreements on special asset lives and accounting 
for gains and losses on disposition of assets may be needed to provide 
appropriate results in specific circumstances that may be encountered 
by the Government and contractors.''
    Response: The Board concurs that CAS 409 is a good candidate for 
conformance because many of the corresponding requirements in GAAP are 
not materially different from those in CAS. Therefore, GAAP can be 
relied on for the majority of CAS requirements to achieve the 
uniformity and consistency required for Government contracting. The 
Board is proposing to eliminate the majority of CAS 409.
    The Board understands the respondent's concern regarding special 
asset lives to be found at CAS 409-50(e)(5), which reads, ``The 
contracting parties may agree on the estimated service life of 
individual tangible capital assets where the unique purpose for which 
the equipment was acquired or other special circumstances warrant a 
shorter estimated service life than the life determined in accordance 
with the other provisions of this 9904.409-50(e) and where the shorter 
life can be reasonably predicted.''
    Furthermore, the Board understands the respondent's concern 
regarding accounting for gains and losses to be found at CAS 409-
50(j)(1), which reads, ``Gains and losses on disposition of tangible 
capital assets shall be considered as adjustments of depreciation costs 
previously recognized and shall be assigned to the cost accounting 
period in which disposition occurs except as provided in subparagraphs 
(j) (2) and (3) of this subsection.'' Thus, for Government contracting 
purposes, any gain recognized is limited to the cumulative amount of 
depreciation recognized on contracts. The result of this requirement is 
that the credit Government contracts receive for a gain on disposition 
cannot exceed the cumulative amount of depreciation cost paid by the 
Government through allocation to contracts. This limitation is also 
addressed in FAR 31.205-16(d) which limits the gain recognized for 
government contracting to the difference between the acquisition cost 
and the undepreciated balance. The Board believes, however, that as 
this requirement relates to measurement of costs, it should be retained 
in CAS.
    The Board concurs these two requirements in CAS for which 
equivalent GAAP requirements do not exist need to be retained to 
protect the interests of the Government and contractors. The Board is 
proposing to move these two requirements found at CAS409-50(e)(5) and 
409-50(j)(1) to CAS 406.
    Compliance history. The SDP requested facts and data on the history 
of CAS 409 non-compliance issues raised and how they were resolved. In 
particular, the SDP requested the frequency and magnitude of the issues 
identified on Government contracts. Furthermore, the SDP requested 
whether the issue raised would have been considered non-compliant with 
GAAP, other CAS, or FAR.
    Comment: Two respondents provided comments in response to these 
requests. One of the professional associations responded that ``A 
survey of FEI-CGB's membership shows . . . minimal history of 
noncompliance with CAS 409. The issues that were identified with CAS 
409 generally had immaterial impacts to US Government contracts and 
were corrected through contract adjustments to the distribution of 
depreciation costs between accounting periods and contracts (i.e., 
generally a net zero adjustment).''
    One of the large industry associations responded that, ``There is 
little history of CAS 409 non-compliance issues raised and resolved at 
individual contractors. Where identified, these issues did not have a 
significant monetary impact on the Government and could have been 
identified by other accounting rules (i.e., GAAP, FAR). Of note, the 
few CAS 409 non-compliances identified by contractors were generally 
immaterial and were resolved without direct payments to the Government. 
Instead, they were typically corrected through contract adjustments to 
the distribution of depreciation costs between accounting periods and 
contracts. Since adjustments are a redistribution of cost between 
contracts, there is likely not a significant cost impact to the 
Government as a whole.'' This respondent provided further analysis of 
the three categories of compliance issues identified.
    The first category of issues is contractors found recognizing 
multiple years of depreciation during a single year because they failed 
to recognize depreciation in the first year the asset was put into 
service. The respondent observed ``This would be a GAAP violation. Such 
circumstances would also be covered as a non-compliance with CAS 406-
40(b).''
    The second category of issues is contractors ``found to have 
selected service lives for assets that were not based on historical 
experience and contractors could not justify the shorter service lives 
selected, as required by CAS 409-50(e)(2).'' The respondent observed 
that ``The use of inappropriate service lives is also a violation of 
GAAP because it would mislead users of financial statements.''
    The third category of issues is contractors not establishing 
``appropriate residual value amounts for assets. This condition would 
result in higher depreciation being recognized for the asset during its 
useful life,

[[Page 53584]]

potentially creating a gain to be recognized when the asset was 
disposition later. Both the depreciation and the later gain would be 
allocated to Government contracts; however, this influences the timing 
of cost recognition and reimbursement for the asset cost in an 
equitable manner.'' The respondent observed that ``GAAP (see ASC 360-
10-35-4) includes a requirement to deduct the salvage value, which has 
the same meaning as residual value in CAS, from the value of the 
tangible capital asset to be depreciated. In addition, FAR further 
mitigates the risk of a contractor setting no or too low of a residual 
value.'' FAR 31.205-11 reads in part, ``[d]epreciation cost that would 
significantly reduce the book value of a tangible capital asset below 
its residual value is unallowable.'' The respondent concluded that ``If 
a contractor depreciated a tangible capital asset significantly below 
its residual value, the Government's interests are protected by 
recovering the excess depreciation as an unallowable cost.''
    Response: The Board appreciates the effort of this large 
association and its members to gather and provide this information and 
analysis. Based on the comments and additional research conducted by 
the Board, the Board has provisionally concluded that the instances of 
CAS 409 compliance issues involving significant cost impact to the 
Government have been limited to rare occurrences related to 
extraordinary events. Furthermore, the Board has also provisionally 
concluded that GAAP, FAR, and other Standards may protect the 
Government's interests in the specific areas in which non-compliance 
issues have been raised. Therefore, the Board is considering a proposed 
rule that would eliminate CAS 409, except for the three requirements 
described above, which would be moved to other CAS standards.

List of Subjects in 48 CFR 9904

    Government Procurement, Cost Accounting Standards.

Christine J. Harada,
Senior Advisor Office of Federal Procurement Policy, and Chair, Cost 
Accounting Standards Board, performing by delegation the duties of the 
Administrator for Federal Procurement Policy.

    For the reasons set forth in the preamble, The Federal Procurement 
Policy Office proposes to amend 48 CFR part 9904 as set forth below:

PART 9904--COST ACCOUNTING STANDARDS

0
1. The authority citation for part 9904 continues to read as follows:

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

0
2. In Sec.  9904.406-50, add paragraph (g) to read as follows:


Sec.  9904.406-50  Techniques for application.

* * * * *
    (g)(1) When gains and losses are recognized on disposition of 
tangible capital assets, the gains or losses shall be considered as 
adjustments of depreciation costs previously recognized and shall be 
assigned to the cost accounting period in which disposition occurs. The 
gain to be recognized for contract costing purposes shall be limited to 
the difference between the original acquisition cost of the asset and 
its undepreciated balance.
    (2) The contracting parties may agree on the estimated service life 
of individual tangible capital assets where the unique purpose for 
which the equipment was acquired or other special circumstances warrant 
a shorter estimated service life and where the shorter life can be 
reasonably predicted.

Subpart 9904.408--[Removed and Reserved]

0
3. Remove and reserve subpart 9904.408.

Subpart 9904.409--[Removed and Reserved]

0
4. Remove and reserve subpart 9904.409.
0
5. In Sec.  9904.418-50, add paragraph (h) to read as follows:


Sec.  9904.418-50  Techniques for application.

* * * * *
    (h) Gains and losses on disposition of tangible capital assets 
transferred in other than arm's-length transaction and subsequently 
disposed of within 12 months from the date of transfer shall be 
assigned to the transferor.

[FR Doc. 2024-13805 Filed 6-26-24; 8:45 am]
BILLING CODE 3110-01-P