[Federal Register Volume 89, Number 124 (Thursday, June 27, 2024)]
[Proposed Rules]
[Pages 53572-53575]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-13806]


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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Parts 9903 and 9904


Conformance of Cost Accounting Standards to Generally Accepted 
Accounting Principles for Operating Revenue and Lease Accounting

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 
notice of proposed rulemaking (NPRM) to elicit public comments on 
proposed changes to the Cost Accounting Standards (CAS) to conform them 
with changes in Generally Accepted Accounting Principles (GAAP) related 
to operating revenue and lease accounting. This proposed rule follows 
issuance of an advanced notice of proposed rulemaking (ANPRM) 85 FR 
70572 (November, 5, 2020), and a Staff Discussion Paper (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 2021-01. 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

    Section 820 of Public Law 114-328 directed the Board to conform CAS 
to GAAP to the maximum extent practicable. In accordance with 41 U.S.C. 
1502(c), the Board is required to 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, prior to the promulgation of 
any new or revised CAS.
    On March 13, 2019, the Board published a Staff Discussion Paper 
(SDP) (84 FR 9143) to solicit views with respect to the Board's 
statutory requirement to review and conform CAS requirements, where 
practicable, to GAAP. Respondents were invited to comment, among other 
things, on whether and how CAS may need to be modified to conform to 
changes to GAAP that occurred after a related CAS was promulgated. More 
specifically, the SDP asked what recommended actions, if any, the Board 
should take regarding the changes in GAAP for operating revenue and 
lease accounting rules. The Board recognized that since the initial 
promulgation of CAS 403 (38 FR 26680, Dec. 14, 1972), numerous changes 
have been made to GAAP. This growth in GAAP content presents 
opportunities to modify or eliminate overlapping CAS requirements where 
GAAP standards may be applied reasonably as a substitute for CAS. 
Furthermore, some changes in GAAP may create inconsistencies not 
contemplated during the initial promulgations of CAS requiring action 
by the Board.
    Public comments received on the SDP, amongst other things, urged 
the Board to prioritize efforts to address changes in GAAP related to 
operating revenue and lease accounting. In response to these comments, 
the Board issued an advanced notice of proposed rulemaking (ANPRM) on 
November 5, 2020 (85 FR 70572) that described changes to the CAS that, 
if adopted, would (i) align CAS with GAAP on the handling of operating 
revenue and (ii) clarify CAS definitions to make clear that GAAP 
changes on lease accounting are not recognized for CAS purposes.
    This NPRM addresses the public comments received in response to the 
ANPRM and also reflects research accomplished by the Board in response 
to the ANPRM. The NPRM is issued by the Board in accordance with the 
requirements of 41 U.S.C. 1502(c).

II. Operating Revenue

    A. Overview. The definitions of operating revenue in CAS and 
revenue in GAAP are currently different. The GAAP definition of 
``revenue,'' found at Financial Accounting Standards Board (FASB) 
Accounting Standards Codification (ASC) 606-10-20, reads as follows:

    Inflows or other enhancements of assets of an entity or 
settlements of its liabilities (or a combination of both) from 
delivering or producing goods, rendering services, or other 
activities that constitute the entity's ongoing major or central 
operations.

    The CAS 403-30(a)(3) definition of ``operating revenue'' reads as 
follows:

    . . . amounts accrued or charge[d] to customers, clients, and 
tenants, for the sale of products manufactured or purchased for 
resale, for services, and for rentals of property held primarily for 
leasing to others. It includes both reimbursable costs and fees 
under cost-type contracts and percentage-of-completion sales 
accruals except that it includes only the fee for management 
contracts under which the contractor essentially acts as an agent of 
the Government in the erection or operation of Government-owned 
facilities. It excludes incidental interest, dividends, royalty, and 
rental income, and proceeds from the sale of assets used in the 
business.

    In the ANPRM, the Board stated its belief that the definition in 
GAAP is essentially equivalent to the CAS, but noted that when a 
contractor essentially acts as an agent of the Government in the 
erection or operation of Government-owned facilities, CAS limits the 
measurement of operating revenue to only the fee earned for managing 
the contract. The Board also noted that GAAP does not provide such a 
limitation. The ANPRM included language that, if adopted, would remove 
the definition of operating revenue from CAS 403 and rely on the 
definition of revenue in GAAP, but retain the CAS 403 criterion 
regarding only utilizing the ``fee for management contracts under which 
the contractor essentially acts as an agent of the Government in the 
erection or operation of

[[Page 53573]]

Government-owned facilities.'' Finally, the ANPRM asked whether changes 
to cost accounting practices to conform Operating Revenue to ASC 606 
should be considered to be a required change, a unilateral change, or 
desirable change in accordance with 48 CFR 9903.201-4(a)(4)(i), (ii), 
or (iii), respectively.
    B. Public comments. The Board received three sets of public 
comments in response to the ANPRM. These comments came from industry 
associations with inputs from member companies.
    Comment: All commenters agree with relying on GAAP for operating 
revenue. However, they believe the Board's desire to retain the CAS 403 
criterion regarding only utilizing the ``fee for management contracts 
under which the contractor essentially acts as an agent of the 
Government in the erection or operation of Government-owned 
facilities,'' was unnecessary. The commenters pointed out the 
additional conceptual framework GAAP includes related to the principal 
versus agent relationship in contracts with customers.
    Response: While GAAP does not provide an express limitation in 
measuring revenue under this specific type of government contract, the 
Board agrees that it does recognize a conceptual framework consistent 
with the intent of the CAS 403 limitation. In determining revenue, 
GAAP, specifically FASB ASC 606--Revenue from contracts with customers, 
requires an entity to consider whether it is acting as a principal or 
an agent for each specified good or service promised to a customer. ASC 
606-10-55-38 reads as follows:

    An entity is an agent if the entity's performance obligation is 
to arrange for the provision of the specified good or service by 
another party. An entity that is an agent does not control the 
specified good or service provided by another party before that good 
or service is transferred to the customer. When (or as) an entity 
that is an agent satisfies a performance obligation, the entity 
recognizes revenue in the amount of any fee or commission to which 
it expects to be entitled in exchange for arranging the specified 
goods or services to be provided by the other party. An entity's fee 
or commission might be the net amount of consideration that the 
entity retains after paying the other party the consideration 
received in exchange for the goods or services to be provided by 
that party.

    The relationship of a contractor performing on Government-owned-
contractor-operated (GOCO) facilities contracts is similar enough to 
that of an agent as described in ASC 606-10-55-38, that the Board 
expects a government contractor would record revenue the same using the 
GAAP, as it would under CAS. For these reasons, the NPRM proposes to 
delete the definition of operating revenue in its entirety from CAS 403 
and rely on the definition of revenue in GAAP.
    Comment: All commenters believed the proposed changes related to 
operating revenue fall under the definition of a required change. They 
all also believed the Board should view this topic more broadly to all 
CAS/GAAP efforts and suggested the Board exempt CAS/GAAP conformance 
efforts from the cost impact process by adding to the existing 
exemption for External Restructuring (see 48 CFR 9903.201-8). The main 
rationale provided was that the CAS/GAAP conformance efforts are not 
expected to have a material impact on the government or contractor; 
however, the administrative burden associated with preparing and 
evaluating cost impact proposals could be significant with minimal to 
no impacts.
    Response: The Board agrees that the proposed changes fall under the 
definition of a required change. Because the CAS and GAAP definitions 
of operating revenue are essentially the same, the Board does not 
anticipate any material impact to the Government or contractors as a 
result of this change. The Board also appreciates the need for careful 
consideration of the cost and benefits associated with CAS/GAAP 
conformance efforts, and the potential role the cost impact process may 
play in executing changes. However, the Board does not believe it would 
be prudent to make an across-the-board determination that all future 
CAS/GAAP conformance efforts are required changes, and also exempt from 
the cost impact process in advance of performing due diligence on each 
case to determine that the changes are consistent with its Guiding 
Principles--i.e., that they minimize burden on contractors, protect the 
interests of the Federal Government, and materially achieve uniformity 
and consistency in cost accounting, without bias or prejudice to either 
party. For operating revenue, the Board has provisionally determined 
that the change is required and an exemption from the cost impact 
process is clearly warranted due to the efficiency gained without 
prejudice to either party. More specifically, there would be a 
quantifiable administrative burden on both parties to execute the 
required cost impact process and, in this case, the administrative 
burden on both parties would clearly outweigh the minimal benefit 
derived by either party from the cost impact process.
    C. NPRM. Based on public comment and additional research conducted 
by the Board, the Board continues to believe that the definition of 
operating revenue in CAS and revenue in GAAP are essentially 
equivalent. Based on the additional research on ASC 606-10-55-38 
discussed above, the Board now further believes that entities would 
operate as agents for the government when performing under a GOCO 
facilities contract. On this basis, the Board has provisionally 
concluded that the CAS 403 definition of operating revenue has become 
unnecessary to protect the Government's interests and may be deleted in 
its entirety to allow for reliance on GAAP and other CAS Standards. The 
Board has also provisionally concluded that accounting changes related 
to conformance of the CAS definition of operating revenue to GAAP ASC 
606 is a required change as described at 48 CFR 9903.201-4(a).
    These actions 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 of relying on GAAP for the definition of 
operating revenue in CAS 403 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.
    Therefore, the Board is proposing a rule that would (i) modify CAS 
403 to rely on GAAP for revenue and (ii) exempt properly disclosed 
changes related to this conformance effort from the contract price and 
cost adjustment requirements of part 9903. The NPRM would also remove 
the term ``operating'' in relation to revenue in CAS 403. The Board 
believes this change is necessary to avoid confusion and make clear 
that the definition of revenue in GAAP is consistent with ``operating 
revenue''' as historically used in CAS. Additional research by the 
Board revealed that the CAS standard predated the codification of GAAP 
by FASB. Operating Revenue was defined to exclude other forms of 
revenue (or income) beyond the contractor's normal operations. As noted 
above, this change is consistent with the definition of revenue in GAAP 
which makes clear revenue is generated by ``activities that constitute 
the entity's ongoing major or central operations.''

[[Page 53574]]

    The Board seeks comment on the NPRM and requests specific input on 
whether there are any instances where an entity might not consider 
itself an agent, based on ASC 606-10-55-38, when performing on a GOCO 
contract.

III. Lease Accounting

    A. Overview. Since the initial promulgations of CAS 414 and 417, 
changes have been made to GAAP related to lease accounting that have 
caused confusion about which assets should be included in the 
calculations of Facilities Capital Cost of Money (FCCM). Specifically, 
the GAAP requirements to treat ``right of use'' assets, that were 
formerly known as operating leases, as assets and liabilities require 
clarification from the Board to avoid confusion or inconsistent 
treatment. In the ANPRM, the Board proposed clarifications to the CAS 
definition and handling of tangible capital assets to make clear that 
GAAP requirements to classify ``right of use'' assets on an entity's 
balance sheet should not be recognized as assets for the purpose of 
computing FCCM in CAS 414 and CAS 417.
    B. Public comments. The Board received three sets of public 
comments to the ANPRM from industry associations with inputs from 
member companies. All of the comments essentially addressed the same 
issue regarding the need for further clarification.
    Comment: All commenters agreed with the need for the definitional 
changes of both tangible and intangible assets to include financing 
leases and exclude operating leases. However, they believed the Board's 
proposed language may still be too ambiguous to achieve the desired 
goal of avoiding confusion or inconsistent treatment. One commenter 
further explained that the proposed changes to the definitions of 
tangible and intangible capital assets associate all right-of-use (ROU) 
assets with operating leases and that this linkage may not hold true 
because leases in general are associated with ROU assets. For example, 
ROU assets from financing leases may be reported within the property, 
plant, and equipment asset category; whereas, ROU assets from operating 
leases may be reported as a separate asset category. To avoid 
confusion, commenters urged the Board to modify the definitions of 
tangible and intangible assets to exclude only ROU operating lease 
assets. By making this change, ROU assets for operating leases will be 
inherently recognized as a separate asset category for CAS purposes--
neither tangible nor intangible.
    Response: The Board appreciates these comments and has considered 
the recommendations in the proposed rule to provide additional clarity.
    C. NPRM. Based on public comment, the Board is proposing a rule 
that would make clarifications to CAS addressing which assets should be 
included in the calculations of Facilities Capital Cost of Money 
(FCCM). The NPRM adopts language in the ANPRM with additional 
clarification. Specifically, the Board is proposing to revise the 
definition of intangible capital assets shown at 48 CFR 9904.414-
30(a)(4) and 9904.417-30(a)(1), as well as the definition of tangible 
capital assets shown at 48 CFR 9904.403-30(a)(5), 9904.404-30(a)(4), 
9904.409-30(a)(3), 9904.414-30(a)(5), and 9904.417-30(a)(2), and add 
clarifying language in appendix A. to 9904.414, in the Instructions for 
Form CASB CMF. The Board seeks public comment on the NPRM.

List of Subjects in 48 CFR Parts 9903 and 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 Office of Federal 
Procurement Policy proposes to amend Chapter 99 of Title 48 of the Code 
of Federal Regulations as set forth below:

PARTS 9903--CONTRACT COVERAGE

0
1. The authority citation for part 9903 continues to read as follows:

    Authority: Pub. L. 111-350, 124 Stat. 3677, 41 U.S.C. 1502.


Sec.  9903.301   [Amended]

0
2. Section 9903.301 is amended in paragraph (a) by removing the 
definition ``operating revenue''.

PART 9904--COST ACCOUNTING STANDARDS

0
3. 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
4. Section 9904.403-30 is amended by removing and reserving paragraph 
(a)(3) and revising paragraph (a)(5) to read as follows:


Sec.  9904.403-30  Definitions.

    (a) * * *
    (5) Tangible capital asset means an asset that has physical 
substance, more than minimal value, and is expected to be held by an 
enterprise for continued use or possession beyond the current 
accounting period for the services it yields. It includes assets 
classified as finance leases for financial accounting purposes and 
excludes those right-of-use assets that were formerly known as 
operating leases.
* * * * *


Sec.  9904.403-40  [Amended]

0
5. Section 9904.403-40 is amended by removing the word ``operating'' in 
paragraph (c)(2) wherever it appears.
0
6. Section 9904.403-50 is amended by revising subparagraph (c)(1)(ii) 
to read as follows:


Sec.  9904.403-50  Techniques for application.

* * * * *
    (c) * * *
    (1) * * *
    (ii) The percentage of the segment's revenue to the total revenue 
of all segments. For this purpose, the method used for determining 
revenue for financial accounting shall be used. The revenue, however, 
of any segment shall include amounts charged to other segments and 
shall be reduced by amounts charged by other segments for purchases.
* * * * *
0
7. Section 9904.404-30 is amended by revising paragraph (a)(4) to read 
as follows:


Sec.  9904.404-30   Definitions.

    (a) * * *
    (4) Tangible capital asset means an asset that has physical 
substance, more than minimal value, and is expected to be held by an 
enterprise for continued use or possession beyond the current 
accounting period for the service it yields. It includes assets 
classified as finance leases for financial accounting purposes and 
excludes those right-of-use assets that were formerly known as 
operating leases.
* * * * *
0
8. Section 9904.409-30 is amended by revising paragraph (a)(3) to read 
as follows:


Sec.  9904.409-30  Definitions.

    (a) * * *
    (3) Tangible capital asset means an asset that has physical 
substance, more than minimal value, and is expected to be held by an 
enterprise for continued use or possession beyond the current 
accounting period for the services it yields. It includes assets 
classified as finance leases for financial accounting purposes and 
excludes those right-of-

[[Page 53575]]

use assets that were formerly known as operating leases.
* * * * *
0
9. Section 9904.414-30 is amended by revising paragraphs (a)(4) and (5) 
to read as follows:


Sec.  9904.414-30  Definitions.

    (a) * * *
    (4) Intangible capital asset means an asset that has no physical 
substance, has more than minimal value, and is expected to be held by 
an enterprise for continued use or possession beyond the current 
accounting period for the benefits it yields. It includes assets 
classified as finance leases for financial accounting purposes and 
excludes those right-of-use assets that were formerly known as 
operating leases.
    (5) Tangible capital asset means an asset that has physical 
substance, more than minimal value, and is expected to be held by an 
enterprise for continued use or possession beyond the current 
accounting period for the services it yields. It includes assets 
classified as finance leases for financial accounting purposes and 
excludes those right-of-use assets that were formerly known as 
operating leases.
* * * * *
0
10. Appendix A to 9904.414 is amended by revising the paragraph under 
the undesignated center heading ``Recorded, Leased Property, 
Corporate,'' to read as follows:

Appendix A to 9904.414--Instructions for Form CASB CMF

* * * * *

Recorded, Leased Property, Corporate

    The net book value of facilities capital items in this column 
shall represent the average balances outstanding during the cost 
accounting period. This applies both to items that are subject to 
periodic depreciation or amortization and also to such items as land 
that are not subject to periodic write-offs. Unless there is a major 
fluctuation, it is adequate to ascertain the net book value of these 
assets at the beginning and end of each cost accounting period, and 
to compute anaverage of the beginning and ending values. 
``Recorded'' facilities are the capital items owned bythe 
contractor, carried on the books of the business unit, and used in 
its regular business activity. ``Leased property'' is the 
capitalized value of leases for which constructive costs of 
ownership are allowed in lieu of rental costs under Government 
procurement regulations. Leases classified as right-of-use assets 
for financial accounting purposes that were formerly known as 
operating leases, are excluded from facilities capital items 
reported on this form. Corporate or group facilities are the 
business unit's allocable share of corporate-owned and leased 
facilities. The net book value of items of facilities capital which 
are held or controlled by the home office shall be allocated to the 
business unit on a basis consistent with the home office expense 
allocation.
* * * * *
0
10. Section 9904.417-30 is amended by revising paragraphs (a)(1) and 
(2) to read as follows:


Sec.  9904.417-30  Definitions.

    (a) * * *
    (1) Intangible capital asset means an asset that has no physical 
substance, has more than minimal value, and is expected to be held by 
an enterprise for continued use or possession beyond the current 
accounting period for the benefits it yields. It includes assets 
classified as finance leases for financial accounting purposes and 
excludes those right-of-use assets that were formerly known as 
operating leases.
    (2) Tangible capital asset means an asset that has physical 
substance, more than minimal value, and is expected to be held by an 
enterprise for continued use of possession beyond the current 
accounting period for the services it yields. It includes assets 
classified as finance leases for financial accounting purposes and 
excludes those right-of-use assets that were formerly known as 
operating leases.
* * * * *
[FR Doc. 2024-13806 Filed 6-26-24; 8:45 am]
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